Amongst many new obligations placed on insurers and insurance brokers by the FCA, as it grapples with meeting its objective of preventing harm to consumers resulting from the coronavirus pandemic, is a requirement that product manufacturers review the value that their offerings provide to customers in light of changing needs brought about by the pandemic. In reality, the product governance process is not an ‘occasional’ piece of work carried out to a deadline but an ongoing regulatory obligation used to help manage risk within the business. Indeed, an obligation that is set to change in 2021 or 2022.

For insurance firms, the Product Governance obligation was created as part of the Insurance Distribution Directive, implemented in October 2018, when the concept of Product Governance was introduced for insurers and insurance brokers. ICSR first looked at this in an article published in August 2018 titled “Insurance Distribution Directive Deep Dive 1: Product Governance”. We looked at how the product lifecycle for an insurance product might differ from that used for physical products.

I wrote at the time that whilst the exact obligations for insurers and Lloyd’s Managing Agents might differ slightly due to their business models,

“…it is important that there is a clear framework for governance of products and their lifecycle, including most importantly the setting of KPIs and thresholds and the review of appropriate Management Information on product performance, the ability to identify issues and where they exist correct them.”

When the coronavirus related guidance was released in June, my colleague Craig Umbleja commented in his article “Product Value – What Price Customer Loyalty?” that:

“Whilst it would be easy to see this as simply another obligation in the process of achieving regulatory compliance, our view is that progressive firms will see this as an opportunity to build trust, engagement and loyalty with their customers.”

He makes an important point – that good product governance should be seen as an opportunity to create competitive advantage, not a cost to the business.

That advantage comes not just from greater levels of customer satisfaction, but also from improved management of risk. In my article “Risk Management And The Art Of Product Governance” in May 2020 I observed that:

“One of the most significant controls for insurance risk is the product development process insurers are required to operate and, in most cases, have been operating for years. This process is designed to ensure that the products they are developing are suitable for their customers. It requires an assessment of the target market, the product wording (which is the cover that is to be offered) and other product documentation, the distribution model and customer value. Products are required to be approved and once approved the insurer is expected to monitor the performance of the product using a series of metrics.”

The Current Review

In June the FCA announced that it expected “insurers and insurance intermediaries to consider the value of their products in light of the exceptional circumstances arising from the coronavirus (Covid-19).” The focus was on identifying situations where the effects of the coronavirus pandemic meant that consumers had paid for a product which would no longer be able to provide the benefits originally expected due to a change in circumstances beyond the customers control.

The FCA highlighted two specific areas of concern, where:

• “Firms are no longer able to provide expected contractual benefits, either in the expected form, to the expected timeframe, or at all. For example, where fulfilling claims involves service providers whose movements are restricted because of lockdown (e.g. boiler servicing), or some medical covers where customers cannot access certain benefits.”
• “Underlying insured events can no longer happen for any holders of the policy eg, due to Government lockdown or other circumstances connected with coronavirus, resulting in a fundamental change in risk for the firm. For example, public liability insurances for businesses that are unable to open, such as hairdressers, bars and restaurants.”

Firms were given 6 months to undertake this work and in October the FCA confirmed there would be no extension to this deadline. The key date is 3^rd December, by which point firms should have undertaken the work necessary to establish:

• Are there any changes in circumstances that could materially affect the value or relevance of a product to the customers buying it?
• If so, what is the appropriate action to take?
• How they will communicate any issues identified with the affected customers?

These are very tangible objectives defined by the FCA with the specific issues around coronavirus in mind. In reality though, a firm that has a process for Product Governance established broadly in line with the principles we have been suggesting for the last two years should have identified these issues before the FCA mandated this work though perhaps not with the timetable set by the FCA. It is very likely to have been a bit of a wake-up call for many in terms of how dynamic the FCA expect the continual review of value and suitability to be.  However, a well-thought out MI pack, delivered on a timely basis to individuals with an appropriate level of skill and expertise to identify trends of potential concern, should have quickly alerted firms to the likelihood of value issues arising and triggered a Product review for products where customer may have been impacted by Coronavirus related issues.

In this context, we think about lead indicators that might have been apparent even before the first FCA guidance was issued in early May and confirm. Examples that firms might have identified from their MI packs or through a process of ownership of the product governance process include:

• A sudden drop in the number of motor vehicle accidents being reported;
• A sudden drop in the number of EL or PL claims being reported as businesses were forced to close;
• A recognition that boiler servicing could not be undertaken;
• A recognition that closed businesses might not need certain covers purchased;
• A recognition that annual travel insurance policies may not provide the same value as intended.

Identification of any of these issues should have triggered a review by firms under their Product Governance process. The FCA has avoided being prescriptive in terms of the action it expects firms to take, leaving them to consider how to rebalance the ‘value’ equation so that it remains fair to both parties to the contract.

