FCA review on insurance product value: a timely warning to insurance firms

Against the background of a range of recent action, the FCA has published its findings on whether insurance firms are living up to its expectations on general insurance product value and Covid-19 related assessments.

Insurance product value is the relationship between the amount paid by customers and the quality of the product. The FCA’s value measures include claims frequencies, acceptance rates and average pay‑out. The FCA’s findings on the shortcomings to provide such value, combined with its expectation under Principle 6 (paying due regard to the interests of customers and treating them fairly), underline the importance insurance firms must place on meeting the FCA’s standards.

In these findings, the FCA has taken a critical view of the industry at a time when firms are preparing for the enhanced product governance rules (coming into effect on 1 October). Despite material progress in recent times, the FCA still found shortcomings in many firms, raising concerns as to the risk of harm posed to customers and warning that “significant work” remains to be done if firms are to comply with the new governance requirements.

The review

Anchored in the FCA Handbook and a key component of the FCA’s work, the regulator’s recent efforts to enhance consumer protection have taken many forms, including the proposed introduction of a consumer duty (which we reported on here). Within the broad principle of consumer protection, one of the FCA’s current areas of focus – and a key priority in its 2021/22 Business Plan – is the delivery of fair value to customers from financial services products.

The FCA’s multi-firm review focussed on how insurers and intermediaries “designed, sold and reviewed their products to ensure they met the needs of their customers”.

The review assessed how firms have considered and implemented the FCA’s expectations on product governance and value as set out in the FCA’s Product Intervention and Product Governance Sourcebook (PROD) and its 2019 guidance for manufacturers and distributors in the general insurance distribution chain (FG 19/5).

As a second key area, the FCA reviewed the approach and response of firms to its Covid-19 guidance, aimed at protecting consumers and ensuring continued customer value of insurance products in the context of the pandemic. (On this topic, see also our previous blog post on “Insurance and COVID-19 – the UK FCA's increasing focus on consumer protection”.)

The FCA’s findings

The FCA’s review resulted in a number of key findings:  

• The FCA found an overall “lack of evidence of customer centricity in many firms”, with processes often being aimed at profitability rather than providing product value and customer outcomes.
• From a governance and oversight perspective, the FCA found that while many firms had in place appropriate governance structures for product development and review, other firms still demonstrated a lack of robustness. The regulator levelled criticism at specific aspects of firms’ governance structures, but more fundamentally, it also felt that some firms misunderstood how governance rules apply in a distribution chain. For example, some intermediaries wrongly believed that manufacturer rules did not apply to them.
• The FCA also reviewed firms’ approaches to regulatory changes, focussing particularly at the implementation of its 2019 guidance for manufacturers and distributors in the general insurance distribution chain (FG 19/5). It found that all firms had considered the new guidance, but the effectiveness and degree of success in how it was considered and implemented were mixed. Some firms were praised for their appropriate and thorough assessments, but others were found not to have fully implemented the guidance yet. The regulator was particularly critical of firms justifying such delays on the basis of the pandemic; it had very little sympathy for such firms, reasoning that the guidance came into effect in 2019 and firms had sufficient time before the pandemic struck to take action.
• While all firms had met the deadline for their Covid-19 product review (as required by the FCA’s June 2020 “Finalised Guidance: Business interruption insurance test case”), the FCA found shortcomings in how this had been conducted. Those firms that had taken a proactive approach to product reviews were found to have performed better than those that conducted reviews in response to COVID-related customer claims. Some firms’ approaches showed a lack of customer focus, and staff were not always evidenced to have been appropriately knowledgeable and competent. The FCA had concerns with the granularity of the review conducted by some firms, and criticised reviews of inappropriate groups of products which were too dissimilar in product features and target markets.
• Regarding action taken by firms to prevent or mitigate harms related to Covid-19, the FCA found that most products had not experienced a reduced core utility and value to the target market. Even where such value was reduced during the pandemic, many firms had taken action (for example by issuing refunds or using alternative approaches to maintain value to customers). However,  few manufacturers were found to fully meet the FCA’s expectations in their approval of new or amended products during Covid-19 – changes made by many firms were aimed at excluding some elements of cover instead of repricing the product or taking other mitigating action.

Overall, these findings see the regulator taking a critical stance on the current level of consumer protection in the general insurance sector. The FCA stresses in its review that shortcomings by firms in providing fair value to customers and putting customers at the centre of business may pose a material risk of consumer harm, making it vital that such failures are remedied.

What does this mean for insurance firms?

The FCA’s findings have been published against the background of enhanced requirements to which insurance firms will soon become subject. These more stringent governance requirements will be introduced in two stages, with the first set of rules (including on PROD) coming into force on 1 October this year. The second, which includes rules on pricing and auto-renewal remedies as well as reporting, will take effect in January 2022. These enhanced requirements include pricing remedies relating to renewal prices, the introduction of accessible and easy options to cancel auto-renewals and additional reporting requirements to aid the FCA in monitoring firms.

With such enhanced requirements coming into effect over the coming months, the FCA’s findings are a timely reminder to firms of the importance of adequately implementing regulatory expectations. The FCA has already taken some enforcement action on the basis of this review and other supervisory work, obliging firms to improve customer values through, for example, additional cover or other benefits. The regulator has stressed that it will continue to monitor the actions which firms take and will do “further work on fair value” to check firms’ compliance with its rules and expectations. Where firms fail to meet their regulatory obligations, it “will consider all appropriate regulatory action”, including the withdrawal of products from sale or an obligation to pay refunds or redress.

Crucially, however, the review contains an explicit threat of a more active regulatory approach in the future: in its findings, the FCA expressly states that it is intending to take a “more interventionist approach” going forward, aided by past and future changes to the applicable regimes. This has been evidenced recently by the Covid-19 product review (as described above), which required insurers to review their policies and consider whether they may be affected by the FCA’s then business interruption insurance test case and report on this in some detail to the FCA in a very short timescale (the guidance being published on 17 June 2021, and a reporting deadline of 8 July 2021), followed by a substantial policyholder communications exercise by 15 July 2021. The review was a significant and challenging exercise for firms, with the FCA expressing its expectations over a range of media (including a consultation, press release and Dear CEO letter). The approach to this review may be an indication of what the FCA’s “more interventionist” approach will look like going forwards.

Firms should be prepared for increased FCA assessments and intervention aimed at ensuring that their products provide adequate protection and fair value to customers.