HT No Claims Bonus Protection - getting ready for new disclosure and reporting requirements

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1 HT No Claims Bonus Protection - getting ready for new disclosure and reporting requirements Insurance brokers and other intermediaries offering private motor with NCB Protection must ensure they have the systems and procedures in place to comply with the new disclosure and reporting requirements of the Competition and Markets Authority by 1 August This article looks at the background to this and the practical implications for insurance brokers. Background In 2012, the Office of Fair Trading referred the supply or acquisition of private motor insurance (PMI) and related goods and services in the UK to the Competition authorities. The Competition and Markets Authority (CMA) carried out an investigation and concluded that elements of the PMI market were uncompetitive and had detrimental effects on consumers. In particular, it criticised the way no-claims bonus protection was sold as an add-on, which made it difficult for consumers to compare products. As a result, the CMA produced the Private Motor Insurance Order (the Order), which affects the market in three key areas: 1. Most favoured nation clauses banned (effective from 19 April 2015) In relation to a price comparison website (PCW), the order prohibits any agreement for a PMI provider not to offer or invite the purchase of PMI through any other sales channel at a lower price than the price made available for the PMI through the PCW (commonly known as a 'most favoured nation' clause). The prohibition does not apply to an agreement containing a restriction on a PMI Provider from offering or inviting the purchase of a PMI on the PMI Provider s own website at a lower price than the price made available through the PCW for that PMI. 2. PCWs to provide regular compliance statements to the CMA (effective from 15 July 2015) Price comparison websites that in the previous calendar year have achieved an aggregate of 300,000 PMI sales or more must calculate each year the number of PMI sales in the previous calendar year. PCWs must also submit a Quarterly and an Annual PCW Compliance Statement to the CMA. The statement must verify that the PCW has not engaged in 'Equivalent Behaviour' during the report period. Equivalent Behaviour means any behaviour which has the object of replicating any of the anti-competitive effects of the most favoured nation clause. 3. Providers to give consumers specified NCB information and issue Annual NCB Compliance Statements (effective 1 August 2016) PMI Providers (which include brokers as well as insurers) must give specified NCB Protection Information' and an NCB Protection Statement to consumers at the point at which the add-on is offered or the consumer has selected the add-on. PMI Providers must also submit an annual PMI Compliance Statement

2 to the CMA. This must contain a statement that firm has complied with the terms of the order and a list of average no-claims bonus discounts. Leaving aside the PCW requirements, the practical issues for brokers of providing the specified NCB information to customers and the Annual Compliance Statement to the CMA are examined below. Providers to give consumers specified NCB information Under the CMA Order, PMI Providers insurers and brokers - will be expected to give customers more transparent information about NCB Protection, so that customers are able to assess the value of that protection at the point they consider purchasing it. The CMA requirement to give consumers specified information about NCB affects all private car motor policies other than motor cycles where NCB Protection is provided or offered - unless NCB Protection is an integral part of the product (rather than being an option). Information must be given at the time of making the NCB Protection Offer in the way prescribed. This is to include: the "implied price of the protection i.e. the difference in premium if the customer takes NCB Protection compared to not doing so tables showing the average percentage discount scale awarded to consumers in the preceding calendar year and setting out the insurer s Step Back formula a warning that NCD Protection does not protect the overall price of the policy, and that premiums may still increase following an accident, even if NCD Protection has been purchased The implied price of NCB Protection is the difference in the retail price between the PMI Product which is the subject of the NCB Protection Offer with, and without, NCB Protection. The implied price of NCB Protection is particular to the PMI Product being offered by that PMI Provider, and does not take into account the price of any other PMI Products that may or may not include NCB Protection. A PMI Broker is not prevented from informing a prospective consumer that a different PMI Product available from its panel of PMI Insurers is cheaper (with or without NCB Protection). PMI Insurers who distribute motor products through brokers are expected to provide those brokers with the Average NCB Discount for sales across all channels along with their Step-Back Formulae, enabling the broker to provide customers with the NCB Protection Statement and the NCB Protection Information along with the quote. If a quote is given for a future date, for example, through a renewal invitation made by post, the Order applies as at the date the quote is generated - this might be the date of the renewal letter. The information given should be correct at the time the quote is provided. The information must be provided clearly and prominently. Prominently is defined by the CMA as, providing the requisite information in a manner that ensures, so far as reasonably practicable, that when the prospective

