By Ed Harrison, Principal at LCP
1. Putting consumers’ needs first: The FCA emphasises the need for insurers to uphold and continually evaluate their standards, ensuring they align with regulatory expectations and, in particular, with the new Consumer Duty. Key focus areas include rigorously assessing and rectifying issues related to product quality, pricing, consumer understanding, and support.
2. Strategy for Positive Change: The FCA highlights the link between poor governance and culture, and poor outcomes for consumers. A key FCA focus area will be on the steps insurers are taking to create a more diverse workforce, and it highlighted its disappointment at the general lack of progress within the market overall so far. The FCA also expects firms to review and address their cultural drivers, focusing on leadership, organizational purpose, governance, and recruitment strategies.
3. Minimising the Impact of Operational Disruption: Operational resilience remains a key area of focus following joint FCA and PRA policy statements on this in 2021/22. Whilst firms continue to make progress towards meeting regulatory expectations, an area that requires particular attention is governance, oversight and contingency planning in respect of outsourced providers. The FCA also highlights the increasing impact of cyber risk on operational resilience.
4. Improving oversight of appointed representatives (ARs) for principal firms: Last year the FCA introduced rules placing more responsibility on principal insurers to ensure their ARs are fit for purpose. The FCA expects to conduct testing to ensure that the enhanced rules are being implemented, in particular using data analytics to identify high-risk principals for further investigation.
What about wholesale and personal/commercial-specific priorities?
In addition to the above market-wide priorities, the FCA also sets out specific priorities for the personal / commercial and wholesale markets.
Within the personal / commercial space, the key focus areas are primarily around putting customers’ needs first. The number one priority in this space appears to be ensuring that products offer fair value to consumers. Beyond this, the FCA focus will be on various aspects of the customer journey from initial accessibility and sales practices, through customer support, and ultimately to claims management, all of which sit within the requirements of the Consumer Duty. There is also a significant focus on ESG issues, in particular around improving culture and diversity equity and inclusion at all levels within firms.
For wholesale providers the focus is more diverse, with other priorities including a focus on: competitiveness of the London Market; ensuring that cyber insurance meets customer needs; strengthening policies and procedures to mitigate financial crime. There is also a similar focus on ESG issues to personal lines, but the FCA makes clear that these issues have not been given the engagement it expects in the wholesale market and need to be prioritised going forward. A particular focus is on ensuring that firms’ empower junior employees to raise concerns, and through greater transparency help firms address the more challenging aspects of their culture.
In addition, it is worth noting that whilst many London Market firms will be outside the scope of Consumer Duty, others will be in-scope where they still have a material influence over end-customer outcomes. The main Consumer Duty focus area for wholesale providers is likely to be ensuring that the distribution chain is reasonable and still provides value to consumers. This applies even where capacity providers don’t have the direct relationships with the customer.
How should insurers respond?
Priorities such as consumer duty and operational resilience are not new, so insurers should already have work programmes in place to deliver the expectations set out in policy statements. That said, the latest letter should provide clarity around the areas to prioritise within these programmes. I would expect insurers to review their workplans and ensure they align with regulatory expectations and focus areas.
From a Consumer Duty perspective, fair value is a key focus. The FCA has already highlighted some areas (eg motor GAP insurance) where it sees low loss ratios as an indicator of poor value. More generally, the FCA’s focus on consumer understanding of the relative benefits offered by different products is worthy of note. Whilst this was highlighted in the context of “basics” home/motor policies offering reduced cover, it applies equally to other personal lines areas such as travel, pet and health, where products are much less homogenous than traditional home / motor offerings.
Regarding operational resilience, a key challenge will be to ensure that firms are able to withstand to the effects of failures of outsourced suppliers of all sizes. There are particular challenges applying operational resilience to large providers such as cloud computing services, but often it is these which have the largest business impact. In addition, failures of large providers may affect many firms simultaneously, not just a single insurer.
Overall, the continued focus on the customer journey and outcomes means an ever-greater role for risk and compliance teams, who must partner effectively with the business to ensure regulatory expectations can be met efficiently and, where possible, in a value-adding way.
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