Context
A representative of the UKGI Group attended the Worshipful Company of Insurers INED Forum in the Old Library at Lloyd’s for its Regulatory Update from the FCA and PRA. We thought it would be beneficial to provide some of the notes arising out of the discussions.
Key points to note
In relation to insurance, the FCA representative made the following points:
Strategy
- The FCA’s changed approach and strategy with 13 key outcomes and the FCA being more accountable. Summarised as:
- Reducing serious harm,
- Setting higher standards, and
- Promoting competition
Consumer Duty
- The Consumer Duty is the FCA’s flagship policy and final rules are due in July. Firms need to ensure that they put consumers at the heart of their business, providing products that give value to customers and respond when customers need them.
- The FCA questioned whether a product that cost 100 but only paid out 5 in claims could offer value and has the right product been sold to a customer (although he acknowledged that some catastrophe covers may have this loss ratio in some years)
- Without naming them, the FCA said that there were some products that it is concerned about, mainly in the add-ons space.
- The Pricing Practices work with Product Governance down the distribution chain covers a lot of things that are in the Consumer Duty and so the Insurance sector is ahead of the rest, especially as some of this was also in the Insurance Distribution Directive.
- Welcomingly, the FCA clarified that value is not just about price, but also the services what customers need and want, for example if they want to talk to someone rather than just online.
- The FCA was asked, under the Consumer Duty, what the difference is between a “good” outcome and a “fair” outcome, and whether the FCA could give some examples. It was stated that the rules will be “broad principles” but there will be more guidance before the implementation in April 2023 with the value measures data and further product governance work. The FCA said that it did not really see a difference between good and fair. In terms of an example the FCA described “sludge practices” such as where customers can sign up for a policy in a few clicks but to cancel or get out it takes an hour of phone calls, that is not fair!
Cost of Living
- The FCA mentioned inflation and the cost-of-living crisis, perhaps in part because the FCA has been criticised in being slow to react to this, with the FCA looking to firms to support customers as they did during the pandemic. For example, if a customer misses a premium instalment, then how quickly is the policy cancelled? How quickly are claims paid out?
Highrise Leasehold Insurance
- The FCA then moved onto the cladding issue and the insurance of high-rise buildings, stating that the FCA’s focus is to understand the market, why the insurance prices to leaseholders have increased and how the premium is derived and split between the various parties. It was acknowledged that, in part, it is more than just a regulatory issue, with poor building standards being a contributory factor. The FCA is grateful to the market for its responses and the FCA is looking to publish a report for Michael Gove at the end of July.
- The FCA believes that this area, along with the business interruption issue, was one where “the insurance industry has not done well to explain itself how the product works and how the premium is derived.”
Final Comments
- In response to a lot of London Market criticism at the moment, the FCA said that it is aware of its competition requirements and is “open for business” although no one brought up the industrial action and the issues with Authorisations.
- In finishing the FCA made some general points in believing that NEDs and the FCA are aligned and should be pushing Diversity & Inclusion, such that companies reflect their customers. Rebuilding trust with consumers and customers will give significant commercial advantage, although the FCA made passing reference to discriminatory pricing.
The PRA made the following points:
- The PRA referred to the previous talk it had given to NEDs 18 months ago when it was stressed that NEDs should look at the Effectiveness of Risk Management in terms of data / MI presented to the board, the assumptions made and the ability to recover if risks crystallise. The PRA believes this was very much still the case with current events such as coming out of the pandemic, Ukraine and the macro-economic situation (e.g., inflation and longer-term events such as climate change).
- For insurers the PRA sees contract certainty risk such as that seen with business interruption insurance and more recently the war in Ukraine and “silent” cyber cover.
- The PRA then moved onto the Dear CEO Letter sent to insurers regarding the PRA’s 2022 priorities DCEO Letter ‘Insurance Supervision: 2022 priorities’ (bankofengland.co.uk)
Financial Resilience
- The PRA commented on the changing commercial situation, with, on the retail side, the FCA’s pricing practices rules restricting the renewal price and, on the wholesale side, harder rates which were welcomed – although there is no room for complacency. It is perhaps an interesting difference between the PRA and the FCA that the PRA welcomes insurers charging customers more, which reflects the differences in the respective regulators’ responsibilities, with the PRA not wanting insurers to fail. On the reinsurance side, the PRA said it is seeing increased retention by insurers and greater use of intragroup reinsurance which adds to the group risk. Inflation is a recent risk; have insurers factored this into their claims, pricing and other business costs?
Climate Change
- How are insurers managing the risk of climate change, referring to the following reports
Joint statement on the publication of Climate Change Adaptation Reports | Bank of England
Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change
Operational Resilience
- Operational resilience rules apply to all insurers but only SM&CR Enhanced solo regulated firms, hence the PRA said more about this than the FCA. The pandemic has tested this and brought this to the fore. Firms generally did well but now need to make themselves resilient for the longer term. Firms should have documented their Important Business Services and Impact Tolerances and have good cyber risk management.
Diversity & Inclusion
- The regulators will be publishing more on this in the coming months. D&I leads to better risk management and good conduct. NEDs should challenge their firms on whistleblowing procedures and succession planning in terms of D&I and call out non-financial misconduct in the London Market.
Competitiveness
- The PRA is “committed to making the UK competitive.”
Next actions
None – for information and awareness