There was yet another warning shot fired by the FCA with the release of the latest general insurance value measures data on 20th September. The warning covered both a failure to comply with the rules around offering Fair Value as required by PROD 4 and a failure to deliver good outcomes for consumers under the Consumer Duty. GAP insurers have been put in the spotlight, but an analysis of the data released, which allows all insurers to see how they compare, suggests that there are a number of firms whose data might be construed as suggesting they are ‘outliers’ in terms of their performance.
And today it seems that the FCA may have gone one step further. There are unconfirmed reports that the FCA has today issued a number of insurers with Notices under S.166 of the Financial Services and Markets Act which will lead to the appointment of an “expert” to review their arrangements, leading almost always to a remediation exercise, repayments to customers and/or fines.
What Did The FCA Say?
This was the second set of data analysed by the FCA and a look back at the data set released in November 2022 makes it abundantly clear why GAP Insurers have come in for some very public criticism now. The FCA has given them one month to explain how they are meeting the PROD rules and providing Fair Value to customers.
To give this some context, this is the percentage of premiums paid out in claims for GAP products sold as an add-on and as a stand-alone product:
January – December 2022
GAP Insurance (Stand-alone)
GAP Insurance (Add on)
In other words, since the first warning from the FCA in late 2022, GAP insurers have paid out less money in claims as a percentage of premiums than they did before the warning was given.
The recent Dear CEO supervisory priority letters from the FCA indicated that it will “use the Senior Managers & Certification Regime to engage directly with accountable individuals on areas of concern”. By doing so, the FCA are turning the screws on senior managers to make sure that they are acting as is necessary and appropriate to ensure customers are receiving fair value products
While specific product Insurers may have been the subject of the initial spotlight from the FCA, they are by no means likely to be the only product class or insurer under scrutiny, as our wider data assessment suggests. In our view, it is that broader set of concerns that will have resulted in the summarised concerns expressed by the FCA. These are:
- the extent and quality to which insurance firms have implemented and embedded the new rules on Fair Value and Consumer Duty overall;
- that the data suggests for certain firms and specific products customers may not be receiving fair value – and specifically, the ability of firms to show that their value assessment of those products is in line with our rules; and
- initial indications suggests there are deficiencies in product governance and a lack of adequate management information.
The wider set of data has not, as yet, generated the public outcry that the specific set of facts surrounding the multi-occupancy buildings insurance issue has attracted, but it is hard to argue that anything much has changed.
The FCA have said they will “continue to use data to identify outliers and, where firms are not meeting our rules and expectations, (they) will take action.”. The use of data has been well flagged by the FCA in recent years and we at ICSR have highlighted how we expect that they will use that increased data. For firms, unfortunately, it seems that our predictions were correct and we now have clear evidence of how they are doing that.
On the flip side of the coin, the decision of the FCA to publish this data, is of real value to firms because it creates an easy mechanism for all firms to understand how they compare to other manufacturers in the markets.
The PROD rules and the Consumer Duty are simply the regulatory tools which will be used to hold to account those firms who are not acting in consumers’ best interests. In other words, don’t ignore the evidence.
There are four main areas where firms can get valuable insight from the data. These allow them to compare their performance to that of their competitors. The data being measured covers:
- The percentage of premiums paid out in claims
- Claim complaints as a percentage of claims
- Claims acceptance rate
- Claims frequency
Looking at the data in more details, some of the product areas likely to give concern beyond the headline focus on GAP insurers include:
- Home (building only) insurance, where the claim acceptance rate is much lower than other products and the complaint ratio is much higher;
- A number of products which have a claims frequency of <1% such as Personal Accident (stand-alone and add-on), Payment Protection and Before-the-event legal expenses insurance (motor and home).
- Home emergency cover (stand-alone) which has the highest complaints ratio and for 2022, the fourth-largest premium volume.
Individual firms can also use the data to compare their performance at product level and we would strongly recommend firms do so as a mechanism of helping to evidence the outcomes they are delivering under the new Consumer Duty rules.
This data set from the FCA is a gold mine for insurance firms and something that should not be ignored. CEOs and other Senior Management Function holders have been placed on warning that action is expected and all firms should be taking heed of this clear warning. For some, if the market rumours are accurate, it might be too late.
Firms should benchmark themselves not only against other firms at a product level, but against similar firms on the size spectrum.
We take this opportunity to remind firms of the VisRisk tool, which we have talked about separately. It remains to our knowledge the only purpose designed and built tool aimed specifically to help firms manage the process of assessing Fair Value across a portfolio of products and distribution channels. If you are under direct regulatory pressure or would just like to know more about the way it could help your firm, please ask. You can learn more about the VisRisk tool here.
The ongoing regulatory concerns over excessive commission have been a topic of conversation for many years now. Whilst it is not in itself the major thrust of the FCA work around value, it is clear from the references made in relation to the commission levels paid to certain parties in distribution chains that it remains an area of concern. We are yet to see the final outcome of the investigations into commission levels paid in the multi-occupancy building insurance market, but this latest set of data will not have helped the cause of those trying to make the case to retain a commission model.
In summary, as Matt Brewis says:
“’If the firms are unable to prove they’re providing fair value to their customers, they should expect further action from the regulator.”
Given the period of time over which these issues have continued, it seems to us that it probably won’t be long before we see that action from the FCA.
If you would like to discuss your own firms value measures data and understand what action you should be taking, or know more about the VisRisk Fair Value tool, please speak with your usual contact at ICSR.