Personal and commercial lines insurance portflio letter: insurance market priorities 2023-2025 [pdf]

The Financial Conduct Authority (FCA) has published a final open letter directed at CEOs of personal and commercial lines insurance companies in which it outlines its key supervisory priorities for the years 2023 to 2025 for the entire UK insurance market and for personal and commercial lines insurers in particular and discusses key risks the Authority has identified in relation to such insurance companies and its expectations to mitigate these risks. Specifically, the FCA notes the following:
Personal and commercial lines insurance is the third significant pillar in the UK insurance market. Nearly 84% of surveyed adults hold insurance contracts and a little over 2/3 of them frequently shop around for such products. As all other insurance sectors, the personal and commercial lines market has faced tremendous challenges in the past few years, including the lingering effects of COVID-19, helping customers cope with rising living costs, and adapting to increased inflation and interest rates. Moreover, issues such as climate change, artificial intelligence, resource limitations, and profitability constraints could severely impact personal and commercial lines insurers and the risk they pose to the market. To address these concerns, obtaining accurate data to evaluate both current and emerging risks is a top priority of the FCA.
The FCA recently found significant issues giving rise to concern. These issues include prolonged waiting times and settlement delays, insufficient identification of vulnerable customers, the sale of products that do not offer fair value to customers, excessive commission payments to third parties without clear justification, failure to follow general insurance pricing rules, discriminatory pricing practices, and many others. As a consequence, the regulator has come up with the following key priorities for the industry as a whole, including corresponding expectations:
#### Market-wide priorities for 2023-2025 and relating expectations
Consumer Protection: A key focus of the FCA will be on monitoring how the market is implementing the new Consumer Duty, which requires insurers to implement measures to ensure good outcomes to customers in relation to products, prices, consumer understanding, and support. Firms are expected to prioritize consumers‘ interests and deliver positive outcomes. This applies to both current and future products, with the Duty expanding to closed products and services from July 31, 2024.
Governance and Culture: In the past, poor governance and culture in the insurance market have led to negative outcomes impacting not only consumers, but also staff members and the market as a whole. Firms are encouraged to promote diversity in their workforce to better understand diverse customer needs. Additionally, they should identify the key drivers of their culture and assess and improve cultural factors such as leadership, governance, and employee management, including hiring practices to ensure diversity among their workforce.
Operational Resilience: The ability to prevent, adapt to, respond to, recover from, and learn from operational disruptions is crucial. There is a particular concern about outsourced services and the need for robust governance, oversight, and contingency planning. Firms are expected to remain within the Impact Tolerance (ITol) for Important Business Services (IBSs) in accordance with the FCA’s Policy Statement PS21/3 on Building Operational Resilience by March 2025.
Appointed Representatives (ARs): Many insurance firms use ARs to support innovation and increase market access. However, there have been issues with this model. Strengthened rules now hold principals responsible for ensuring the fitness and propriety of their ARs. The FCA plans to enhance its supervision in that regard. Firms are expected to improve their oversight over ARs to ensure that these ARs maintain the same high standards as the principle firm.
In addition to these market-wide priorities, the FCA will focus on broader regulatory concerns over the next two years, including the Future Regulatory Framework (FRF) and its implications for the insurance market, the newly established secondary goal of enhancing competitiveness, and addressing climate change risks. Regarding climate change risks, the FCA urges organizations to proactively stay informed about how climate change may affect them and consistently evaluate the accuracy and effectiveness of their climate change (risk) models.
#### Priorities for 2023-2025 as regards the personal and commercial lines insurance sector in particular and relating expectations
The priorities for this market segment primarily center around the following:
– enhancing consumer protection,
– providing fair value to consumers,
– ensure adequate sales practices, and
– ensure non-discriminatory pricing in the personal and commercial lines insurance market. Below is a very brief summary of the key priorities noted by the FCA:
Putting customers needs first – the provision of fair prices and value:
The FCA emphasizes the importance of the relationship between the price customers pay for insurance and the quality of service or benefits they receive as required by the new Consumer Duty. This means that insurers must demonstrate how fair value is delivered, including justifying prices and commissions. In this context, the FCA notes that it has seen quite some shortcomings in this area and that it will not refrain from taking enforcement actions, if so needed. The same holds true for distribution arrangements, especially where insurance is sold alongside primary products like financial services or non-financial products. Commission levels also need to align with fair value for consumers, which is another key area of concern of the Authority.
Finally, the FCA notes that it will have a particular focus on the practice of price walking, where loyal customers are charged higher premiums, following the introduction of rules to prohibit such discriminatory practices.
Putting customers needs first – consumer support and claims management:
In light of rising costs of living, the FCA calls for firms to support customers facing financial difficulties, especially those who are vulnerable due to factors such as gender, ethnicity, age, unemployment, gig economy employment, or renting. Premium increases may disproportionately affect these groups which is why insurers need to put a key focus on this issue.
As far as claims management is concerned, the FCA emphasizes the need for firms to provide clear information to consumers about their claim settlement options, particularly those in vulnerable circumstances. In recent times, the Authority has observed significant delays and poor service in the claims settlement process, particularly as regards the (under)valuing of insured items. Again, the regulator notes that it will not tolerate such practices and will take enforcement action wherever needed. Furthermore, the FCA notes that it may conduct reviews to ensure prompt and fair claims handling.
Sales practices:
The Consumer Duty emphasizes the importance of prioritizing consumers‘ needs in sales and marketing practices. Some insurance products, like ‚essentials‘ home and motor policies, may offer limited coverage, and there’s concern that customers might not fully comprehend these limitations. The Consumer Duty encourages firms to empathize with their customers and assess whether their communications are suitable.
Firms must also ensure that the products they offer align with the customers‘ demands and needs. It’s essential to provide customers with appropriate information about the product so they can make well-informed decisions. To achieve this, firms should make material conditions or limitations of policies clear to the target market and, if necessary, test consumer understanding.
Setting & Testing Higher Standards – Environmental, Social & Governance Priorities:
As all other insurance firms, insurers in the personal and commercial lines segment are encouraged to cultivate inclusive cultures where employees feel safe to report concerns. Firms should establish effective channels for employees to comfortably voice their issues. The FCA expects insurers to address this issue, together with non-financial misconduct. As the issue of „corporate culture“ is of utmost significance for the regulator, the FCA notes that it will likely follow up on this issue. Firms must stand ready to present their progress in this area.
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To conclude, the FCA notes that in the coming two years, a significant part of its focus will involve evaluating firms activities and conduct against the above noted priorities and expectations. The Authority will also utilize data analysis to identify any firms that deviate from rules and expectations, and in such cases, will not refrain from taking appropriate enforcement action.