The FCA’s multi-firm review into insurers' valuation of vehicles

In this article, we summarise the findings from said review.

Valuation methodology

The price of second-hand vehicles can vary significantly, and valuing vehicles is not an exact science. The FCA expects firms to follow the Financial Ombudsman Service’s (FOS) approach to compare prices in multiple retail guides. Usually, the FOS will look at three guides (if available) and conclude that the average price is fair. However, the FCA stated that the FOS approach may change if there is a significant difference between the guides and an indication that the firm’s valuation is unfair. Instead of the average, the FOS would rely on the highest value in the guides unless there is evidence that supports a modification.

Firms should not rely on a single trade guide but, if they do, they need to be able to demonstrate how this allows them to handle claims fairly. Average settlement values should not be lower than the available guide prices.

Firms should identify and consider customer vulnerabilities in their claims-handling process. A customer may be vulnerable depending on the circumstances after an accident. Those who are in financial difficulty may be more inclined to accept a quick, lower offer.

If a firm is using multiple valuation methodologies or makes changes to its methodology over time, it needs to monitor the related consumer outcomes.

Multiple offers

The vehicle valuation should not be treated as a negotiation. There may be instances where a second valuation is required to consider new information or correct a mistake. Firms should not go beyond a second offer unless absolutely necessary for a fair outcome. Protracted valuation disputes can discourage customers from challenging or referring the matter to the FOS.

Any firm using a different methodology for a revaluation should be able to demonstrate, through Management Information (MI), that this does not result in systematically different outcomes for customers.

Communication

It is important that a customer understands how the firm reached the valuation. The settlement offer should not dissuade customers from challenging the valuation, for example, by saying that the vehicle valuation reflects the FOS’ approach.

Deductions

Any deductions from guide prices should be justified for the individual vehicle based on evidence available rather than blanket deductions of set amounts or percentages. 

Examples of poor practice include deducting for wear and tear that would reasonably be expected since this is already reflected in the guide price. Some firms deduct 20% from the settlement if the vehicle has previously been a total loss. The FCA stated that the individual circumstances should be considered to reflect the insurance write-off category of the car (CAT).

The first offer should be the best estimate of market value and not below, or at the lower end of, an identified range.

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. This is clearly preferable to requiring them to cancel and buy a new policy. However, firms should consider the window they allow for this, and whether it puts any pressure on the customer to accept a valuation offer.

If a customer pays monthly premiums, some firms will deduct the remaining premiums from the claim settlement. The FCA highlighted a risk of poor customer outcomes since a customer might not have budgeted for paying the outstanding premium in one go and might be left with insufficient funds to buy a replacement vehicle.

Outsourcing

Firms need to demonstrate robust oversight of their third-party service providers. There needs to be internal expertise to effectively monitor such third parties. Such oversight should reflect the risk to good outcomes if Third Party Administrators (TPAs) or repairers have direct interaction with customers and/or authority to make valuations.

Complaints data is not enough to detect emerging issues. The MI used must provide assurance that third parties do not lead to systemically worse outcomes for customers or certain groups of customers. Likewise, an annual audit of only a small sample of cases would not demonstrate sufficient oversight.

There are also conflicts of interest to manage between a firm, its third-party providers, and its customers. For example, if a third party also salvages vehicles for resale.

Management Information (MI)

Timely access to appropriate MI that allows senior management to challenge, identify, and investigate potential issues would help demonstrate reasonable steps. Firms should monitor relevant guidance and decisions issued by the FOS to gain assurance that outcomes are the same for those who complain to FOS versus those who do not.

As above, firms should not rely on complaints data in isolation to identify systemic issues in claims processes. Firms should collect basic data on total loss claims, such as the number, scale and reasons for increases to initial offers. Firms should also monitor the average deviation between their valuations and corresponding guide prices.

What are the next steps?

The FCA may ask firms to explain the actions they have taken in response to the findings of the multi-firm review. The regulator expects firms to be able to demonstrate how their approach reflects its expectations. Key questions to consider include:

• Do we value vehicles in the same way as the FOS, by looking at multiple guides?
• Do we have differing methodologies for valuations or has our approach changed over time? If so, is there a good reason for this and is there any risk of different outcomes for our customers?
• How many offers do we make to customers? Is there any indication that the initial offer is unfair?
• Do we tell customers that our valuation is in line with the FOS’ approach? Or are there any other practices that might discourage a claimant from challenging the valuation?
• Can deductions be justified based on the individual vehicle and is there evidence on file to support such deductions?
• Do we identify and support customers with vulnerabilities at the point of claim?
• Do we allow customers to continue with their policy once they have a replacement vehicle? If so, how long do we allow them to find a replacement?
• Do we deduct outstanding premium instalments from the total loss settlement?
• Can we demonstrate that we have internal expertise to effectively monitor third parties and that our third-party oversight is sufficient?
• Is our MI comprehensive enough to monitor third parties, conflicts of interest and potential issues?

Senior managers should pay close attention since they will be accountable for considering the findings and how they apply to the firm’s own processes. The FCA is also continuing to engage with firms on total loss valuations.

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