Regulatory update for insurance: Q2 2024

AR oversight

The Financial Conduct Authority (FCA) has an ongoing commitment to improve the oversight of ARs and introduced rules and guidance to build on the AR regime back in December 2022. However, FCA data highlighted problems where the regime was misunderstood either by principal firms or ARs. The FCA held a webinar in April to reaffirm the expectations and the requirements of the AR regime.

The FCA expects:

• Submissions for new ARs to be clear and comprehensive with robust due diligence and all necessary checks completed. Principal firms should act like the regulator in identifying risks, using all available information sources to assess AR suitability, encouraging disclosure, and introducing independence and challenge in AR oversight.
• Firm’s self-assessments to be completed to a good level, with principal firms regularly assessing their ability to oversee ARs through a pragmatic lens. Principal firms should conduct an assessment that is wide in scope but also tailored and bespoke to the business. They should also conduct an in-depth review of AR senior management competence, suitability, and employment history. Firms must be ready to explain and evidence any concerns, risks, and the mitigating steps taken.
• Principal firms to regularly review and monitor AR growth. It is important for principal firms to understand all aspects of an AR’s business which could present risks or have an impact on consumers and markets. Therefore, principal firms should clearly set out the activities that ARs can undertake in AR agreements.
• Annual assessments to be comprehensive, robust and consider a wide range of measures such as AR business plans, systems and controls, management meetings, fitness and propriety, data security and training completion. Principal firms need to keep evidence of completion of the assessment and a clear audit trail of compliance with the requirements.

GAP sales to recommence

Following action by the FCA to improve fair value, several firms were permitted to return to selling GAP.

The FCA has been concerned with GAP since a market study back in 2014. In February this year, there was an agreement to pause sales of GAP insurance for 80% of the market, with the rest of the market following suit in March. For more information on the suspension of GAP sales and the fair value implications, here is a previous article we published on the topic.

To restart sales, firms must demonstrate that their policies provide fair value to customers on a continuous basis. In particular, the FCA mentioned that firms resuming GAP sales had done so with materially lower levels of commission being paid out. Going forward the FCA will consider the remaining firms’ proposals to improve value for customers.

Multi-firm review of motor total loss claims

The FCA previously warned insurers against undervaluing cars. Following the FCA’s multi-firm review of total loss claims in March, the regulator found that some firms were undervaluing motor vehicles when settling claims. The fair market value for written-off or stolen vehicles was not always being offered, and in some cases offers were only increased after customer complaints.

To avoid incorrect and unfair valuations, management may wish to revisit the valuation methodologies used. This should align with the Financial Ombudsman’s published approach and should ensure that valuations are undertaken promptly and fairly.

To decide whether a valuation is fair, the Financial Ombudsman Service (FOS) compares prices in online motor trade guides such as AutoTrader, CAP, Percayso and Glass’s. The FOS guidance now states that firms should go with the highest guide price, unless there is other evidence to justify a lower valuation such as adverts or an expert’s opinion. Any deductions from guide prices should be based on evidence available rather than blanket deductions of set amounts or percentages.

The vehicle valuation should not be treated as a negotiation. There may be instances where another valuation is required to consider new information or correct a mistake. Extended disputes can discourage customers from challenging or referring the matter to the FOS.

Communications with customers should be clear and the settlement offer should not dissuade customers from challenging the valuation. Customers need to be able to understand how the firm reached the valuation of their vehicle and any deductions.

Firms should also consider how policies are treated post-settlement. The FCA identified that the ability to replace the vehicle insured for the remaining term would enable customers to continue to access the benefits of their policy.

Customers claiming are likely to wish to insure a replacement quickly and may also have elements of vulnerability post-accident or theft. Firms must consider the needs of their customers at every stage of the product lifecycle, including after the point of claim. Customers may not have budgeted for paying the outstanding premium in one go, and so payment plans would allow customers to continue making monthly payments and buy a new car from the settlement paid.

For more information on the FCA’s multi-firm review of total loss claims, we published an article summarising the findings in more detail here.

Implementing the Consumer Duty for closed products and services – life insurance

The FCA published a ‘Dear CEO’ letter for the life insurance sector, setting out information to support firms in their final preparations for implementing the Consumer Duty rules for closed products and services by 31 July 2024. The FCA highlighted that life insurers will have specific challenges because of their large books of closed products and the volume of product reviews, fair value assessments, and communication testing needed prior to the deadline. The letter sets out the priority issues for firms to consider, including:

Gaps in customer data – There may be incomplete data for closed products and services due to legacy systems, back book purchases and inadequate recordkeeping practices at the time of sale. This may make it difficult to understand the needs, or outcomes for groups of customers. Where a firm has material gaps in its customer records, the FCA expect firms to be able to evidence that they have taken proportionate steps either to address the gaps, or to work around these limitations.