3 purchaser assesses the NCB Protection Offer as a whole, it is reasonable to expect that the prospective purchaser s attention will be drawn to the information, or no less prominently than other information provided contemporaneously in relation to the PMI Product. The disclosure requirements depend on whether the quote is being provided orally or in writing. Offering NCB Protection in writing Where the information about an NCB Protection offer or the conclusion of the process is made through the internet or by a postal service, the customer must be given a written NCB Protection Statement and NCB Protection Information. For internet sales the CMA would expect this to be achieved, for instance, by setting out the NCB Protection Statement and NCB Protection Information on the same webpage as the NCB Protection Offer, or by opening a pop-up window containing the NCB Protection Statement and NCB Protection Information. When the PMI Product is being purchased by or postal service, for example, at renewal, the NCB Protection Statement and NCB Protection Information must be provided clearly and prominently in the or letter. 1. Written NCB Protection Statement The text is specified by the CMA is as follows: (a) No claims bonus protection does not protect the overall price of your insurance policy. The price of your insurance policy may increase following an accident even if you were not at fault. (b) No claims bonus protection allows you to make one or more claims before your number of no claims bonus years falls. Please see the step-back procedures for details. The details of the step-back procedures must include a clear description of the Step-back Formula for that PMI Product and must be provided: (a) when the NCB Protection Offer is made on a website or by , by providing a link, displayed prominently, leading to the description of the Step-back Formula ; or (b) when the NCB Protection Offer is made by postal service, by providing a clear and prominent reference to the Step-back Formula, and enclosing with the NCB Protection Offer a description of the Step-back Formula. 2. Written NCB Protection Information The requirements are specified by the CMA is as follows: Required text: You are considering whether to purchase NCB protection. This [would increase] your premium by [amount]. You have declared a current NCB of [number] years. The tables below show: (i) the average NCB discount awarded to [our] motor insurance policyholders last year according to their number of NCB years; and (ii) what would happen to your NCB years if you were to make one or more claims in the next 12 months with and without this protection.

4 For the purposes of this paragraph, the word [amount] is to be replaced with the Implied Price of NCB Protection; the word [number] is to be replaced by the number of NCB Years that the PMI Provider is including in the NCB Protection Offer; the word [our] may be replaced with the name of the PMI Insurer; and, the words [You are considering whether to purchase] may be replaced with [This quote includes] and the words [would increase] replaced with [increases]. A table showing: in one column all the different NCB Years for which an NCB Discount applies to the PMI Product; and - in an associated column the Average NCB Discount associated with each number of NCB Years for which an NCB Discount applies to the PMI Product. A second table showing: the Step-back formula for the number of NCB Years in the NCB Protection Offer, in one column without NCB Protection and in another column with NCB Protection. The exact format of the tables (e.g. font type, colour schemes, spacing) is a matter for PMI Providers to decide, but the CMA expects the table to be structured in a certain way. When submitting the tables, brokers should not, therefore, alter the layout. Making NCB offers orally When an NCB offer or the completion of a process is made orally, including in person or by telephone, the following NCB Protection Statement and NCB Protection Information must be provided prominently at the time. 1. Oral NCB Protection Statement The wording is specified by the CMA as follows: No claims bonus protection does not protect the overall price of your insurance policy. The price of your insurance policy may increase following an accident even if you were not at fault. 2. Oral NCB Protection Information The NCB Protection Information which must be also provided at the time of an oral NCB Protection Offer is the following: (a) (b) (c) (d) the Implied Price of NCB Protection; the number of NCB Years offered in the NCB Protection Offer; the Average NCB Discount for that number of NCB Years; and the number of Claims that a customer can make within the Step-back Formula for the PMI Product before the number of NCB Years would be affected, depending on whether the customer purchases NCB Protection or not. 3. Written NCB Statement and Information after oral acceptance Where the NCB Protection Information has been given orally to a purchaser of NCB Protection, the firm must also, following acceptance of the NCB Protection Offer by the purchaser, provide the purchaser with the NCB Protection Information in writing with the policy documents, as follows:

5 Required text: You have purchased NCB protection. This has increased your premium by [amount]. You have declared a current NCB of [number] years. The tables below show: (i) the average NCB discount awarded to [our] motor insurance policyholders last year according to their number of NCB years; and (ii) what would happen to your NCB years if you were to make one or more claims in the next 12 months with and without this protection. A table showing: in one column all the different NCB Years for which an NCB Discount applies to the PMI Product; and - in an associated column the Average NCB Discount associated with each number of NCB Years for which an NCB Discount applies to the PMI Product. A second table showing: the Step-back formula for the number of NCB Years in the NCB Protection Offer, in one column without NCB Protection and in another column with NCB Protection. The Annual Compliance Statement All PMI Providers, including insurance brokers, are required to submit an Annual PMI Compliance Statement to the CMA, in the format prescribed. The Statement must contain a statement that the firm has complied with the terms of the Order along with tables of Average NCB Discounts relating to each individual insurer and subset of products. The first Compliance Statement is to be provided to the CMA by 1 August Each subsequent Annual Compliance Statement is to be provided to the CMA by 1 February each year. The required wording for the Annual Compliance Statement is as follows: Annual PMI Compliance Statement for [insert name of PMI Provider(s)] [I/We], [insert name(s)], confirm on behalf of [insert name of PMI Provider(s)] that during the report period [insert calendar year prior to this Annual PMI Compliance Statement, except for the first Annual PMI Compliance Statement, where the words preparation period must replace report period ], [insert name(s) of PMI Provider(s)] [has][have] complied with The Private Motor Insurance Order 2015 (the Order). The Average NCB Discount[s] [PMI Provider(s)] [is or are] displaying to consumers, from [1 February] [insert year of this Annual PMI Compliance Statement] [except for the first Annual PMI Compliance Statement, insert 1 August 2016], in its NCB Protection Information [is or are] listed in Annex 1. FOR AND ON BEHALF OF [NAME OF PMI PROVIDER(S)] Signature:... Name:... Title:...

