Insurance – Q3 2023

This ranged from guidance on diversity and inclusion to assessment of the competition impact Big Tech may have on the insurance industry. Below we provide a detailed overview of these publications and highlight what firms’ management should focus on.

Financial Lives Survey highlights the importance of FCA’s Consumer Duty

In July 2023, the FCA published selected statistics from its Financial Lives January 2023 Survey. The survey was designed to understand the financial impact of the rising cost of living on consumers across the UK. Relevant to insurance, the FCA set out the following summary findings:

• 13% of the policyholders in May 2022 (or 6.2m people) cancelled and/or reduced insurance or protection cover.
• 1 in 2 UK adults, or 28.4 million people, were more anxious or stressed due to the rising cost of living.
• The survey emphasised the importance of the Consumer Duty, which came into force on 31 July 2023.

The FCA has since published its full Financial Lives 2022 survey report, which drew upon the survey conducted in January 2023.

Finalised insurance guidance on supporting customers in financial difficulty

In July 2023, the FCA published review findings on the Cost of Living: good and poor practice in the general insurance market, setting out how home and motor insurers were supporting customers in financial difficulty and handling claims. The review assessed whether insurers were meeting the expectations set out in the Dear CEO letter on cost of living and insurance (September 22). The FCA saw examples of good practice, but also identified areas for improvement, particularly on the treatment of vulnerable customers and claims handling.

The FCA assessed firms against three key expectations from the Dear CEO letter to understand how they were; providing appropriate support to customers in financial difficulty, giving consumers access to fair value products, and handling claims promptly and fairly.

Good practices

The FCA stated that most of the firms in the sample offered various means to support financially vulnerable customers. Some examples of good practice include:

• Increased levels of quality assurance for vulnerable customers.
• Use of voice analytics and specialist training provided to help identify vulnerable customers.
• Dedicated website sections offering specialist support.

Poor practices

One of the most common causes of motor insurance complaints was claim settlement figures. The FCA saw evidence of consumers who had their cars written off after an accident being offered a price lower than the vehicle’s fair market value, and this only increased following complaints.

Some firms had challenges with providing information related to financial support being provided to customers.

Several firms struggled to provide outstanding information in a timely manner, indicating poor information flows between intermediaries and manufacturers.

Financial promotions on social media

In July 2023, the FCA published GC23/2, a guidance consultation paper on financial promotions on social media. This reaffirms that all financial promotions should be fair, clear, and not misleading.

Social media is being used by many consumers as a go-to source of information. The FCA has seen a substantial increase in financial influencers on social media promoting financial products. The FCA intends to update the existing guidance on social media and customer communications (FG15/4) and this will be replaced when the new guidance is finalised. The existing guidance was issued in 2015, and whilst many of the principles still apply, there are some limitations.

Future Regulatory Framework – the Insurance Distribution Directive

The UK implemented the Insurance Distribution Directive (IDD) in 2018. Most of the changes were applied through the FCA’s rules, but some of the requirements were contained in EU delegated regulations.

In September 2023, the FCA published CP23/19 on the Future Regulatory Framework (FRF) - The Insurance Distribution Directive, relevant to all firms involved in insurance activities. As part of HM Treasury’s (HMT) FRF Review, now called the Smarter Regulatory Framework, the EU IDD delegated acts will be repealed, and the requirements added to the FCA’s Handbook. 

Update to the Prudential Regulation Authority’s (PRA) Supervisory Approach for Insurance Supervision

The PRA released an insurance supervision approach document on 31 July 2023. This provides a high-level overview of the policies and standards that supervisors follow.

Following the UK’s departure from the EU, the PRA will treat UK branches of EU insurers as international insurers. The PRA also highlighted it does not seek to operate a ‘zero-failure regime’. The PRA’s expectation is that if insurers fail, or are likely to fail, they can exit the market in an orderly manner, without systemic disruption, impairing continuity of cover for policyholders or significant recourse to public funds. 

Potential Competition Impacts of Big Tech Entry and Expansion in Retail Financial Services

The FCA has been addressing concerns regarding Big Tech firms’ competitive advantage through their access to comprehensive and unique data, such as browsing data, biometrics, and social media of their consumers.

In October 2022, the FCA published a Discussion Paper (DP 22/5) assessing the competition benefits and harms that arise from Big Tech entry into financial service sectors. In July 2023, the FCA published a Feedback Statement setting out the responses received from a wide range of stakeholders, actions and next steps.

The FCA proposed the following next steps:

• To gain input as to whether Big Tech firms should be made ‘gatekeepers’ once they enter the financial services market. This would include their role in sharing key data with financial firms to facilitate asymmetry by the end of 2023.
• Review its supervisory approach on how to effectively monitor Big Tech firms’ activities.

Continue its work with the Government and the Digital Markets Unit (DMU) as the Digital Markets Competition and Consumers Bill passes through Parliament. 

FCA Insurance Sector Portfolio Letters

In September 2023, the FCA published its 2023-2025 priorities for the Insurance Market in Dear CEO letters that list specific risks of harm and how firms can mitigate them. While the UK insurance market covers a broad range of firms, the FCA set out four market-wide priorities:

• Governance and culture, including Environmental, Social and Governance (ESG) priorities.
• Operational resilience and the increasing reliance on Third Parties.
• Embedding the Consumer Duty.
• Improving oversight of Appointed Representatives.

The FCA highlighted the priorities for each of its three supervisory portfolios within the insurance sector:

1. Wholesale insurance specific priorities
2. Life insurance specific priorities
3. Personal & commercial lines insurance specific priorities

Leasehold buildings insurance reforms

The FCA published its policy statement (PS23/14) with feedback on its previous consultation (CP23/8) and final rules relating to multi-occupancy building insurance. The rules will come into force on 31 December 2023 and require insurance firms to act in leaseholders’ best interests and treat them as customers when designing products that they benefit from. Insurance firms will also be banned from recommending an insurance policy based on commission or remuneration levels.

Insurers will be required to provide insurance policies that give fair value to leaseholders and disclose important information to them about pricing, including the details of any commission paid.

Diversity and inclusion in the financial sector – working together to drive change

In September 2023, the FCA issued a consultation paper (CP23/20) alongside the PRA on proposals to introduce a new regulatory framework on Diversity and Inclusion (D&I) in the financial sector. This comes off the back of well-publicised concerns around D&I in the insurance sector.

The FCA stated it has been clear that D&I are regulatory concerns and there is more to be done. The proposed framework would establish minimum standards and give firms a better understanding of what is expected from a regulatory standpoint. It would also help consistency and transparency across approaches to D&I. The policy proposals would apply to larger firms (with more than 251 employees) and exclude Limited Scope SM&CR firms. The rules would cover D&I strategies, data reporting, disclosure, setting targets and risk & governance. There is a proposed regulatory return that would be made through RegData by larger firms.