Posted: 28th November 2019
Product value in the general insurance (GI) market has become an ever-increasing area of concern for the FCA.
“Oversight”, “customer harm” and “value” have become prominent features of the FCA’s vocabulary with which insurers should be only too familiar with by now. With so many initiatives happening in these areas, it’s important that firms take a ‘joined up’ and holistic approach to change.
The regulator announced in its Business Plan for 2018 / 2019 that it would be undertaking diagnostic work on the impact of distribution costs on product value. In the years since then, the FCA has uncovered some interesting and impactful findings.
These findings were revealed in November 2019 as part of FG19 / 05 – The GI distribution chain: Guidance for insurance product manufacturers and distributors. They include:
- There exists potential for consumer harm arising from product development and distribution approaches in some sectors of the GI market
- Many consumers pay prices significantly higher than the production and deliver cost of the products purchased
- Some firms fail to adequately consider risk of harm to consumers when developing products and the distribution arrangements around them
- Some product manufacturers are giving control of product design to other members of the distribution chain without proper oversight
- Some firms lack appropriate due diligence and oversight of distribution partners
While the FCA was conducting this work, the Insurance Distribution Directive (IDD) entered into force in the UK, introducing new rules around product design, oversight, governance and distribution and imposing stricter requirements on the activity of firms and restrictions on remuneration practices.
The new guidance has been published with the aim of clarifying the FCA’s expectations all along the GI distribution chain, with a particular focus on how firms should “consider the value that the product and distribution arrangements present to the customer.”
The regulator reiterates that it has chosen to apply the requirements of the IDD around product oversight and governance as if they were FCA rules.
On top of this, it has also been working on a separate market study into how GI firms charge customers for home and motor insurance. In conjunction, both studies form part of broader FCA focus on product value within the sector, an issue that is gaining increasing traction amongst thought leaders and industry bodies.
Alongside this, the Senior Managers and Certification Regime has put a brighter spotlight on governance and accountability across financial services as a whole. Firms now need to identify the Senior Manager responsible for product governance and oversight.
To summarise some of the most important pieces of guidance from the new publication, let us break down the report by section:
1. Guidance on the responsibilities of insurance product manufacturers
- “Firms must put in place a product approval process, covering product design and review”
- FCA rules require firms to ensure that products and their costs and charges are compatible with the “objectives, interests and characters of customers in the intended market”
- Firms cannot delegate their regulatory responsibilities, in any way, to a third party
- Manufacturers should be using all possible data and information available to assess the value of product offerings to customers
- They also have “an obligation to ensure the distribution strategy is consistent with the identified target market
2. Guidance on the responsibilities of insurance product distributors
- The FCA expects distributors to monitor the products they offer, and their distribution arrangements, on an ongoing basis
- Wherever customer harm is identified, distributors must inform the manufacturer and, as appropriate, amend the way they distribute the product
- Remuneration cannot conflict with 'customer’s best interest' rules
- Firms must regularly review distribution processes, making sure they are in line with intended target market and that they are not adversely affecting customers
Considerations for firms
GI businesses have a lot of work and adaptation ahead of them, especially considering that more proposed rules will likely be coming in Q1 2020 following the wrap up of the FCA’s market study into GI pricing practices.
The guidance provided this month is an understandable move on the regulator’s part. It provides a clear roadmap for firms currently struggling to meet the regulator’s expectations. The ultimate impacts of this guidance on firms will largely depend on whether a firm is a manufacturer or intermediary and where they sit in the distribution chain.
The first part of this journey for most businesses will be undertaking detailed reviews of processes, policies and frameworks in line with the guidance.
For one, they will need to review product governance frameworks and ensure that ‘value’ is taken into account at all stages of product development.
They will also need to agree upon the role of principal, manufacturer and distributor between the various parties involved in product distribution, particularly where there is a co-manufacturing arrangement in place.
Critically, a review of governance and oversight of distributors will need to be completed by manufacturers. The FCA wants to ensure that there is an appropriate and adequate level of risk-based oversight, especially over product design and sales processes (including related remuneration structures). Firms along the chain will also need to pay close attention to conduct areas, such as complaint handling, where applicable.
In addition, firms will need to reviewing existing contractual arrangements with distributors (from a remuneration perspective, as well as oversight metrics such as service level agreements and management information) and consider overarching product design and distribution strategies.
Looking into past cases of where customers may have suffered detriment as a result of pricing or distribution strategies, then taking appropriate remediation exercises of the back of this, will be absolutely vital. By proactively reaching out to impacted customers, businesses in this space can build up trust and positive customer advocacy, which are both, of course, essential to remaining competitive in an increasingly crowded market.
The bottom line is that regardless of how a customer purchases their insurance they should not experience material difference simply because of the route they chose to access it.
Huntswood can assist in this regard, providing the resource, training and governance support to assist in past business review and remediation projects of all scales and scopes.
Our team of advisory experts and ex-regulators are well-placed to assist you. Contact us today to find out more about where can assist your firm in meeting – and exceeding – the FCA’s expectations for your market.