What’s it all about?

The FCA has been concerned with value being provided to consumers for some time, with various market studies, thematic reviews and pilots being conducted by the FCA since it was created. The Consultation Paper covering Value Measures issued in January is merely one of the latest. Since the issue of that document they have also issued the outcome of Thematic Review 19/2 on Distribution Chains under cover of a Dear CEO letter which also made reference to the Guidance Consultation on the same topic which was issued on the same day. Those documents and the issues covered will be the subject of our next article, later this week.

Historically the FCA’s work has also included:

• a General Insurance Add-ons market study in 2013 which identified poor product value as a key area of harm both in add-on and some standalone products sold by firms. The regulator felt that these poor outcomes were caused by ineffective competition and a lack of common measures of value.
• In 2016, the regulator also carried out a Value Measures Data pilot, with claims data being captured from a number of insurers who volunteered to take part in the study.
  The pilot tested 3 data metrics for four GI products, home emergency, home, personal accident and key cover;
  1. Claims frequencies
  2. Claims acceptance rates
  3. Average claims pay out

The pilot also had a positive impact, improving transparency and awareness, by both industry and media, of different indicators of product value.

Since launching the pilot, overall product value, in terms of suitability and performance, has become an increasing concern for the FCA, which they highlighted in the 2018 sector view.

There has been a thematic review of the mobile phone insurance market, which found that product governance was not always effective, aspects of products were not designed to meet customer needs and there were examples of poor sales and claims handling practices. The CMA also found in a separate investigation into private motor insurance add-ons, that products of poor value were being sold in the form of low claims rations for motor legal expenses, personal accident, key cover and extended foreign use.

The FCA has also taken action where identified harm has been caused by poor value products. In 2017, Express Gifts Ltd entered into an agreement with the FCA to provide £12.5m redress to approximately 330,000 customers who were sold accidental damage and theft insurance for all products purchased from their “Ace Or Studio” brands. In March 2019, the regulator fined the Carphone Warehouse £29,107,600 for failings that led to the mis-selling of mobile phone insurance and a technical support product.

On a more positive note on 1 October 2018, the FCA introduced rules as part of the implementation of the Insurance Distribution Directive (IDD) which set out the product oversight and governance responsibilities of firms in the insurance sector, which are that:

• Product manufacturers must identify the target market for their products and ensure products are compatible with the needs, characteristics and objectives of customers in that target market. They must regularly review their products and take appropriate action if they identify any circumstance that may adversely affect the customer.
• Product distributors must have adequate arrangements to understand the characteristics of each insurance product and the identified target market of each insurance product. They must also obtain sufficient, adequate, and reliable information from the manufacturer and the insurance products to ensure that they will be distributed in accordance with the characteristics, objectives and needs of the target market.

The findings from these market studies, pilot scheme and thematic reviews have been fundamental in the FCA deciding that some action was needed to help improve product value and reduce the risk of unsuitable general insurance products being bought or sold.

The outcome has been the publication of Consultation Paper 19/8 on 30th January.

The consultation paper sets out two proposals that the FCA are considering:

1. Requiring firms to report General insurance Value measures data, in the retail sector, to the FCA for publication on an annual basis;
2. Additional requirements for firms to use value measures data as part of the monitoring and governance of their products.

The FCA aims to improve market transparency and competition, with the snowball effect of encouraging firms to make products improvement on their own accord, driven by the transparency of publishing data which is easily comparable which will create internal and external pressure on firms to make product improvements, therefore increasing value to consumers. Publishing the value measures data will also provide the FCA with an additional tool to help them supervise firms.

KEY ELEMENTS OF THE PROPOSALS

Product Scope

Only Retail General Insurance products will be in scope, so any Commercial products sold by insurers are outside the scope of the proposals. Taking a broad approach is designed to reduce the risk that poor value will become more prominent in products outside the scope of reporting.

The following products are in scope:

• Motorcycle
• Home (Contents only)
• Travel- annual multi trip (European travel)
• Travel- single-trip
• Pet- accident only
• Pet- maximum benefit
• Home emergency
• Extended warranty- electrical goods
• Extended warranty- motor
• Healthcare cash plan
• Personal accident
• Payment protection (including credit card, store cards and personal loans)
• Motor legal expenses
• Legal expenses (other)
• Breakdown cover (for motor)
• Excess cover (for motor insurance)

A number of products are excluded from scope. These include insurance provided with a package bank account, no claim bonus protection and commercial products.