6 Annex 1: Average NCB Discount[s] PMI Insurer: [Insert name of insurer, or if appropriate relevant sub-set] Table of Average NCB Discount *[Insert the table[s] of Average NCB Discount prescribed above (as required to be provided to prospective purchasers of a PMI Product Implications for insurance intermediaries] The table should be repeated for each PMI Insurer and sub-set of PMI Products if appropriate. *For example, the Annual PMI Compliance Statement submitted on 1 February 2017 will show for each PMI Insurer or subset of PMI Products supplied, for each relevant number of NCB Years, the mean NCB Discount actually awarded by that Insurer in the calendar year This is the same as the information provided to consumers in the NCB Protection Information. Providing the first Compliance Statement The first compliance statement, which is to be provided by 1 August 2016 will be different from subsequent statements as it pre-empts the NCB Protection Offers that insurers will make between 1 August 2016 to 31 January showing the average NCB Discount(s) the firm will present to consumers. The first Compliance Statement must be signed, stating that the Order has been complied in preparing the Average NCB Discounts. An example of a Compliance Statement as required by 1 August 2016 forms an appendix to this article. Compliance Statements should be sent by to PMI.Order@cma.gsi.gov.uk Systems to assist compliance Insurer systems and broker systems are being updated to provide the information firms need to comply with the CMI requirements. Quotes provided by insurers should, in future, include average NCD scales, step-back formula and implied price. New fields, including statements for customers are being introduced to aid the sales process. It is anticipated that EDI documents will contain NCB information as required under The Order. ICS understands that changes are being made by some systems providers not only for private cars (including motor homes but not motor cycles) but also for commercial vehicles to cater for cases where commercial vehicles are insured under a private car policy. Systems providers will make available a document template which user firms can use, via their management system, to provide the required written information to their customers. It is up to the firm in contact with the customer to ensure that the oral disclosure requirements (see above) are also met, in particular, for telephone sales. Insurers are expected to provide some guidance on this. For existing cases where NCB Protection is not currently included, ICS understands that systems will state the renewal price including NCD Protection so that it is available if needed. Motor insurance systems providers are also liaising with insurers and gearing up to stream the data necessary for the Annual Compliance Statement. Depending in the system used, it may be possible for brokers to simply to download a completed Statement, which can be checked, signed and forwarded to the CMA.

7 Summary The aim of the CMA Order is to ensure customers receive sufficient and transparent information to enable them to make an informed choice before purchasing NCB Protection. It remains to be seen to what extent these measures will affect the decisions made by consumers but they have undoubtedly increased the regulatory burden on the insurance industry. The need for both PMI Insurers and PMI Brokers to submit to the CMA the same tables of average NCB discounts is questionable and it is not clear how the CMA (without involving the FCA) will ensure that every intermediary complies with the disclosure and reporting requirements. Whilst the government aims to reduce bureaucracy in business, generally, the supervision of the distribution chain for financial services products appears to become ever more intense. Significant changes to broker and insurer systems and processes and policyholder documentation need to be made so that firms can meet the new requirements by 1 August Brokers that offer NCB Protection must review their sales systems and processes - whether face-to-ace, by telephone or via the internet or - to make sure the prescribed information regarding NCB Protection is provided for all relevant quotes and renewal invitations issued after 1 August Firms should also make a diary note to prepare and submit their first Compliance Statement to the CMA by 1 August 2016 and subsequent statements by 1 February annually. Brokers may be prompted to do so via their system provider - and/or by the insurers. It is likely that brokers systems will enable them to produce the necessary documentation and reports but motor brokers operating without an IT system which makes provision for the CMA requirements may need to rely on individual insurers to provide the relevant information. In the meantime, firms may wish to check how their system providers and/or motor insurers are progressing with the necessary changes. Further information CMA Order: CMA Explanatory note: May 2016 If you require any further information on the Compliance Manual, ICS Services, Elearning, HR or anything else we might be able to help you with, please contact your usual ICS representative, Head Office on or enquiries@insurancecompliance.co.uk

8 Appendix - Example of a broker s first PMI Compliance Statement Annual PMI Compliance Statement for XYZ Insurance Brokers Limited I, Joseph Blogger, confirm on behalf of XYZ Insurance Brokers Limited that during the preparation period, XYZ Insurance Brokers Limited have complied with The Private Motor Insurance Order 2015 (the Order). The Average NCB Discounts PMI Providers are displaying to consumers, from 1 August 2016, in their NCB Protection Information are listed in Annex 1. FOR AND ON BEHALF OF XYZ Insurance Brokers Limited Signature:... Name: Joseph Blogger Title: Managing Director PMI Insurer: Acme Insurance Company Table of Average NCB Discount: Annex 1: Average NCB Discount[s] [Repeat for each PMI Insurer and sub-set of PMI Products.]