The Regulatory Impact of Covid-19 on Insurance Part 2

The FCA’s 15 April Dear CEO Letter already stated that most BI policies only provided basic cover and would not cover pandemics such as Covid-19. However, some policies do cover BI from other causes, and could extend to Covid-19.

The question of whether there is cover relating to Covid-19 is complex and there are differences in policy wording between products and across firms. The FCA is therefore working to provide clarity to prevent undue delay to payments where there are valid claims. It intends to do this by:

• writing to a small number of firms to ask them to clarify their position on their BI policy wording
• identifying a sample of cases of the most frequently used policy wording that give rise to uncertainty
• bringing those cases to court as soon as possible for an ‘authoritative declaratory judgment’ on the meaning and effect of the policy wordings

The action is not intended to encompass all possible disputes, only to resolve some key contractual uncertainties. It will not determine quantum.

Individuals will not be prevented from pursuing their own legal action or referring complaints to the Financial Ombudsman Service (FOS). The FOS would however consider the legal judgement.

The FCA may ask other firms to clarify their position and join any action if further examples emerge.

Firms should continue to meet their obligations when handling claims, dealing with complaints and communicating clearly and sympathetically to customers. These expectations also apply when establishing quantum for valid claims and making interim / partial payments. Firms may consider whether there is other help they can provide, for example by signposting to other support that may be available.

Customers may believe they have been mis-sold their BI cover where it is inconsistent with what they understood, requested, instructed or were informed of at the point of sale. They can make a complaint if dissatisfied with the product or the claim outcome and refer their complaint to the FOS or take legal action if they remain dissatisfied. Firms should promptly and appropriately investigate such complaints.

The FCA will work closely with the FOS. This is to assist in its supervision and monitoring of firms by looking at any trends that indicate firms are failing to meet expectations. The FCA will consider firms’ behaviour and performance in this area as part of its supervision and when assessing culture.

Complaint handling functions should continue to operate, and firms should take reasonable steps to handle complaints fairly and effectively despite people working from home. Firms are to prioritise:

• paying redress promptly when it has been offered and accepted
• complaints from:
  • those who are vulnerable 
  • micro-enterprises and small businesses likely to face serious financial difficulties
  • sending timely holding responses to micro-enterprises and small businesses where complaints are not resolved promptly

If a firm cannot do this, then it may be appropriate for the firm to have minimal on-site presence if this can comply with social distancing requirements.

The FCA does not expect any reduction in the quality of complaint handling. It reminded firms of the relevant obligations to investigate competently, diligently and impartially, and resolve complaints appropriately.

The current circumstances should not stop firms from:

• telling customers of complaint procedures and those of the FOS
• enabling customers to submit complaints, for example by restricting telephone lines to customers who cannot use online services
• acknowledging receipt of complaints

The FCA has reminded firms of its vulnerable customer definition and circumstances that can cause vulnerability. It stated that Covid-19 is likely to worsen or change personal circumstances, even for those who would not normally consider themselves to be vulnerable.

For example, this could be through loss of income, the impact of isolation on mental/physical health, caring for others and, for key workers, their extreme working conditions and exposure to the virus.

Micro-enterprises and small business can also be susceptible to harm if a firm fails to act with appropriate care by resolving complaints promptly and fairly.

If a firm is facing difficulties complying with the DISP ‘complaints time limit rules’ you need to inform your Supervisor or email the FCA with your plan to manage and address the issue.

CMCs should allow firms a reasonable amount of extra time to give final responses before referring complaints to the FOS. That’s unless they can evidence an urgency due to the individual circumstances of the complaint. In deciding what is a reasonable amount of time they should consider firms’ operational challenges.

The FOS may return complaints to CMCs and ask firms to get in touch with CMCs directly about timings and how to resolve the complaint. CMCs are expected to cooperate with the FOS and act professionally and reasonably.

The capacity of FOS to process complaints may be affected, and it will focus on resolving complaints from vulnerable customers.

CMCs should continue to keep their customers informed in accordance with CMCOB 6.1.9. They may need to consider clients’ circumstances when collecting fees.

There are likely to be challenges for firms responding to Data Subject Access Requests within usual timeframes. Again, CMCs should communicate with firms and should consider Information Commissioner’s Office (ICO) guidance. If issues cannot be resolved, CMCs should speak to the ICO before making complaints.

The FOS will continue to decide complaints based on what is fair and reasonable in the circumstances. This will take into account the challenges faced by firms, good industry practice and FCA guidance.

The FCA is communicating with the FOS about its approach on specific issues relating to Covid-19. This information is to be published on the FCA website.

The points set out above apply to all complaints including PPI. The FCA referred to its October 2019 Dear CEO Letter and said it will monitor firms’ ability to provide final responses by the summer. Firms should continue to update customers on when they can expect a final response.

The guidance applies to all firms carrying on regulated activities relating to all non-investment insurance products - product manufacturers in particular. It is relevant to all insurance products regardless of the type of customer (retail and commercial), except for reinsurance.

Product Review and Assessment

The FCA reminded firms that they are already required to regularly review their products:

“Product manufacturers should consider whether a product, including its costs and charges, remain compatible with the needs, objectives, interests and characteristics of the target market.”