The FCA is proposing to split some products up to provide more meaningful data e.g. for pet insurance there are different product types including accident only, time limited, maximum benefit and lifetime policies.

REPORTING

Reporting Threshold

The proposed reporting thresholds for each product per firm are:

1. Where total premium written is above £400,000 in the reporting year; and
2. Where there are more than 3,000 policies in force during the reporting year.

Any product which is within scope but falls below one of the thresholds outlined, is not required to be reported on by the firm.

Values Measures Metrics and Metric Definitions

The proposed metrics to be reported are:

Claims Frequency: number of claims registered by firms divided by the average number of policies in force. (How often consumers are claiming on their insurance policies)
Claims acceptance rate: number of claims registered less the number of claims rejected, divided by the number of claims registered (how likely claims are to be accepted)
Average claims pay-out: total pay-out for claims (including relevant claims costs incurred by firms) during the reported period divided by the number of claims where all or part of the claim has been accepted and a pay-out has been made and the claims is closed
Claims complaints as a % of claims: as the number of claims complaints divided by the number of registered claims.

For many firms this narrow scope of metrics is likely to be less than what is already reported to management as Conduct Risk Management Information meaning that the scope of information to be reported is unlikely to create considerable difficulties for most firms.

Broadly these metrics are what were in scope for the pilot scheme though a completely new metric from the pilot has been proposed, “claims complaints as a % of claims”. This is because the FCA believes that it is often only when consumers make a claim that they know whether it meets their needs. Measuring complaints during the claim period can highlight potential issues, which include, firms unfairly rejecting claims an claims process that are difficult to navigate or create barrier to claiming.

The metrics may:

• potentially help consumers understand the potential benefit of a product; and
• highlight poor value to customers.

Insurers and distributors will be on notice that they can expect consumer groups and others to be very interested in the annual publication of this information.

Insurers should also note that the FCA are proposing to link claims complaints to their existing claims complaints reporting requirements in DISP, but also requiring the complaints to be split by the value measures products. This will mean that insurers must be able to evidence that the two metrics are reconcilable if they wish to ensure that questions are not asked about differences in reported complaints.

Reporting Responsibility

The responsibility for reporting will normally fall with insurers.

However, there are exceptions to this. For most insurance products sold to UK customers by EEA firms, the FCA propose to apply the reporting requirements to the EEA firms. However, where an EEA firm passports into the UK on a service only basis and there is a UK manufacturer of that product, then the UK manufacturer will be responsible for reporting the value measure data to the FCA. A firm will be considered a UK manufacturer, if it has an office presence in the UK, and is deemed a product manufacturer as per the FCA Handbook definition.

The other exception will be, where an EEA firm passports into the UK and provides e-commerce service from another member state, under the e-commerce directive and there is no UK manufacture. Here the FCA propose to apply reporting requirements to the UK distributors.

Where there is no authorised provider of the products (for example, some breakdown cover business), the FCA propose applying the rules to the authorised intermediary in the distribution arrangement the effect of which is to make the relevant authorised intermediary responsible for reporting value measures data to the FCA.

Retail business underwritten by Lloyd’s syndicates is within scope. Lloyd’s Managing Agents will have to report on the products where they manage underwriting capacity.

Granularity

The insurer or other party responsible for reporting the data will be required to report data at product level, with a split between add-on and standalone sales, the same as the pilot. However, an additional level of granularity is being proposed by the FCA in this consultation, with the insurer being asked to report the 5 largest distribution arrangements and a 6th category capturing the remaining business.

The FCA thinks the additional level of granularity will provide them with the most effective coverage of insurers and distributors. It will also help firms and the FCA monitor distribution arrangements and ensure that consumers are getting value from the insurance products purchased.

The FCA are proposing to treat insurance policies sold alongside or with primary products as add-ons and optional extras (where there is not a seperate policy) treated as part of the primary product, with one exception: legal expenses cover will be required to be reported separately because the cover is a very common add-on for motor and home insurance and it operates differently from other insurance products on the market.

However, the FCA also propose that the average claim pay-out is not reported on for legal expenses as there is likely to be little benefit to the consumer as a claims pay-out is to the legal firms and advice provided on helplines.

Reporting Period and Frequency

The proposed reporting for firms will be December 31st of each year.

The Value Measures Definitions

The definitions of the value measures are generally remaining as they were in the pilot scheme but the FCA has proposed two changes from the pilot. The first is the treatment of the initial contact from consumers when making a claim. In the pilot, where consumers made a claim and were informed at that time they were not covered or that the claim was rejected, this was treated as an enquiry rather than a registered claim. The FCA now consider that where a consumer contacts a firm about a potentially claimable event that has taken place or loss that has occurred (i.e. the ‘first notification of loss’), but the claim is rejected at that time, it should be treated as both a registered claim and a rejected claim.

