The Financial Conduct Authority (FCA) has today published its thematic review looking into the handling of insurance claims from small and medium-sized enterprises (SMEs). The FCA’s review emphasises that insurers must treat their SME customers fairly, including in relation to the handling of their insurance claims. However, the FCA’s review has found that the claims service does not consistently work in the interests of many SMEs, resulting in a poor claims experience.
Background to the Thematic Review
The regulatory focus in the insurance sector in the past decade has naturally been on retail markets. However, the clear view in the market is that the tide has turned and that the PRA and FCA are both becoming increasingly interested in how wholesale markets operate and to ensure that commercial policyholders, including SMEs, are receiving fair treatment. The FCA announced in its 2014/2015 Business Plan that it would be undertaking a detailed thematic review of commercial claims handling standards. The FCA focussed its review on the handling of claims for SMEs, primarily due to the vital role they play in the UK economy but also because SMEs are less likely to be sophisticated customers with many having similar knowledge and experience to retail consumers when purchasing insurance products.
In our experience, regulatory responsibilities have historically been given little or no attention in the context of handling commercial claims. Typically, a review will be undertaken as to the background circumstances and policy wording and if the conclusion is reached that there is a legal right to reject a claim then (subject to any commercial relationship issues) the claim will be declined on these grounds. However, the high level claims handling responsibilities under the Insurance Conduct of Business regulations (ICOBS) impose duties that potentially go well beyond what the law provides. It is therefore important that firms consider their regulatory responsibilities in conjunction with any legal rights they may have under the policy.
How claims from SMEs are handled
The FCA found that there was a gap between the claims service received and SMEs’ expectations. A recurring complaint from SMEs was that the claims process was not working effectively in their interests. The FCA’s research found that a number of claims were going “very wrong for claimants”. This, in turn, has led to claimants being subjected to financial and emotional distress, which can be damaging to both the SME and the responsible individuals within the business.
Handling the initial stages of a claim
The FCA’s review makes it clear that making contact with a claimant immediately after the notification of a claim is crucial. The FCA identified numerous cases, for example, where there had been delays in carrying out site visits to make an initial assessment of a loss. The FCA found that these delays are exacerbated where there are several parties involved in the claims handling process. The FCA’s review also found that SMEs were often unclear about the roles of different parties involved in the claims process. Further, the FCA concluded that many SMEs felt they were not given a clear plan detailing the stages in the claims process and the timescales involved. The FCA make it clear they expect firms to provide its customers with all the information they need to navigate the claims process at the outset.
Ongoing management of a claim
The FCA’s review only found a limited number of cases where SMEs felt that their claims had been handled effectively. The FCA’s research found that it was common for SMEs to have to chase for updates on the progress of a claim. In addition, the FCA has raised concerns that insurers are not settling claims promptly and fairly.
Settlement of a claim
The FCA found that it can be difficult for SMEs to understand what they are entitled to under the terms and conditions of their policy, primarily because a claim can vary across different aspects of cover within a policy. However, the FCA’s research concluded that firms are generally flexible in accommodating claimants’ wishes.
The Financial Conduct Authority (FCA) has today published its thematic review looking into the handling of insurance claims from small and medium-sized enterprises (SMEs). The FCA will now meet with senor industry figures to discuss its findings and to explain its expectations and the changes that are required to improve the claims handling service for SMEs.
Implications and Next Steps
The FCA expects customers’ interests to be at the forefront of how firms manage their business, including as to how they handle claims. All claims by customers should be handled promptly and fairly and controls should be in place to ensure that this is the case. The FCA’s thematic review concludes, however, that processes are currently not:
- detecting and addressing inconsistencies in the handling of claims;
- identifying and taking steps to manage claims that have stalled because of unresolved issues; and
- identifying and addressing issues that appeared widespread, particularly the failure to communicate with policyholders about the progress of a claim.
The FCA expects firms to consider the findings of its review and to take appropriate steps to ensure that SME customers are treated fairly. The FCA will now liaise with firms and senior industry figures to discuss the findings of its thematic review, its expectations and the changes that may be required to improve the claims handling service for SMEs.
Unless a firm’s claim handling procedures include an assessment of regulatory standards before a decision is made to reject a claim, then the FCA is likely to treat that as a deficient process and in breach of its rules. For example, ICOBS requires insurers to handle claims “promptly and fairly” and prohibit insurers from “unreasonably rejecting a claim”. It is quite possible that it would be lawful to decline a claim and yet it would not in the circumstances be fair or reasonable to do so. In addition, there are a series of other duties on insurers in ICOBS that apply in the context of handling commercial insurance claims – such as keeping the policyholder properly informed of the progress of its claim and paying out funds promptly once a claim has been agreed – which impose standards not required by the law of insurance. The Insurance Act 2015, which will be in force in August 2016, also changes the landscape forming part of a far more insured-focussed insurance world in the UK.
Firms are advised to take heed of the FCA’s findings and need to be wary of their regulatory responsibilities to their customers in order to avoid the FCA taking action through a supervisory notice and/or painful enforcement action.