Consumer Duty: Challenges and next steps for general insurers and intermediaries

Who is this blog for:

Board members and senior executives working across the UK general insurance industry, in particular those in risk, compliance, internal audit and regulatory affairs teams.

At a glance

• General Insurers and intermediaries (GI) firms have already moved a long way towards Duty compliance in relation to the ‘products and services’ and ‘price and value’ outcomes as part of meeting the pricing practices and enhanced product governance rules. However, the current cost‑of‑living crisis may give rise to some previously unidentified value challenges which will require careful attention when reviewing product value assessments.
• Notwithstanding the progress they have already made, firms still need to ensure they have the appropriate evidence and records to be able to demonstrate compliance with these two outcomes. The recent FCA findings on GI pricing practices attestations indicate that documentation and record keeping are areas of weakness for many firms.
• The ‘consumer understanding’ and ‘consumer support’ outcomes will require significant work to achieve compliance by July 2023. GI firms might need to adopt a risk-based approach to communications testing if the volume of in‑scope communications makes it difficult to review and remediate all of them in time.
• GI firms need to assess their data needs carefully to ensure Duty compliance. Those firms with multiple legacy systems and/or in long or complex distribution chains are likely to have to resolve data challenges to allow a successful implementation of the Duty rules.

Context:

The Duty, underpinned by the three cross-cutting rules, introduces a higher standard of care that firms across the financial services industry give to consumers (see our previous blogs here and here). With the effective date for implementation a few months away, firms need to assess progress continuously and quickly get to grips with any remaining challenges. 

The GI sector is arguably a few steps ahead of other sectors in meeting Duty standards on the ‘products and services’ and ‘price and value’ outcomes following their recent work implementing the FCA’s pricing practices and enhanced product governance rules (effective from 1 January 2022 and 30 September 2022 respectively). Firms that can evidence compliance with PROD and the fair value rules are considered to meet the FCA’s expectations for the Duty’s products and services and price and value outcomes. However, GI firms still face challenges to ensure they are Duty compliant by July 2023 .

In this blog, we outline three challenges that the GI sector faces when it comes to implementing the Duty along with a list of practical considerations for firms in each area.

What next for 'price and value?

The ‘price and value’ outcome under the Duty requires firms to ensure customers receive fair value for their product or service.

Whilst GI firms have already completed a substantial amount of work to demonstrate compliance with the ‘price and value’ outcome following the implementation of the FCA’s GI pricing practices and enhanced product governance rules, there are still some challenges ahead.

Factoring in the impact of the wider economic and social environment

In the context of the cost‑of‑living crisis the FCA issued a Dear CEO letter to the insurance sector in September 2022 highlighting the need to consider premium finance (where offered) as part of the product value assessments and stating that in many circumstances premium finance might breach fair value rules. It also flagged the risk of underinsurance due to customers having to make difficult decisions and the need for firms to ensure that products offered continue to meet the demands and needs of customers. The recent consultation on Insurance guidance for the support of customers in financial difficulty outlines further steps for firms to take in this area. The FCA has expressed concerns about insurers undervaluing insured assets when settling insurance claims in particular in motor, further highlighting the importance of firms getting ‘price and value’ right.

Evidencing good customer outcomes

A key aspect of the Duty is that firms need to demonstrate compliance, resulting in the need for strong evidence gathering and record keeping processes.

In the recently published General insurance pricing attestation multi-firm review, the FCA found that many of the smaller firms in the market had few or no records to show how they had complied with the FCA pricing rules on motor and home products. The FCA also identified cases where no evidence or records were provided to substantiate how firms had satisfied themselves that they comply with pricing rules on an ongoing basis. These findings indicate that evidence gathering and record keeping can be a weakness for some firms.

Firms’ boards will be required to review and approve an annual assessment to demonstrate compliance with the Duty and delivery of good customer outcomes. In support of this, firms will need to improve their record‑keeping processes to evidence meeting these outcomes. This could include, for example, minute taking from steering committees and product governance meetings across product lines as well as records of key decisions made when assessing fair value and price.

GI firms should ask themselves the following when considering the ‘price and value’ outcome under the Duty:

• Does our annual assessment sufficiently detail activity undertaken to assess whether we are delivering good customer outcomes?
• Does our data demonstrate that we are offering fair value and, if not, have we appropriately recorded the actions we have taken? Are there issues with data granularity?
• Have we assessed any gaps in current value assessments – due to lack of data/issues with third parties/low data quality? If gaps exist,  actions will we take to improve quality and achieve compliance?
• Have we communicated the outcome of our fair value assessments both internally and externally where appropriate?
• Are we documenting and able to evidence how we are meeting the ‘price and value’ outcome currently?
• What actions are we taking as a result of the fair value assessments and how will these actions improve customer outcomes? Have we documented and retained records of this?
• Have we considered the interdependencies with other Duty outcomes when considering price and value?

Delivering good ‘consumer understanding’ and ‘consumer support’ outcomes

The FCA wants firms’ communications to support and enable consumers to make informed decisions about financial products and services. It expects firms to give consumers the information they need, at the right time and in a way they understand. The FCA considers testing to be central to this. Firms face two significant challenges in this area: scope and complexity.

