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At the end of August, the Financial Conduct Authority (FCA) published their latest report on how general insurance (GI) firms are matching up to the product governance requirements. The findings were not good. Whilst acknowledging that most brokers and insurers in the study had taken steps towards improving their product governance, too many continued to fall short of the regulator’s high standards. The tone and language used in this bad-tempered report makes the FCA’s disappointment abundantly clear.
In this study, the FCA focussed specifically on the process by which firms conducted their product governance. They did not actually assess any products, although their headline finding was that too few firms could ‘prove’ they were providing fair value.
The FCA reviewed 22 GI manufacturers who are collectively responsible for £3bn GWP premium and 107m policies between them. 45 GI products were included in the review. 29 distributors were included. This feels like a fairly broad cross-section of the market.
Alongside this thematic review, the regulator also issued the most recent set of value measures data. The data includes provider-level granularity on claims frequencies and claims acceptance rates, although this level of specificity is only available in the downloadable data.
The summary data, which is published on the FCA’s website, also contains some interesting information. This summary indicates that GAP insurance sold as an add-on had a claims ratio (defined as the percentage pf premiums paid out in claims) of 10%. Sold as a stand-alone policy, GAP insurance has a claim ration of 22.4%. This data would have been collected before the product was withdrawn from the market in February of this year, so you could take this as an indication of the claims ratios which the regulator thinks are too low. Anyone selling Excess Protection insurance for motor, or Personal Accident insurance as an add-on should be mindful – these are the two products that sit in between the two versions of GAP insurance, with claims ratios of 12.7% and 19.9% respectively.
The thematic review tested firms processes against the requirements of PROD 4 – a robustly strengthened chapter of the FCA Handbook which made the reach of the Consumer Duty clear well before the Duty was implemented. The report states that too many manufacturers (mainly insurers, but also some brokers) were “not adequately assessing and evidencing that their products deliver fair value and good outcomes”. It also found some distributors (mainly brokers) “do not fully understand their responsibilities to consider their remuneration, its interaction with the services and benefits they provide, and its impact on the product’s value”. As such, the report represents a strong warning to all the major parts of the GI industry.
On the whole, the FCA found that many of the firms included in the review fell short of the standards that the regulator expects. There is no hint that enforcement action or fines are imminent, but the FCA is clearly running out of patience.
The FCA found that the governing bodies of manufacturers often did not have enough involvement in, or responsibility for, the product governance process. Boards must explicitly approve products that their firms manufacture and must be provided with enough detailed information to do so.
Echoes of many recent communications appear in the section of the report which deals with Fair Value Assessments (FVAs). The FCA has repeatedly expressed its frustration with how firms are assessing ‘fair value’, and that frustration is clear in this report too. Remarkably, given the frequency of communication about ‘fair value’, some manufacturers had not carried out an FVA, and a few more provide very limited information to support their FVA. Even where many firms had included an FVA, most had not used it effectively or consistently. The FCA appear to be saying that very few firms could prove their products delivered ‘fair value’, and that seems to be a pretty damning indictment of the GI market.
The subject of distributor remuneration comes up many times during this report, but it’s first significant mention comes in the FVA section. The FCA also propose a solution to the problem, as they see it. On several occasions and with subtly realigned wording each time, they state “Where commission was based on a percentage of premium, many manufacturers did not have controls to manage the risk of commission automatically increasing due to premium rises, which could affect the product’s value over time. So, for example, they had not considered creating a cap on the pound value of commission or the level at which the remuneration would be inconsistent with providing fair value”. So there you have it – a commission cap is back in play!
In this section, fewer than 5 manufacturers (out of a total of 27), provided an appropriate justification and rationale of how and why the remuneration paid to distributors was consistent with delivering a fair value product. I’m not sure if this means they couldn’t, or just didn’t, but I suspect there will be a lot more work to do here over the coming months. It should be straightforward for the intermediary sector to articulate the value that they add to a product.
The FCA has also repeated its disappointment that very few products were suspended or withdrawn from the market after value issues had been identified. The regulator is so disappointed, it feels obliged to point out that “It is a clear breach of the rules for firms to fail to act when they identify issues that may cause customer harm, including the risk that a product does not provide fair value”. I think the industry should take that as a final warning!
The FCA found very few target market statements that met their expectations fully. This was mainly down to inaccuracies or oversights that risk the product being sold to the wrong people. Less time is spent on this subject than is spent on fair value, which may indicate where the emphasis should lie.
FCA rules require manufacturers to choose appropriate distribution channels for the products. Again, the FCA found that firms had fallen short of the standards required with remuneration of the distribution chain being repeated as a potential issue. The standard of information passed from manufacturers to distributors was also highlighted as a significant shortcoming. Expect the information passed to intermediaries to be improved, significantly and quickly!
The final chapter is dedicated to the findings from the 29 distributors who were included in the review. Distributors have to meet the various obligations of PROD 4.3, which are less intensive than the requirements for manufacturers, but are no less important. Distributors have to assess whether the products they distribute are appropriate for their customers.
Once again, remuneration is one of the big factors for distributors, with many unable to articulate the value that they provide in return for their remuneration. The FCA points out there is a risk if a distributor “receives a level of remuneration which does not bear a reasonable relationship to the quality and cost of their service”. Only a few of the distributors in this review had appropriately assessed whether their remuneration was consistent with providing ‘fair value’. As mentioned above, I suspect the intermediary sector will be able to articulate this. Again, the idea of a commission cap is floated.
As with manufacturers, the FCA found that many distributors failed to comply with the relevant rules.
This short (42 pages) report lays bare the FCA’s annoyance with the industry. If the tone of this report is anything to go by, the regulator’s patience won’t last much longer.
