Wholesale insurance portfolio letter: insurance market priorities 2023-2025 [pdf]

The Financial Conduct Authority (FCA) has published an open letter directed at CEOs of wholesale insurance companies in which it outlines its key supervisory priorities for the years 2023 to 2025 for the entire UK insurance market and for wholesale insurers in particular and discusses key risks the Authority has identified in relation to wholesale insurance companies and its expectations to mitigate these risks. Specifically, the FCA notes the following:
Wholesale insurance is a significant pillar in the UK insurance market. With Gross Written Premiums (GWP) of more than £55bn in 2021 alone, the market is – what the FCA calls – „a fundamental enabler to the UK and global economy“. As all other insurance sectors, the wholesale 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 wholesale 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 in the wholesale market, 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 wholesale insurance sector in particular and relating expectations
The priorities for the wholesale insurance market primarily center around the following:
– enhancing competition,
– promoting responsible business conduct, and
– protecting the interests of consumers and the stability of the wholesale insurance market, with a strong emphasis on monitoring and enforcement where necessary. Below is a very brief summary of the key priorities noted by the FCA:
Promoting Competition and Positive Change:
The primary objective is to ensure that the London market remains a competitive global hub for large-scale and specialty risk insurance. This involves aligning with international standards to enhance the UK’s financial services sector.
Setting & Testing Higher Standards – Environmental, Social & Governance Priorities:
Wholesale insurance firms are encouraged to cultivate inclusive cultures where employees feel safe to report concerns. Currently, the London market lags behind other segments of the insurance industry in cultivating inclusivity and establishing effective channels for employees to comfortably voice their concerns. Firms are expected to address these issues, together with matters such as discrimination, harassment, victimization, and bullying. The FCA stands ready to take enforcement action against firms that fail to address such non-financial misconduct effectively.
Minimizing the Impact of Operational Disruption – Operational Resilience:
The London market’s interconnectedness necessitates strong operational resilience. Firms should have robust plans in place to ensure the continuous operation of critical systems, especially those containing sensitive risk data. In case of operational incidents, firms are expected to take prompt action and demonstrate proactive accountability in accordance with the above noted policy statement (PS21/3).
Putting Consumers‘ Needs First – Cyber Insurance:
With the increasing prevalence of cyber-attacks, firms offering cyber insurance must ensure that their policy terms are clear and comprehensible to customers. Customers should understand what they are buying to avoid misunderstandings. As far as claims handling is concerned, firms are expected to manage cyber insurance claims fairly and in a timely manner to support businesses facing cyber threats. Furthermore, the FCA expects wholesale insurers to improve their understanding of cyber risks, with a particular focus on board-level expertise and product oversight.
Putting Consumers‘ Needs First – Embedding the Consumer Duty:
The Consumer Duty extends to wholesale insurance firms that influence retail customer outcomes, even if they don’t have a direct customer relationship. Therefore, they must ensure fair value in product design and pricing, considering the end retail consumer in the distribution chain.
Reducing and Preventing Serious Harm – Reducing Financial Crime:
Wholesale insurance firms are specifically exposed to financial crime risks due to their international business operations and dealings with politically exposed persons. Therefore, it is essential that firms have strong policies, procedures, systems, and controls in place to detect, prevent, and combat financial crime. Firms lacking appropriate controls will be subject to stringent scrutiny and enforcement action, if so needed.
Reducing Harm from Firm Failure – Prudential Risk to Debt Servicing:
This priority applies to wholesale insurance intermediaries and involves addressing the risk of liquidity problems due to high levels of debt, especially in the context of mergers and acquisitions. In this context, the FCA notes that firms are expected to maintain sufficient financial resources to service debt under various scenarios, including stressed situations. Therefore, one of the FCA’s key priorities will be to assess intermediaries‘ financial positions, stress-testing, wind-down plans, and client safeguarding.
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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.