Coronavirus: FCA expectations of insurers

On 19 March 2020 the FCA set out its expectation that insurance companies should "consider very carefully the needs of their customers and show flexibility in their treatment of them" in light of the pandemic.

The FCA also acknowledged that general insurers will be trying to manage their exposure to risks by taking measures such as introducing policy exclusions on renewal or suspending products. However, it is clear that the FCA expects firms to treat customers - including vulnerable customers - fairly, and to act in the customer's best interests and be clear, fair and not misleading in their communications. See our Out-Law analysis on fair treatment of vulnerable customers during the pandemic for more on the FCA's general approach.

The FCA issued additional draft guidance on how insurers and and intermediaries should approach product value and deal with customers in temporary financial difficulty during the pandemic on 1 May.

Renewals

According to the FCA, insurers must consider the needs of customers carefully, in particular where the customer is relying on renewal for continuity of cover, and take into account any vulnerabilities. It said that, in such circumstances insurers might not be treating customers fairly if they chose not to renew cover even if the product would be suspended for other reasons. These expectations tie in with the FCA's ongoing consultations on vulnerable customers and its work on treating customers fairly in the context of the impact of distribution chains on product value and on pricing in the general insurance sector.

With both insurers and brokers in mind, the FCA has emphasised that alternative products should meet the demands and needs of customers. Communications about policy exclusions on renewal should make it very clear, in a prominent position and before renewal, that the policy is due to renew and that there will be an exclusion, it said.

The FCA acknowledges that firms may have trouble contacting customers in order to meet conduct requirements, such as assessing their demands and needs, at renewal - for example, if the customer is unwell. In these circumstances, the FCA expects firms to continue to seek to meet these requirements, but suggests that it may be "reasonable for firms to rely on existing information that they already hold" in certain circumstances: for example, if the information is recent and can still be expected to be accurate, and there have been no significant changes to the product.

Firms should, however, treat this guidance with caution. The FCA has warned that it expects firms to treat customers fairly, if the customer contacts the firm following renewal to say that the policy did not meet their needs.

Specific guidance for travel, motor, home and medical insurers

Regarding travel insurance, insurers should take individual circumstances into account, where a claim relates to travel arrangements made before the coronavirus situation escalated and arises after the renewal date, particularly where the consumer was given a reasonable expectation that cover would continue, the FCA said. Where appropriate, the insurer should renew or consider claims under the terms of the original policy for these travel arrangements. The FCA has advised consumers whose holiday has been cancelled to contact their travel insurance provider, where the holiday is covered by ABTA or ATOL protection but the provider is unable to offer a refund or an alternative. Travel insurers should be prepared for such claims.

In a separate statement issued for consumers, the FCA urged consumers to contact their insurer before travelling, in case of holiday and flight cancellations, if having to self-isolate whilst travelling, before renewal, and in case of financial difficulty where they are using premium finance to fund their policy. Insurers will need to handle a large volume of communications and maintain their compliance with the FCA's conduct rules.

Motor and home insurers should be mindful of consumers following government advice and changing how they use their vehicle and their home address and should not reject claims because of such understandable temporary changes.

Medical insurers should communicate effectively, timely and compassionately on delays to non-urgent private medical treatments provided under an insurance policy, where the private hospital providing the treatment is required to support the NHS.

In addition, the FCA's expectation is that general insurers will consider existing requirements for product design when making changes to policies on renewal, suspending products and offering alternative products. This follows on from the FCA's recent letter to the general insurance industry in which it raised the effective implementation of regulatory changes, such as the product governance rules introduced by the Insurance Distribution Directive (IDD), as fundamental to tackling significant risks of harm.

Operations

General insurers are warned that they should have plans in place to manage and mitigate the operational impact of Covid-19. Firms should consider the impact that staff absence and the need to ensure staff wellbeing will have on continuity of service. Firms should mitigate the effect of staff absence or inability to use business premises. These expectations are in line with the FCA's proposals on operational resilience. Where firms identify gaps that will, or could, cause harm to consumers, they should notify the FCA.

The FCA also expects general insurers to have a senior manager "responsible for business continuity and for managing the impact of coronavirus". Dual-regulated insurers have been subject to the senior managers and certification regime since 10 December 2018 – and the rest of the industry since 10 December 2019. These rules are designed to increase individual accountability within the financial sector.

Customers in financial difficulty

Following guidance for customers in financial difficulty in the consumer credit space, the FCA has now published similar guidance for insurers and premium finance firms. The guidance applies to general insurance and protection policies and covers eligible complainants as defined in the disputes (DISP) section of the FCA Handbook - so, including small businesses. However, lending for business purposes is not covered by the guidance. The FCA has clarified that the guidance may be helpful in relation to business customers within the scope of the consumer credit regime in so far as it builds on the Principles for Business, which apply to these customers regardless. Exempt credit agreements, such as pay-as-you-go arrangements with insurers, are within scope of the draft guidance, as well as premium finance.

