FCA Product Regime to Force Major Rethink Among General Insurers

When the UK’s Financial Conduct Authority confirmed the new measures it was taking on general insurance pricing practices earlier this year, the media spotlight fell on price walking. However, in the intervening months it’s become clear that the regulator’s campaign to improve product governance has more far reaching implications for the sector.

The headline rules are intended to make sure that consumers renewing home and motor insurance are quoted prices that are no higher than they would be quoted as a new customer through the same channel. These steps alone have presented carriers with a rethink that extends from back to the front office.

But the introduction by the watchdog of new product governance rules “to ensure that firms deliver fair value on all their insurance products” means all players along the insurance value chain will have to take a new look at relationships, commissions and their compliance responsibilities.

New rules on product governance, systems and controls and remuneration for premium finance, applicable to all general insurance non-investment products, including legacy products pre-dating 1 October 2018, came into force on 1 October. Additional measures on home and motor insurance pricing, automatic renewal, premium finance disclosure and data reporting will take effect on 1 January 2022.

Nicky Hasler, compliance specialist with London consultant ICSR says many firms have not fully adopted the existing rules and are not prepared for the additional requirements: “Our experience has been that some brokers in particular have struggled with the new requirements. Many brokers are looking to understand what is required when they are a product ‘manufacturer’ and how this differs to when they operate as a ‘distributor’. This demonstrates a market that is unclear on what is expected of them to satisfy the new requirements.”

The disruption caused by the pandemic hasn’t helped — but Hasler expects the FCA take a firm line anyway: “As firms look to return to normality the introduction of the new rules is perhaps untimely; however, firms have had three years to bolster their product governance framework. The FCA is very clear on this; firms must adopt the new rules, failure to do so could mean regulatory sanctions. The sanctions could include the removal of the firms’ products for sale.”

Laura Scarpa, London-based partner with consultant Deloitte, says that firms are managing the pricing practice piece successfully in-house, but the product governance area is where they need outside help ahead of the January deadline: “It’s because there’s a lot of third-party contact required between carriers and brokers. The information flowing between parties isn’t always in a structured format.

“At a basic level, carriers needed to get together a full list of all their products across different distribution channels and brands. It proved to be quite difficult to collate, frequently in a manual format, particularly where products are on different systems.”

A product value assessment needs to be done in relation to each of these products and that has required structured data and defined templates, Scarpa explains: “Then the carrier has to make hundreds of value assessments in different formats, review them and even challenge them. Many underestimated the amount of work it all involves.”

ICSR’s Hasler agrees: “The changes to the product governance rules are challenging for insurers, brokers and MGA’s. They have a year after the new rules are applied to conduct a product approval process for any existing products that did not fall within the current ‘PROD’ scope, and to update their approval for any in-scope products to take into account the new requirements on fair value.

“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.”

With many distribution channels already established and sometimes involving numerous links in the chain, the review of each party’s role is a big job. Insurers and intermediaries need to work together to ensure this happens though, Hasler says: “It provides an opportunity to review the current distribution chain, which may be overly complex and no longer fit for purpose. This can result in a more slimmed down, efficient distribution channel that offers greater value to the consumer.”

However, it appears that the roles and responsibilities of co-manufacturers have not always been agreed up front, Scarpa points out.

“With MGAs especially there has been a blurring of responsibilities. MGAs (and also brokers) didn’t expect to be doing the job of a carrier. But in the eyes of the FCA they do have co-responsibility as a co-manufacturer.

“It could be challenging for MGAs because they are quite streamlined organisations and don’t have substantial risk and compliance teams. The additional level of work required under the product governance requirements is proving an additional challenge for them.”

The product governance changes have resurfaced the thorny issue of broker renumeration. The new requirements for brokers, as a manufacturer or a distributor, require brokers to justify their value. The theory is that the changes once adopted will lead to a more transparent distribution model, where each party knows their role and is renumerated for performing that role. This will mean that brokers are paid fair renumeration for the value they add to the insurer and the consumer.

In practice, if the broker is charging 40% commission, they need to evidence what activities they undertook and what value has been generated to justify that 40%, Scarpa explains.

“It’s caused some brokers to look more closely at what’s an acceptable maximum [remuneration] and put in place systems that oblige contracts to be signed off, or remediated.

“Remuneration models haven’t been changed substantially yet, but in time brokers might eventually look into articulating in more detail what services they provide at [say] 20% versus 50%.

“It’s a potentially complicated picture for distributors: for example, an MGA might use a comparison website to distribute its products, with the website taking a commission rate of 40%. It won’t always be clear to the MGA if it should, or could, reasonably challenge that rate.”

Nicky Hasler believes the wide ranging reforms brought about by the FCA have the potential to bring fundamental change to the UK insurance market.

“The price walking changes are substantial and could lead to insurers exiting products they may no longer see as viable, whether that is because they can no longer make the product profitable or because, by introducing these measures, it becomes easier for new insurers to enter the market with that product thus making it even more competitive,” Hasler says.

From a product value perspective, if insurers have complex distribution channels, with multiple brokers in the chain, the value of a product could be diluted: “A complex distribution channel also reduces profit margins and therefore insurers may opt to sell more on a direct basis.”

Closer scrutiny of remuneration should persuade carriers and distributors to assess the role of each person in the distribution channel to ensure their fee or commission is offering fair value to the consumer and the insurer.

“It is possible, at some level, that one consequence may see brokers establishing their own capacity providers to retain their income levels,” Hasler says.