The FCA expects firms to assess if Covid-19 has materially affected the value of their insurance products. This may mean that:

• the firm or the product itself cannot deliver a benefit. For example, in claims where service providers movements are restricted (e.g. boiler servicing), or for medical cover where customers cannot access certain benefits
• the customer cannot make a claim because the underlying event is no longer relevant. For example, public liability insurance for businesses that are unable to open

There is no expectation to reassess product value where claims are still possible but the likelihood of a customer making a claim has changed e.g. a reduction in car usage.

Where firms identify that a product is not delivering the value intended, they should consider taking appropriate action. This includes:

• delivering benefits in a different way
• the provision of alternative, comparable benefits
• reducing premiums for the duration of the change in value
• refunds or partial refunds of premiums already paid - note these are unlikely to be treated as mid-term adjustments for the purpose of ICOBS if they do not involve changes to the product itself

There are no specific mandatory actions. Firms should consider how best to address any changes in circumstances and identify the right steps to take. However, they must be able to demonstrate how they meet the obligations at a product level and treated their customers fairly.

There may have been a material change in the value of products for customers in temporary financial difficulties due to Covid-19. In these cases, firms are to consider product value when customers contact them, or when they contact customers, about missed payments.

To give firms sufficient opportunity to assess the overall impact of Covid-19, they will be given 6 months to complete reviews of their product lines and decide on any action(s).

In line with existing obligations, firms are expected to communicate clearly with customers where they have identified an issue and are taking action to address this.

The guidance lists the regulated firms it applies to including insurers, intermediaries, lenders, brokers, debt collectors and others that operate in insurance and premium finance. The extent the guidance is relevant to a firm depends on its role and relationship with the customer. Firms will need to work with others in the distribution chain to assist qualifying customers.

For insurers and insurance brokers, the guidance applies to eligible complainants (DISP 2.7.3R). Likewise, for premium finance agreements, it is not intended to capture lending for business purposes.

The FCA refers to premium finance as: “credit that is provided when there is a regulated credit agreement with the customer, specifically for the purpose of enabling the customer to pay their insurance premium in instalments”. Other arrangements which facilitate the payment of insurance premiums in instalments are within scope of the guidance e.g. credit provided under an exempt credit agreement on a pay-as-you-go basis.

The guidance does not apply to customers already in financial difficulties before Covid-19 instead the existing forbearance rules and guidance in CONC continue to apply.

There are circumstances where firms should support customers who may be in financial distress as a result of Covid-19. These might include where:

a customer contacts the firm because:
they are having difficulty making repayments
they wish to reduce cover
they are enquiring about their insurance cover because of Covid-19
the firm has identified (or should reasonably have identified) that the customer is suffering financial distress e.g. they have missed payments

Firms should consider how to meet their obligations under FCA rules, what options can be provided to the customer and steps to take to give customers fair outcomes. The firm may:

• re-assess the risk profile. For example, some motor insurance customers might not use their vehicle or might no longer use it for business purposes and could be offered lower premiums
• offer other products that would better meet the customer’s needs and revise cover accordingly. For example, a motor insurance customer might no longer need add-ons like legal expenses cover, key cover or other products
• give options such as payment deferrals to avoid cancellation of necessary cover, waive cancellation fees and fairly assess new premiums for customers who had to cancel and then later return
• waive fees associated with adjusting the policy in line with the other options set out above

The action could result in a reduction in the customer’s monthly payment or, for customers who paid in advance, could result in a partial refund of their premium.

Any adjustments to cover can be done short-term (for a period within the policy duration) or longer-term (the remainder of the policy). For short-term changes, the firm should take reasonable steps to reassess the customer’s situation when the period comes to an end. This could be by using an expiration date or inviting customers to make contact when their circumstances change.

The same steps should be considered across all the products the customer holds with the firm.

The different solutions available should be made clear in communications and customers should be encouraged to make contact if they are experiencing financial difficulty as a result of Covid-19. This should be made as easy as possible, considering the needs of vulnerable customers.

If changes to insurance cover do not help customers paying in instalments, firms should review interest rates associated with instalments. They should ascertain whether they are still fair in the exceptional circumstances caused by Covid-19.

If customers are still facing payment difficulties, then firms are expected to consider granting payment deferrals unless it is not in the customer’s interests to do so.

This means the customer is allowed to make no payments for a specified period, without being in arrears, and without the firm (or another in the chain) cancelling due to non-payment. No other party in the chain should seek payment from the customer until the payment deferral has ended.

The deferral period can be rolling and is expected to be granted for 1 – 3 months.

At the end of the deferral period firms:

• can seek payment of accrued interest charges
• should work with customers who are unable to resume payments to help resolve any difficulties before payments are missed
• ought to waive any interest accrued during the relevant period for customers who are entitled to forbearance under the normal rules

If payment deferral is inappropriate, the firm should, without unreasonable delay, offer temporary relief in other ways to treat the customer fairly. These could include:

• accepting reduced payments
• rescheduling the term
• waiving missed or late payment fees
• amending the repayment date

Firms can go beyond the guidance and provide additional assistance, including writing off unpaid repayments as well as any associated interest, fees or charges.