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23 November 2021 | 5-minute read
Every carrier and intermediary would agree with the Financial Conduct Authority that customers should receive fair value from the insurance products they buy. Most, I think, would also agree that embedded distribution costs are sometimes higher when dealing with London. Finally, I know for a fact that everyone believed we had to work together in response to the FCA’s recent requirements to assess and evidence fair value.
The FCA’s new Policy Statement PS21/5 on General Insurance Pricing Practices brought in a suite of measures designed to tackle what the FCA believed to be some sharp practice in the industry, including differential renewal pricing and certain features of auto-renewals.
The Lloyd’s market was supportive of the FCA’s direction, however, the devil is always in the detail.
The extensive new requirements around product governance and transparency around payments in the distribution chain had the potential to snowball into an unmanageable administrative burden for both carriers and intermediaries. To head off a costly, sustained and potentially confusing, flurry of activity, the LMA led a body of work with the IUA, LIIBA, BIBA, the MGAA, and Lloyd’s to agree a coordinated approach to collecting information which will minimise the burden of this new regulation.
The FCA means business. In its recent Dear CEO letter, the regulator made it clear that although many firms had made material progress in this area… they had also seen many firms where shortcomings remained, which the FCA believed left the potential for consumer harm. The FCA suggested that many firms still had significant work to do to comply with the enhanced product governance rules which came into effect on 1 October 2021 and their expanded scope which included clearer and higher expectations for firms’ standards of care towards consumers.
Previously, FCA concerns over lack of market progress have compelled them to intervene, this has come at a high cost, including requiring firms to withdraw products while they’re amended, or even to pay refunds or cash redress. The FCA says: “We will consider all appropriate regulatory action where firms fail to meet their regulatory obligations, both for their historic product governance arrangements or under the new requirements from 1 October 2021.”
The FCA’s concerns regarding product value can be split into three strands:
- A lack of intrinsic value, where products do not perform in a way which would reasonably be expected by the consumer.
- Mis-selling, where products which may have intrinsic value are sold to people who cannot properly benefit from them.
- Inefficiency of the distribution chain, where such chains dilute value to the point where the price paid by the end customer bears little resemblance to the risk price.
Indeed, in the recent Dear CEO letter, the FCA observed that “insurance intermediaries may be receiving remuneration which bears no reasonable relationship to the costs or workload to distribute the product.”
Under these new rules, product manufacturers (which always include the carrier, and possibly an intermediary if co-manufacturer) are required to review and assess the value of all general insurance and pure protection products (large risk and reinsurance products excluded) at least every 12 months, with more frequent reviews of products which are considered to carry a higher conduct risk. They have a year from rule implementation to approve or re-approve all in-scope products.
They need to explain to their distributors the benefits of the product which could include details of the approval process supported by information such as claims and complaints data. They will also need to define the target market and those for whom the product would not be suitable.
In return, distributors/intermediaries are required to provide carriers with information about the type and amount of remuneration paid by the customer (including fees and commissions, etc.), an explanation of the services provided by each firm in the chain, information on any ancillary products or services sold alongside the product which may affect the product’s value, and confirmation that any remuneration paid by the customer is consistent with the distributor’s regulatory obligations.
Everyone wants to avoid the situation where multiple requests are made about hundreds of products, each asking for different granularity of detail in different formats. Such a whirlwind of requests has the real potential to spiral out of control, which could, ironically, increase costs for consumers.
To avert this, the LMA launched a collaborative effort to develop a market approach. The solution is intended to result in consistent presentation of product information and remuneration arrangements which should dramatically reduce the reporting burden. After agreeing parameters, we designed an information-request template and accompanying guidance which all market associations have endorsed.
The template and guidance, which are available on the LMA’s website and have been published on the Lloyd’s Wordings Repository, are designed to assist carriers and intermediaries in meeting the new requirements in a proportionate and consistent manner and demonstrate to the regulator that the market is taking their concerns seriously with positive action.
It won’t always be possible to obtain every detail the FCA desires; there is a limit for instance to which the information will be supplied by intermediaries outside the UK. However, by using the template, market participants should be able to show that they have made reasonable efforts to get the information required.
Although the new rules will require significant initial effort from firms, they should ultimately prove beneficial. Intermediaries should be able to ensure a proper understanding of the value of the products they distribute and, in turn, carriers should gain a better understanding of the value of the distribution chain. Most importantly, it should go a long way to ensuring that end customers are receiving valuable products at fair prices.
A collegiate approach to collecting this information should substantially reduce the administrative burden created by this new compliance requirement and this LMA-led initiative is an excellent example of the market working together to find solutions to improve the customer experience.
First published in Insurance Day: 17 November 2021