FCA Thematic review into General Insurance distribution chains

YOUR COMPLIANCE MATTERS:  FCA Thematic review into General Insurance distribution chains

 Relevance:                       All firms.

 Action required:           Review current product distribution chains to ensure customer ‘best interest’ requirements are met

The FCA has published a report on General Insurance (GI) distribution, arising from the findings of a Thematic Review of value in GI Distribution Chains, and a review of Delegated Authority arrangements. 

In its report, and the accompanying Non-Handbook Guidance, the FCA details its expectations regarding ‘Manufacturers’ and ‘Distributors’ of GI products. 

The FCA defines an insurance product Manufacturer as a firm which manufactures (creates, develops, designs and/or underwrites) a contract of insurance for sale to customers. The Manufacturer is the entity with the right to sign off wording and pricing so, in many cases, this will be an insurer (but not always). 

Distributors are not defined by the FCA but will include all entities with a role in the delivery of the “Manufactured” product.

 The main thrust of the Thematic Review findings is that product Manufacturers have not always carried out effective due diligence and monitoring of the distribution chain which leads to a sale. 

Background 

The feedback and findings related to investigation, undertaken by the FCA, in respect of specific insurance products:- tradesmen’s (liability covers), travel, GAP and other motor add-on products (scratch and dent). 

The FCA was specifically looking at the impact on consumer outcomes of long, and in some cases, poorly managed distribution chains with varying levels of delegated authority.

 There are a number of key findings:

 1.     Pricing and Quality

 ·           There was evidence of significant commission, or other payments, to firms in the distribution chain, which significantly increased the cost of the product to the end user (70% to a motor dealer in one case).

 ·           In some cases, the FCA was unable to identify clearly the value added by the additional members of the distribution chain.

 ·           As a consequence of the way in which the product was delivered to the market, the cost of product was, in some cases, significantly more expensive (or the product provided was cut down in some way) compared to an equivalent product that the customer may be able to buy through another route.

 2.     Service Delivery

 ·           A number of cases were identified where service had been delegated by the product Manufacturer (in particular claims) to firms who are not then subject to proper oversight by the product Manufacturer.

 ·           Other functions, including complaints, were also delegated, leading to inappropriate complaint rejection, of which the product provider/Manufacturer was not aware.

 3.             Product Governance and Oversight

 ·           Product Manufacturers did not always take clear responsibility for the way in which the product is designed and delivered, with an overview of ultimate consumer outcomes.

 ·           Regulated firms did not always understand that they remain responsible for activities of unregulated businesses (using the connected contracts exclusion).

 ·           Situations were identified where the product Manufacturer, or intermediate Distributor, had limited oversight of the ultimate sales process, which created the risk of a customer being sold a product for which they were not eligible to claim, or which was not needed by them.

 ·           The quality of management information used was inadequate, particularly on the part of the product Manufacturer and intermediate Distributors being unaware of service standards being achieved further down the chain.

 ·           Product Manufacturers and intermediate Distributors were not carrying out relevant due diligence on potential partners to ensure that they did not increase the risk of customer harm.

 Actions/FCA Expectations and next steps

 1)     Product Manufacturers need to have a clear product sign off process, covering design and review, with a clear view of the benefit, value and ultimate cost to the customer. As part of this process, a review of competitor products needs to be completed, including products available direct from product Manufacturers (online or otherwise).

 2)     There is a need to review the impact of the distribution strategy on the value ultimately delivered to the customer. Specifically, a need to map out the recipients of remuneration and identify their value within the distribution chain.

 3)     Firms need to pay particular regard to remuneration and conflict with the customers’ best interest rule (incentives to sell a product which does not meet the customer’s demands and needs or does not deliver good value to the individual customer concerned).

 4)     Client disclosure of the remuneration received (as required for fees) cannot be relied upon as justification, in itself, for a charge, if that charge is inappropriate or creates potential harm to the consumer. So, simply switching from commission to a disclosed fee will not be a solution unless the overall value of the product is acceptable.

 5)     If the review of remuneration leads to identification of potential customer harm, the expectation is that the remuneration structures will be changed accordingly.

 6)     Product Distributors need to be seen to be monitoring the way in which the products are ultimately sold in order to identify potential harms and draw these to the attention of the product Manufacturer. There needs to be a dialogue between the insurer (product Manufacturer) and the Distributor(s) of the product, through to the firm communicating with the client,

 7)     Activities undertaken by unregulated entities need to be supervised and appropriate MI used to assess performance.

 8)     Ultimate Distributors with access to only a single product may be tempted to sell that product to clients when they should in fact be advising them not to purchase it. Suitable MI needs to be reviewed back to insurer level to identify any evidence of this.

 9)     Firms need to review their distribution process regularly, particularly where it is possible that a product could be delivered to customers outside of the identified target market for the product Manufacturer. Insurer engagement needs to be an ongoing process, not a one-off exercise.

 10)   Product Manufacturers and Distributors need to carry out due diligence on the whole distribution chain in order to ensure that potential for consumer harm is minimised.

 11)   Firms need to be looking at the right management information. FCA value measures need to be considered in this regard:

(i)        Claims frequency

(ii)      Claims acceptance rates

(iii)      Average claims payout

(iv)      Claims complaints as a percentage of claims

 In addition to the above, in order to provide a real test of the value delivered to customers, firms need to identify the total claims payments made against the total premium actually collected from the customer (at the moment, we suspect that many insurers are looking at loss ratios based on the net premium they receive. Given that the FCA identified some situations where the premium received by the insurer represents less than 10% of the total cost paid by the customer; this is not necessarily a relevant measure).

 Conclusion

 There may be significant work involved for firms involved in some distribution chains. As always, we are happy to provide advice on any issues arising.