New regulations for insurers have been outlined by the Financial Conduct Authority (FCA), with the first part of the regulations coming into effect on the 1st of October. All general insurance and pure protection firms – both insurers and intermediaries – were required to implement the new product governance rules contained in PS21/5 by 1st October, with new rules around pricing taking effect on 1st January 2022.
As part of the FCA’s ongoing work to ensure consumers receive fair value, the review looked at how firms designed, sold and reviewed their products to ensure they met the needs of their customers.
The findings showed that some firms had made good progress in meeting the FCA’s existing rules and guidance on product governance and value, issued in 2018 and 2019, as well as against temporary guidance on product value, issued in response to covid-19 last year.
However, too many firms were not fully meeting the FCA’s standards. In addition, many firms were likely to be unprepared to meet new enhanced rules on product governance, which came into force on the 1st of October 2021. These new rules are part of a wider package of remedies introduced by the FCA to tackle the loyalty penalty and ensure that firms focus on providing fair value to all their customers.
The review found weaknesses including:
- Insufficient focus on customers, outcomes and product value, including when considering value in the context of covid-19.
- Shortcomings in governance and oversight of products.
As an example, it was not always clear firms have adequate processes in place to assess whether intermediary remuneration (such as how much a broker is paid) bears reasonable relationship to the costs or workload to distribute the product as set out in previous guidance and required under the rules applicable from 1 October 2021.
When the new governance regulations were announced, Sheldon Mills, Executive Director for Supervision, Policy and Competition at the FCA, said, “We know some firms are doing the right thing but with the deadline for implementing our enhanced rules less than two months away, it’s worrying that some firms may not be ready.
“Where firms are not consistently meeting existing requirements and expectations, it risks harm through poor value products or products being sold to the wrong customers. These firms have significant work to do urgently to be able to comply with the enhanced product governance rules. Firms that fail to do that work risk regulatory action.”
The FCA’s enhanced product governance rules were introduced following its General insurance pricing practices market study which found home and motor insurance markets were not working well for consumers, particularly loyal customers. The rules are designed to ensure that firms have processes in place to deliver products that offer fair value to customers (all non‑investment insurance contracts, not only home and motor insurance).
Patrick Mottram, senior director of risk, analytics and insurance at Precisely, advised that adopting data integrity practices would help insurers to price more accurately, in line with the new FCA regulations:
“With just three months left to prepare for the FCA’s new pricing regulations coming into effect on 1st January 2022, insurers have a limited time to ensure their pricing processes are accurate, as well as demonstrating that they are not penalising customer loyalty (a process known as “price walking”). This means that insurers need to know their customer (KYC) and be able to show that they are treating them fairly.
“KYC relies on having a single customer view that is both accurate and unique, relying on robust data quality processes that standardise, cleanse and match data – allowing insurers to see a complete profile of its relationship with each customer, from initial quote to any claims made. This allows insurers to more accurately position and price products based on customer demographics and geographic profiles.
“However, achieving this can be complicated to undertake, particularly for many insurers that are operating globally, or those that are dealing with key customer information that is limited, flawed, out of date, or held in different systems and formats.
“Adopting data integrity processes within the next three months will be critical to complying with these new pricing regulations coming into force. Ultimately, insurers will not only be able to provide a better service for customers, but this will also set them apart from their nearest competitors – a must-have in a large market that’s soon to be shaken up by the FCA.”