The Financial Services Conduct Authority (FSCA) has warned insurers about unfairly increasing premiums for funeral policies after consumers complained that the increases were too high and that some insurers even increased premiums more than once per year.
The authority says while it recognises the impact of Covid-19 on mortality rates and funeral policy claims, insurers are still expected to ensure fair outcomes for policyholders in line with the Policyholder Protection Rules (PPRs) issued under Section 62 of the Long-term Insurance Act (LTIA).
Priced correctly at inception to avoid unfair increases
According to Rule 1.2 of the PPRs, insurers have to act with due skill, care and diligence when they increase premiums, which mean that premiums must be priced correctly at inception to ensure that any increases would still result in fair outcomes for policyholders where the policy continues to perform as expected.
The premiums must also be actuarially sound, in line with Section 46 of the act that specifies that bans long-term insurers from entering into any long-term policy unless ‘the statutory actuary is satisfied that the premiums, benefits and other values are actuarially sound’.
Insurers must also ensure that the premiums set at the inception of the policy reasonably balance the interests of the insurer and the reasonable benefit expectations of policyholders. Premiums must be based on assumptions that are realistic and that the insurer reasonably believes are likely to be met over the term of the policy, in line with Rule 6(1) of the PPRs.
The FSCA says it has noted that some of the recent premium increases may relate to policies which were under-priced from the inception of the policies. However, if policies were not correctly priced at inception, insurers cannot just implement exorbitant increases due to the impact of Covid-19 or underwriting losses because this would be unfair to policyholders.
Premium increases more than once a year
Consumers also complained that their premiums are increased more than once per year, although Rule 15(1) of the PPRs states that premiums can only be reviewed if the policy provides for a review and how often it will be done.
This is the process to increase premiums
The FSCA says it expects insurers who intend to increase policy premiums on existing policies to consider the existing requirements and follow the appropriate processes. They must be able to demonstrate that they are complying with the provisions of the LTIA, particularly the PPRs and treating their customers fairly.
The authority pointed out that insurers must also inform policyholders beforehand and in writing of a pending review and the timing of the review if it is expected to result in a premium increase. The insurer must, in the case of a review, give policyholders alternatives, such as the option to terminate the policy, reduce the policy benefit or enter into an alternative policy to mitigate the impact of the increase.
Treat consumers fairly in funeral policy increases
Consumers have to be treated fairly according to the PPRs and insurers must adhere to the provision that they ‘must have appropriate policies and procedures in place to achieve the fair treatment of policyholders’.
The fair treatment includes at least that policyholders receive products ‘that perform as insurers or their representatives have led them to expect and the associated service is both of an acceptable standard and what they have been led to expect’.