1. Outsourcing arrangements and delegating authority
Outsourcing continues to be one of the main ‘conduct risks’ for insurers operating in the general insurance market. In June 2015, the FCA published the findings of its long-awaited thematic review (TR 15/07) into insurers’ outsourcing of underwriting authority, claims handling authority and certain other elements of insurance product provision (including complaints handling). The FCA concluded that some firms had not adequately considered or recognised their regulatory obligations. Following the TR 15/07 the FCA expects all insurers and intermediaries to:
- consider the extent to which the issues identified in the review impact their businesses;
- assess what changes might be necessary to existing arrangements; and
- ensure any new arrangements are designed with the review’s outcome in mind.
2. Oversight of appointed representatives
Announced in its 2015/16 business plan, the FCA launched a review into the role appointed representatives (ARs) play in distributing general insurance products. The principal must have robust systems, controls and resources in order to be in a position to select and oversee ARs effectively. The findings of the review are expected in 2016.
3. Claims handling for Small and Medium-sized Enterprises (SMEs)
In May 2015 the FCA published the findings of its thematic review (TR 15/6) into how promptly and fairly insurers were handing claims made by SMEs. The FCA found failings around claims handling for these customers and noted its intention to engage with firms, senior figures in the industry and relevant trade bodies to discuss the findings of the review. Firms with SME customers should note carefully the findings of TR 15/6 and implement the changes necessary to improve communication and ensure a more customer-centric claims handling process.
4. General insurance products sold as add-ons
Following a market study conducted in 2014 into general insurance add-ons, the FCA consulted on a range of possible remedies to tackle the issues arising, before publishing final rules (PS 15/22) in September 2015. In summary:
- From 1 April 2016, FCA rules will no longer permit the opt-out sale of add-on products to customers. The effect of this is that customers will no longer be defaulted into add-on products for which they will be charged.
- Firms must ensure their appointed representatives comply with the new rules.
- Free add-ons will continue to be allowed, unless the firm seeks to charge for them at renewal.
- Non-binding guidance in relation to the provision of information about add-on products to customers should be reflected in firms’ sales practices by September 2016.
5. Measuring the value of insurance products
In its market study into general insurance add-ons, the FCA found that customers were paying too much for some products that offered poor value. The FCA explored this issue in a discussion paper (DP 15/4) in June 2015, which considered various options for requiring insurers to report information that would allow consumers to assess and compare the value of insurance products more effectively. Options for the appropriate value measures include:
- Using the claims ratio as a standalone measure;
- Using the claims ratio coupled with claims acceptance rates; or
- Using a package of measures comprising claims frequencies, claims acceptance rates and average claims payouts.
The FCA was originally expected to publish a formal consultation on the preferred measures towards the end of 2015, however this is now expected in 2016. The new measures will be included in a new regulatory return to be completed by general insurers on a regular basis.
6. Cybercrime and data security
Reliance on web-based front-end channels poses a risk of increased cybercrime. These channels increase the risk of personal data and consumer funds being compromised. Similarly, insurance firms providing cover for cybercrime risks are themselves collecting large volumes of data that could be vulnerable to cyber-attacks. The FCA sees this as a key area of risk as set out in the FCA’s ‘Risk Outlook’ for 2015/16 (included in the FCA’s most recent business plan). Firms should be aware that traditional security controls firms used around data may not be sufficient to withstand the breadth of sources of cyber-attacks. The FCA’s Financial Crime Guide (published in April 2015) contains useful guidance for firms on data security, including examples of good and bad practice in respect of systems and controls. In November 2015, the FCA published Consultation Guidance (15/6) on the requirements for firms when outsourcing to the ‘cloud’ and other third-party IT services. The guidance is intended to help all firms oversee effectively all aspects of the life-cycle of their outsourcing arrangements: from making the decision to outsource, selecting an outsource provider, and monitoring outsourced activities on an ongoing basis, through to exit. The final guidance will be published following the consultation period (which will end on 12 February 2016).
7. Big Data
The use of ‘Big Data’, such as web analytics and behavioural data tools, is increasing across financial services and particularly in the general insurance sector. For the FCA, there is a balance to be struck between allowing innovation while preventing poor consumer outcomes. In its 2015/16 business plan, the FCA committed to undertake a thematic review, to gain more understanding both of how insurers use Big Data and how this might evolve in the future. At the end of November 2015 it published a call for inputs to the review, focusing on three key questions:
- Does Big Data affect consumer outcomes?
- Does Big Data foster or constrain competition?
- Does the FCA’s regulatory framework affect developments in Big Data in retail general insurance?
The call for inputs closed on 8 January 2016. The outcome from the call for inputs may feed into one of several next steps. The FCA will use the findings from the call for inputs to determine whether to conduct a market study or make adjustments to existing policy and/or guidance.
8. Insurance premium financing
The FCA published the findings from its thematic review of premium finance for retail customers in May 2015. In our view, there is plenty more work for the FCA to do in this area, particularly in the light of the new CONC rules relating to the provision of premium finance.
In October 2015, the FCA and PRA published final rules and guidance requiring firms to put in place formalised whistleblowing procedures. The rules will apply to insurance and reinsurance firms within the scope of Solvency II and Lloyd’s managing agents. For other firms, the rules should be treated as guidance. In particular, the rules require firms to:
- appoint a non-executive director to be the “Whistleblowers’ champion” (a role which aligns with the prescribed responsibility for whistleblowing procedures under the new SIMR regime);
- put in place appropriate and effective internal procedures for the disclosure of reportable concerns;
- provide adequate training and information for staff about the firm’s internal whistleblowing arrangements and the FCA and PRA whistleblowing services;
- require their appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service;
- include text explaining employees’ legal rights in respect of making protected disclosures in any new settlement/compromise agreements;
- ensure that nothing in any employment contract or settlement agreement prevents or discourages an employee from making a protected disclosure to the PRA/FCA;
- put in place “reasonable measures” to ensure that whistleblowers are not victimised;
- inform the FCA if they lose an employment tribunal case brought by a whistleblower; and
- present a report on whistleblowing to the board at least annually.
Insurers have until 7 March 2016 to assign responsibilities to a whistleblowers’ champion and until 7 September 2016 to comply with the new rules.
1o. General insurance renewal
In December 2015 the FCA published CP15/41 following a large scale research project, which looked at over 300,000 customers from one home insurance and two motor insurance providers. The aim of that project was to assess whether improved disclosure can help consumers become more engaged at renewal. The FCA’s consultation proposals, which follow on from the research project and other FCA work, include:
- rules that require firms to disclose last year’s premium on renewal notices;
- rules that require additional disclosure when customers have renewed the same product for times or more;
- guidance on how firms can improve their processes around renewals; and
- guidance about records that firms maintain to demonstrate compliance, including a record of premiums.
The consultation closes on 4 March 2016 and Policy Statement and final rules are expected in mid-2016. Firms should consider increasing their focus on renewal pricing, and consider their obligations to Treat Customers Fairly when developing their overall approach to renewal pricing and in their treatment of long-standing customers.
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