Fair value – Firms need to demonstrate that they are providing fair value to customers in closed products and services. This includes the requirement that there is a reasonable relationship between the price and the benefits of the product or service.

Treatment of consumers with characteristics of vulnerability – Working with closed products and services may create a particular risk of harm to customers with characteristics of vulnerability. For example, challenges such as data gaps, the age and complexity of products, and the changing needs and circumstances of customers over time can create a risk of potential customer harm.

Gone-away or disengaged customers – Firms should identify less engaged and gone-away customers and take appropriate action. Gone-away customers are expected to be a particular issue for life insurance. Firms should undertake appropriate tracing to find customers. There are some policies that are worth relatively small amounts, where the cost of tracing may be disproportionate to the improvement in customer data. Firms are still expected to take reasonable steps in this area. It is important for firms to be able to evidence why they took any decisions and how they track the impact of these decisions, with the overall aim of delivering good customer outcomes.

Vested or contractual rights – Firms are not expected to give up any vested contractual rights. Where a customer can terminate a contract without an exit charge, the future payment of charges is not a vested right. Where the firm has a vested right, they should consider alternative ways to prevent or manage any harms for existing customers.

Post implementation review of the travel insurance signposting rules for consumers with medial conditions

In February 2020, the FCA introduced rules to help improve access to travel insurance for consumers with more serious pre-existing medical conditions (PEMCs). These rules required firms to signpost consumers with PEMCs. In April 2024, the FCA conducted a post implementation review which considered compliance with these rules.

The FCA found that signposting has had a positive impact for those with more serious PEMCs, although the overall impact had been lower than expected. The FCA highlighted that most firms complied with the signposting rules and, overall, they were satisfied that most trigger points remained appropriate. However, it was noted that the £100 medical condition premium trigger for signposting could be raised to reflect the increase in risk prices, medical costs, and claims.

Website disclosures of a directory should be prominent, clear, and accurate and firms should signpost customers appropriately. In line with Consumer Duty requirements, firms should ensure consumers are getting fair value from their travel insurance products and that they are delivering good customer outcomes.

Solvency II – Implementation of the MA reforms

The PRA’s reforms to the MA came into effect on the 30 June providing insurers with greater flexibility to invest in long-term assets. This was finalised in the Policy Statement (PS10/24) issued on 6 June 2024, which outlined the changes coming into effect.

Some of the reforms that came into effect on the 30 June 2024 include:

• Expansion of the assets and liability criteria allowing firms to apply for permission to include a wider range of assets in the MA portfolio.
• Removal of the limit on the amount of MA that may be claimed from sub-investment grade (SIG) assets facilitating more investments close to or below the boundary between investment and SIG assets.
• Changes to the requirements on internal credit assessments, MA permissions and breaches.
• The option for firms to apply voluntary Fundamental Spread (FS) additions. The PRA have, however, noted that firms will need to account for the attestation process, which are not required until the first attestation date of 31 December 2024.

The key updates from PS10/24 are summarised below:

• Clarification that there is no change to the proposal set out in PRA’s consultation Paper (CP19/23) for the inclusion of assets with highly predictable (HP) cash flows within MA portfolios and no change to the existing classification of assets with ‘fixed’ cash flows.
• The PRA Rulebook has been updated to allow the inclusion of in-payment group dependent annuities (GDAs) in the MA portfolio.
• Replacement of the sub-investment grade (SIG) cap with a range of metrics, including Probability of Default (PD) adjusted cash flow, total monetary value of MA and total monetary value of Fundamental Spread. These provide a measure for insurers to judge the importance of assets against when determining the importance of SIG assets in their investment portfolio.
• The introduction of an additional eligibility criteria where insurers must demonstrate that each asset within the MA portfolio could be managed in line with the Prudent Person Principle (PPP). This has also been accompanied by streamlining of the MA approval process.
• The requirement for firms with MA portfolios to submit a new Matching Adjustment Asset and Liability Information Return (MALIR) on an annual basis. This is to allow the regulator to assess how MA portfolios change overtime. This will come into effect on 31 December 2024. Firms will have 130 business days from its respective financial year end to complete and submit their first MALIR to the PRA.
• The PRA has made notching mandatory for Technical Provision (TP) calculations. This PS clarifies the flexibility in timescale for firms to update their internal models, although this must be implemented by 31 December 2024.