The fact that the FCA have not imposed any specific feedback mechanism on firms reinforces the reality that this is more reminder and a heads up about how they expect the Product Governance  requirements to be applied than new regulation. Indeed the FCA have highlighted existing regulations in making that point.

The draft guidance published in May stated: “When considering product issues, firms are reminded of their obligations under:

• the FCA Principles for Business (PRIN)
• the systems and controls sourcebook (SYSC)
• the product intervention and governance sourcebook (PROD)
• the insurance conduct of business rules (ICOBS), in particular ICOBS 2.5.-1R”

How should you proceed?

Our advice is simple – don’t ignore the 3^rd December deadline. If you have not already done so, use it as an opportunity to set in place clear guidelines, principles and responsibilities for the Product Governance process within your organisation. This is our recommended approach for doing so. A 4-step guide to creating an effective Product Governance process, one that can operate as a core part of your firm’s wider governance and risk controls.

1. Ensure your Product Governance process is aligned to the risks in your firm’s risk register.
2. Ensure you have the right resources tasked with owning, overseeing and delivering your Product Governance process. Your underwriting and compliance functions should be equally involved.
3. Review your Management Information (MI) packs to ensure you have available, on a timely basis, current data to facilitate a clear understanding of the way your product is working.
4. Look at the culture within your organisation and ask yourself if the culture is aligned to a clear objective of putting customer value at the heart of your Product Governance process.

Product Governance In Action

It is fair to say that Admiral Insurance, by their actions so early in the pandemic, would appear to have a very effective Product Governance process, with appropriate resources involved in the process and a culture that from an external perspective would appear to quite overtly place their customer’s best interests very firmly within the contemplation of the way they run their business.

By 21^st April (well ahead of the FCA guidance being issued on 3^rd June) Admiral had announced that all of its car insurance customers would get a £25 refund. One can only imagine the internal work required to reach that point and approve a payment that cost it a reported £110m. I think we can safely say that Board engagement was required to approve that decision and it is apparent the process for doing so was almost certainly within their Product Governance processes. Going from initial lockdown to the publication and communication of this decision within the space of a month is pretty impressive. It is certainly a better response than from my own motor insurers !

What Next?

Firstly, make sure you have completed your product reviews. Whilst there is no specific requirement to report back to the FCA that you have done so, it is to be anticipated that the FCA will ask questions and it is certainly the case that under the Senior Managers & Certification Regime there should be an individual with identified responsibility and accountability to oversee Product Governance. If that is you, be prepared to answer the question if asked. A little investment in preparing your response now could save a lot more time in the future if your response is not to the satisfaction of the FCA.

Secondly, make sure your firm’s Product Governance processes are fit for purpose. Embedding your Product Governance processes as part of your ‘BAU’ activity will serve you well with so many other pieces of work that you will be considering.

The General Insurance Pricing review brought forward proposed changes to the Product Governance Sourcebook in September 2020. Assuming these are implemented, it brings all products within scope of the guidance, something I considered in my article “Pricing – ‘Fair Value’ Is Not Just A Household And Motor Issue” back in October.

“Product governance rules are currently defined in the Product Intervention and Product Governance Sourcebook (PROD) and currently only apply to products manufactured on or after 1st October 2018. The FCA are proposing that both the existing and proposed new PROD rules will now apply to all general insurance and pure protection products. Firms will have 1 year to complete this transition, a time frame likely to conclude sometime around Q2 2022. Additionally, firms will be expected to undertake a review of products at least every 12 months, or more frequently if the risk of harm is high.”

In his article recently on vulnerable customers (Vulnerable Customers: Be Aware and Take Due Care) my colleague Craig Umbleja reminded us that

“The reason why the FCA is focusing so much on this topic is that research has highlighted that the fair treatment of vulnerable customers is not yet being consistently embedded by all firms in their culture”. This is an issue Product Governance should identify and the FCA in their report specifically said “We expect the fair treatment of vulnerable consumers to be taken seriously by firms, and embedded into their culture, policies and processes throughout the whole consumer journey.”

These are just two examples of work being undertaken by regulators that firms with a well implemented Product Governance process will find significantly easier to respond to.

Conclusion

Our suggested 4-step process to embedding Product Governance in your organisation is intended as a guide to help firms establish if they have an effective process in place. The reality is that each of these steps requires detailed work to be effective. Indeed, something like culture is notoriously difficult to change in an organisation and it is likely that if work is required it will cut across many other aspects of your business.

Wherever you stand though, act now. An effective Product Governance process is not just for pandemics, it is an essential part of the permanent structure of your organisation and an effective tool to help your board manage risks to your business and set suitable strategies. Done well, it can be a competitive advantage to your firm.

ICSR has covered the subject of Product Governance in many articles, either on a focussed basis or as part of our consideration of a wider subject. You can read all of these on our website here.

If you would like to discuss any aspect of your firm’s Product Governance structure, please feel free to contact us in complete confidence.

Kenneth Underhill

Director
Implement Compliance Solutions & Resources