The FCA has released its business plan for the coming year and within that document, there are some views on how it sees each sector that it regulates. I thought it might be worth sharing some of the FCA’s view with you concerning General Insurance.
The plan can be accessed at https://www.fca.org.uk/publications/corporate-documents/our-business-plan-2018-19
Brexit - The impact of EU withdrawal could be significant, given the amount of cross-border business (passporting) undertaken by general insurance firms. The potential loss of passporting rights has led many larger firms to announce or investigate contingency plans for restructuring or relocating.
There are plans being drawn up by the FCA and PRA for a transitional arrangement to allow firms that passport into the UK to continue to operate post-Brexit, but as yet, the EU has not given any indication of a similar arrangement for UK firms who passport out of the UK into Europe.
In fact, we have seen Ireland’s Central Bank (the Irish Regulator) start to contact firms to see if they intend to continue to operate in Ireland to gauge the need for separate regulation.
Technological change is likely to see further automation of the distribution chain, productivity improvements, reduced costs and the use of artificial intelligence in functions such as claims processing. As well as providing benefits, such developments could also increase firms’ vulnerability to cyber attacks and financial crime. This is, of course, a major concern given the FCA’s operational objectives to protect the UK financial system.
Inadequate governance and oversight of appointed representatives by their principals have resulted in misselling and poor service to retail and commercial consumers. The FCA’s 2016 Thematic Review 16/6, which looked at principals and ARs, identified potential misselling and harm at a third of firms assessed. This still remains high on the FCA’s radar and we can expect more work in this area.
The household insurance market is seeing a gradual ongoing shift from sales made through traditional intermediaries and banks to price comparison websites and direct channels. This will add further pressure to the intermediary market.
Sales of protection products grew slightly for the first time since the financial crisis, this rise is due to both the increased profile of protection products as firms invest to generate interest and engagement within the market. However, the regulator is very worried about the quality of advice given with such products, particularly around the taxation and trust issues that arise with protection policies. Insurance brokers need to ensure that they understand these issues and can either advise effectively or direct the client to another party who can do this whilst making clients aware of the risks of these issues being unresolved. There is a likelihood of this being the subject of a future thematic review.
Market access and choice can be restricted due to long and complex distribution chains, as well as a lack of transparency in market practices in wholesale markets. The FCA will be carrying out more work on this is 2018 to understand the value in each chain and how chains affect the ultimate price of insurance when fees are taken into account at each stage.
Continuing pressure on NHS budgets is expected to lead to further growth in demand for private medical insurance. Whilst traditionally seen as an IFA product, it does fall under general insurance and some insurance brokers operate in this area. However, some of those operations see minimal sales and this causes the FCA concern as infrequent sales/advice can lead to difficulties keeping competence and market knowledge current with possible consequences of poor advice.
Renewal pricing/disclosure, product suitability and product performance are areas of concern in the retail area and the FCA are looking closely at how renewal pricing compares to new business and seeing how the value is determined and how renewal prices are set.
Areas of general concern that apply across the sector include operational resilience, data security, governance and culture, distribution chains, inadequate governance and oversight of ARs, insolvency of insurers outside the UK and financial crime insurance fraud.