The number of communications within the scope of this outcome is very significant, including not only those communications that are currently regulatory disclosure requirements but also any verbal, online and in letter communications and terms and conditions. In addition, the GI sector is known for its use of jargon and technical wording in policies and terms and conditions which increase their complexity. In the pandemic we witnessed the cost to SMEs and insurers of the lack of clarity and consistency in contract wording around business interruption cover. It is likely that when firms begin testing consumer understanding, they may identify many areas for remediation. Given the reliance many firms have on third parties to make changes to policy documentation, there is a risk of missing the implementation deadline.

As a result, firms will need to consider adopting a risk-based approach to focus on high risk areas or communications more widely relied on by consumers in their decision making.

Firms normally offer a number of channels of support for customers. Regardless of the channel used, firms must ensure that their customers’ support needs are consistently met, in particular for those with characteristics of vulnerability. GI firms will need to map all the support avenues available for different customers and products and identify the data needed to monitor that consumers are receiving appropriate support throughout the customer journey and product lifecycle.

Developing a robust outcomes testing plan to cover both the ‘consumer understanding’ and ‘consumer support’ outcomes will be key to a smooth path to compliance. With the first assessment due before the end of July 2024, firms will need to work hard over the next year to ensure that the way they design, implement and monitor customer outcomes will provide the necessary evidence.

In our view, GI firms should consider the following questions when designing their approach to compliance with the ‘consumer understanding’ and ‘consumer support’ outcomes:

• Have we identified all the communications under the scope of the ‘consumer understanding’ outcome?
• Have we identified all the channels through which we provide support to our customers and do we have the necessary data to monitor the quality and effectiveness of the support? Are there any signs to indicate support is insufficient to any cohort of customers?
• What data is needed and what are the data gaps to enable us to demonstrate appropriate consumer understanding and consumer support?
• What root cause analysis could we do on claims and complaints data at a product level, to evidence the required customer outcomes?
• Should we consider performing call listening activity to identify where we are not providing the necessary support to meet customer needs?
• Could creating automated customer feedback surveys help identify and address any ‘red flags’ e.g., vulnerability not identified? (These could be generated after a claim or complaint has been closed, following an ad-hoc customer query, or following a policy sale.)
• How regularly should we review customer journeys to ensure they are fit for purpose, provide the necessary customer support and make clear the price, benefits and exclusions of the product?
• Are we sharing and receiving the appropriate information within our distribution chain to enable us to satisfy ourselves that we are delivering good customer outcomes?
  

Data and MI to support oversight

Lastly, data and Management Information (MI) will play a key role in helping firms’ senior executives and ultimately boards monitor and oversee the implementation of the Duty. For each of the outcomes under the Duty, appropriate data and MI will help firms analyse whether their products and services are providing good customer outcomes on an ongoing basis and should feed into the annual assessment process.

Firms often create MI from whatever data already exists, rather than from the data they need to collect and measure. To implement the Duty successfully firms will need first to define the measures and indicators of good outcomes. Firms can then develop an MI framework that includes the required data, where it needs to be gathered from, how it will be tested, captured and reported If this work identifies data gaps, they will need to be closed.

Many GI firms have to contend with legacy systems, which are often old‑fashioned in design and difficult to integrate with new datasets. Firms should look to review these legacy systems to ensure they provide appropriate data to produce meaningful MI that is both easy to understand and actionable.  Firms should also consider the need to exchange data with other parties in their distribution chain, including assessing the impact of long distribution chains on overall customer outcomes and the firm’s ability to monitor outcomes. 

To deal effectively with these challenges around data and oversight, firms should consider the following:

• Have we defined what we need to measure and does this capture the outcomes of the Duty?
• Does our MI framework sufficiently detail what data is required, what our data sources are, and how data will be captured, tested and reported?
• Are our current systems capable of capturing the appropriate data to produce meaningful MI that is easy to understand?
• Are our data systems fluid to ensure they can deal with any changes in products and services as well as target market?
• Do we require any information from parties within our distribution chain and do we have the systems and processes in place to obtain it?

Conclusion

GI firms will be working hard to implement the Duty over the coming months. In the process they will be solving the challenges highlighted in this paper and many more. The FCA has made it very clear that it expects firms to implement the substance of the rules. This means firms will need to focus on delivering and evidencing good customer outcomes. We see three central elements to ensuring substance in implementation:  factoring in the changes in the wider economic and social environment and their impact on customer outcomes; securing and analysing the right data to measure, monitor and evidence customer outcomes; and using a risk-based approach to develop a proportional Duty framework. There is much to do but there are also grounds for optimism. Better customer outcomes are not only good for customers but also for the firms that provide them. Beyond implementation, the Duty may pave the way for new opportunities and innovation in product design, pricing, customer support, engagement and much more.Firms should consider responding to the consultation but also prepare to engage with the FCA when it publishes its detailed consultation. The FCA will be looking to tailor and apply the rules in a manner that mitigates the potential customer harms resulting from BNPL.  It will be key for firms to engage fully with this discussion to ensure the regime results in a well calibrated set of rules that allow customers access to cost effective credit without incurring in material harm.