Recording this rejection could highlight where there are issues with consumer understanding of the product or the firm’s product oversight and governance process. This change will help firms to monitor and improve claims handling, sales processes and product literature. The regulator expects that the main impact of this change will be to increase the claims frequency (as some enquiries will be treated as claims) and reduce the claims acceptance rate (as these additional claims would be treated as rejected claims).

From an insurers point of view I anticipate that the main operational impact to be quite significant as they will now be required to retain their staff and improve their recording processes potentially also requiring some IT changes.

A consumer contacting a firm to raise a hypothetical question about their policy will still be treated as an enquiry.

The second area of improvement that the FCA has focused on is the treatment of “walkways”. This is where consumers raise a claim but stop pursuing the claim with the firm during the claims process. In the pilot, “walkways” were treated as part of registered claims (impacting on claims frequencies) but did not include them as rejected or accepted claims.

Going forward, it has been proposed that “walkaways” are removed from the published data entirely (i.e. not included as registered claims), as the FCA consider this better reflects the reality that they are neither accepted nor rejected claims. This change is likely to lower reported claims frequencies and reduce claims acceptance rates (albeit by not as much as the proposed treatment of claims rejected at the point of the first notification of loss).

However, the FCA still propose to continue to collect (but not publish) data on the number of walkaways. As they consider this will help with the supervision of firms as it can highlight where some firms, with relatively high proportions of walkaways, may have overly complicated claims processes which discourage consumers from pursuing valid claims. It may also highlight products that were potentially unsuitable for the consumers’ demands and needs.

Publication of Data

Just like the pilot, the FCA proposes to publish value measure data in bands, with the bandings varying from product to product. They will be published on the FCA website and the bandings will be determined by the FCA’s assessment of the claim’s profiles of the different products.

FCA DESIRED OUTCOMES

The FCA hope these proposals will improve the GI market in the following ways:

1. Promote competition in product value by creating incentives for firms to improve products and address poor product performance.
2. Protect customers by reducing the potential harm caused by the sale or purchase of poor value or unsuitable products.

MEASUREMENT OF SUCCESS

The FCA intend to assess the impact of these proposals in 2 main ways:

1. By measuring and monitoring how the reported metrics changes over time, both at a firm and product level, will show the FCA how consumers are using their products (claims frequencies and average claims pay-outs). Data will also highlight whether the sale of unsuitable products has reduced (claims acceptance rates) and whether consumers are satisfied with their product (claims complaints as a % of claims).
2. Through the FCA’s supervisory engagement with firms, the FCA will then assess the impact the remedy has had on firms and whether improvements have been made to protect value.

PRODUCT GOVERNANCE PROPOSALS

As part of this consultation paper the FCA are also proposing additional requirements for firms to use value measures data as part of the monitoring and governance of their products. The FCA consider that value measures data should be an important factor in firms’ product governance processes and controls. As it can help highlight a range of potential issues, such as low consumer awareness and understanding of the product, unclear sales processes, or where the volume of claims is significantly lower than estimated by the firm as part of the product design process.

Therefore, they are proposing the additional governance rules, requiring firms:

1. To take into account value measures data when monitoring products generally (including existing products);
2. To consider whether their products are likely to offer sufficiently good value to customers in their target market; and
3. Where appropriate to inform changes in their products.

I have already made the point above that the metrics proposed to be reported on are already likely to be less than that covered by most insurers as a part of their product governance processes, so I see little change here for insurers. However these proposals are going beyond that to require positive action in the appropriate circumstances. Firms will need to take careful note of this particularly in light of SM&CR and the potential for personal responsibility.

For those interested in ready further on Product Governance our earlier article titled “Insurance Distribution Directive Deep Dive 1: Product Governance” will be of interest.

Scope

The FCA propose that the value measures data product governance rules will apply to all products, including existing products. As is currently the case, other rules in PROD 4 will continue to apply only to new products manufactured after application of the IDD, on 1 October 2018, or to significant adaptations of existing products after that date.

WHAT NEXT

The FCA are seeking views on their proposal and would like firms to send comments to questions asked in their consultation paper by 30 April 2019. They will then consider all the feedback and intend to publish a Policy Statement later this year with their responses to the feedback gathered from this consultation.

Craig Umbleja
Senior Consultant
ICSR