The FCA will expect an insurer to "consider what options it can provide to the customer and whether there are steps that can be taken which could deliver a fair outcome for the customer, considering their changed circumstances". Suggested actions include re-assessing the risk profile of the consumer and lowering or refunding premiums as a result; considering whether there are other products the firm can offer which would better meet the customer’s needs and revising the cover accordingly; offering payment deferrals where appropriate; and waiving cancellation and other fees. However, firms can deduct outstanding premium payments from claim settlements, provided they treat customers fairly and this is in the customer's best interests.

The FCA has warned that for some products, such as pure protection contracts, a reduction or suspension of cover may not be appropriate, in particular where taking out new cover later may require a health re-assessment and will result in potentially higher premiums. In such cases, firms should instead consider forbearance measures. In line with its guidance for other sectors, if a customer wishes to receive a payment deferral the FCA expects firms to grant this unless they determine, acting reasonably, that it is obviously not in the customer's interest and, if that is not the case, firms should offer other options in accordance with treating the customer fairly. The FCA expects firms to take into account all products a customer holds with the firm and to manage temporary measures so as to avoid the risk of underinsurance, for example by introducing an expiration date or by inviting the customer to contact the firm when their circumstances have changed.

Firms should work with other relevant firms in the distribution chain to assist qualifying customers. The FCA has indicated the order of priority in which firms should offer solutions. Firms should grant payment deferrals only if amendments to insurance cover do not alleviate the payment difficulties of customers paying by instalments. Premium finance firms should consider reviewing any interest rates associated with the instalments in line with the obligation to treat customers fairly. If a payment deferral is granted, insurers and brokers in the distribution chain which have cancellation rights for non-payment of premiums should not exercise those rights. Lenders are expected to consider if it is appropriate to rely on any recourse arrangements they may have in place with brokers.

The FCA expects firms to make clear in their communications, including on their websites and apps, the different solutions available to customers; and to encourage them to make contact if they are experiencing temporary financial difficulty as a result of coronavirus. Firms should "make it as easy to contact them as possible". In line with other sector guidance, firms are expected to "consider the needs of vulnerable consumers to ensure all consumers that need help can access it easily". Notably, the FCA has drawn firms' attention to customers with "different communication needs", for example "those needing to communicate through channels other than telephone". This poses a particular challenge given the government's rules on social distancing.

The guidance came into force on 18 May 2020 and will be in place for at least three months.

Product value during the pandemic

The FCA has also published draft guidance on how insurance firms should approach product value during the Covid-19 pandemic. In particular the FCA has stated that it expects all manufacturers of insurance products to review the value provided by their products within 6 months of the finalisation of its guidance, and to take appropriate action to address any material alteration in the value provided by products.

The guidance explains how the FCA expects firms to identify any material issues that impact on the value of their policies to customers during the pandemic, and to continue to focus on good customer outcomes. The FCA views delivering value as an essential part of firm's product design obligations and regards the expectation of value from products by consumers as reasonable, particularly during difficult economic times.

As part of the review, firms should consider whether Covid-19 has materially altered the value delivered by products, and in particular:

• whether firms may no longer be able to provide contractual benefits under the policy e.g. under boiler servicing policies where it is no longer possible for a service to be provided or under private medical cover where policyholders can no longer access private health care; and
• whether an underlying insurance event may no longer be able to happen e.g. public liability insurance for companies that are no longer able to open due to lockdown restrictions.

Where firms identify a material alteration in value, they should consider what action is appropriate to take. This may include:

• delivering policy benefits in a different way or the provision of alternative comparable benefits;
• reducing premiums for the relevant period; or
• providing partial refunds of premium already paid.

The FCA has welcomed the work already done by some firms to review their products and consider whether premium returns or premium holidays are justified. It also clarified that it would not expect firms to take action to reassess policies where the risk of an insured event occurring has reduced, but could still occur, e.g. for car insurance policies.

In light of the FCA's guidance it will be important for all manufacturers of insurance products, both insurers and insurance intermediaries, to ensure that they undertake a review of their products. If material alterations in value are identified firms will have to consider how to address these changes in order to meet the FCA's expectations and to ensure that those products still deliver value to customers. In considering what actions to take firms will need to balance the financial impacts of modifying benefits or returning promised premiums against the risk of complaints from customers based on the FCA's guidance if the appropriate action is not taken. The FCA has stated that this guidance will apply to both retail and commercial insurance policies and has asked for feedback from firms by 15 May 2020.