The anticipated cost of living crisis is here, and yesterday’s ‘Dear CEO’ letter to insurers confirms the FCA’s return to a theme it adopted early in the pandemic: firms need to consider the impact that economic turmoil has on their customers, and their conduct will be assessed in that context.
Insurers’ legal and compliance teams will note several points. Our initial observations are below, followed by some brief thoughts about what to do next.
Key points from the letter
The Consumer Duty. Although not in force until July 2023, this is mentioned prominently in the Dear CEO letter. Insurers should have the new duty in mind when they consider how to respond to the letter. The letter includes a subtle reminder that boards should have agreed their Consumer Duty implementation plans by the end of October 2022.
Focus on businesses as well as individuals. The letter mentions concerns for SMEs (small and medium sized enterprises), including ‘energy costs’ and ‘staffing issues’, prominently. It is not immediately obvious what the insurance nexus is with these two concerns, but the FCA has recently been vigorous in advocating small business interests to insurers (see, e.g., its high profile ‘test case’ on covid-related business interruption insurance claims).
Expectations around sales and renewals. The FCA anticipate consumers and SMEs making difficult spending choices, deciding to take less comprehensive insurance cover or none at all. This creates some new conduct / mis-selling risk. The FCA has made clear that it expects insurers to consider several matters, including reassessing customers’ risk profiles, considering whether economic circumstances alter product suitability decisions, helping customers avoid having to cancel necessary cover, waiving fees for necessary adjustments, and waiving cancellation fees.
Premium finance. FCA data shows more than half of consumers with low financial resilience pay for home and motor insurance through monthly instalments. The letter pointedly notes that these customers are likely to be most affected by increasing interest rates, and less likely to be able to make the payments. There is conduct risk associated with this lending, and the FCA expects premium finance providers to consider a raft of measures, including suspending, reducing, waiving or cancelling further interest or charges.
Risk of fraud (…is insurers’ problem). The letter expressly acknowledges that in an economic downturn there may be an increase of fraud against insurers, but also makes clear that this must be insurers’ problem, and not customers’ problem: ‘it is important that firms do not introduce additional processes which unreasonably delay or potentially decline payments for valid claims’.
Maintaining customer service standards. The letter anticipates insurers reducing costs in customer support functions. It also makes clear that firms need to be circumspect about reducing headcount in these roles: to the extent it reduces the service customers receive, it is a regulatory conduct risk.
Firms will already be considering how to respond to the requirements of the Consumer Duty and, as the letter reminds, should be agreeing implementation plans by the end of October 2022. Alongside that, insurers serving consumers and SMEs should:
- consider the issues highlighted in the letter, and consider what actions if any are needed to demonstrate that they understand and have responded to (or anticipated) the FCA’s concerns;
- be ready to discuss this with supervision contacts; and
- ensure boards are briefed with appropriate people taking responsibility for any necessary actions.
More widely, this letter follows a similar one sent to lenders in June 2022, and the FCA’s approach to this issue through the pandemic. Firms are on notice that the FCA expects them to be aware when customers are likely to be affected by wider economic events, and to adjust their conduct towards customers through that lens. That includes thinking about where a modified approach may be needed in sales, ongoing customer support, product renewals, claims, complaints, and forbearance.