FCA sets priorities for personal and commercial insurance sector

In a ‘Dear CEO’ letter to insurance intermediaries (5 page / 123KB PDF) serving retail or commercial customers, and other firms such as loss assessors, FCA retail general insurance head Roma Pearson said the regulator had identified customers buying unsuitable or poor value products as the most significant risk of potential and actual harm within this sector.

The letter identified three areas where the FCA said it would prioritise its supervisory work: ineffective governance and oversight of businesses; incentive arrangements that do not support a positive conduct culture; and business models which provide poor control over sales and renewals and conflicts of interest.

Pearson said the FCA would continue to monitor areas such as firms’ incentive structures where these drive behaviour that could harm consumers. The regulator also reminded firms to implement the requirements brought in with the Senior Managers & Certification Regime in December 2019, and said it would assess how firms had achieved this in due course.

The FCA said firms should additionally have implemented and embedded the requirements of the UK’s adoption of the EU’s Insurance Distribution Directive (IDD) in October 2018. It said it had seen evidence of business models within the personal and commercial insurance portfolio which employed elongated distribution chains and poor product oversight both in design and execution.

The letter told firms they should have robust controls for sales and renewals arrangements and managing conflicts of interest. The FCA said it would continue its thematic work in this area.

The letter also addressed the issue of firm resilience in relation to Covid-19. It re-emphasised earlier messages about business resilience, reminding firms they should conserve capital and plan for how to meet demands on liquidity. Firms should also maintain up-to-date wind-down plans, and if forced to wind down, should continue to meet FCA rules and principles and communicate with the regulator and clients.

Insurance regulation expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law, said the letter continued the FCA’s work on addressing potential consumer harm and “supervisory strategies” for various portfolios across the industry.

“This Dear CEO letter follows on from a number of previous FCA supervisory engagements with the insurance sector on areas it considers high risk, for example dual pricing, GI distribution chains and delegated authority arrangements,” Cavill said.

“In its latest progression, the FCA states that the most significant risk of potential harm lies in customers buying poor value or unsuitable products. The FCA has been working on its position on product value for many years but has arguably found it challenging on occasion to land on a suitable metric by which to assess regulatory compliance in this regard. To some degree the IDD assisted the regulator in better policing the areas of product design and value,” Cavill said.

Cavill said firms should put this area high up their agendas and act accordingly.

“Prompted by this recent Dear CEO letter, firms should revisit their assessments of product value and suitability, and look to correct instances where they may not be meeting regulator expectations,” Cavill said.

“Furthermore, there have been a number of compensation schemes addressing such issues in recent years, both proactively or on the recommendation of the regulator. Where firms uncover things have gone wrong, it is likely that such solutions will continue to be adopted by firms as they seek to do the right thing for their customers and mitigate regulatory risk, particularly as the regulator has more recently commented on how redress schemes may reduce sanctions in cases where firms have not corrected deficiencies,” Cavill said.

The timing of the letter coincided with the fourth publication of value measures data under the FCA's general insurance value measures pilot. By publishing this data, the FCA aims to create incentives for firms to compete on broader elements of product value than price alone, and to improve the value of their products and services. The data allows the regulator to identify trends and comment on them. On this occasion, it has commented that it was particularly concerned about the potential value of personal accident and key cover where these are sold as ‘add-ons’ to other insurances.

Last year, the FCA consulted on proposals requiring firms to report value measures data for all general insurance products, with a few exceptions. The FCA expects to publish a policy statement this autumn.

Another upcoming development is the final report on the FCA's general insurance pricing practices market study which is due to be published later this year and followed by a consultation on rule changes to pricing practices.

Co-written by Daniela Ivanova, expert in insurance regulation at Pinsent Masons.