The FCA released guidance last week that instructed insurance firms to assess the impact of Covid-19 on the value of their insurance products. Whilst it would be easy to see this as simply another obligation in the process of achieving regulatory compliance, our view is that progressive firms will see this as an opportunity to build trust, engagement and loyalty with their customers.
As Chinese philosopher Confucius is alleged to have said: “The scholar does not consider gold and jade to be precious treasures, but loyalty and good faith.”
There is of course also the product review obligations under PROD 4 that firms should consider.
Summary of FCA Guidance
The FCA guidance sets out their expectations for insurers and insurance intermediaries, in particular those who are Product Manufacturers of general insurance and protection products, to consider the value of their products for their private and business customers, in light of the exceptional circumstances arising from Covid-19.
“Customers should expect value from the insurance products that they buy, but the exceptional circumstances of coronavirus may have materially reduced the value they are getting”- Sheldon Mills Interim Executive Director of Strategy and Competition, FCA
It is a subject I have considered previously, in an article I wrote in April 2019 titled The FCA’s Latest Warning: Value, Pricing, the GI Distribution Chain and the Customers’ Best Interest Rule. Our world may have changed somewhat in the last 12 months, but the regulators expectations remain the same.
The FCA expect firms to consider whether and how coronavirus may have materially affected the value of their insurance products. The effects of coronavirus may mean that:
- Firms are no longer able to provide expected contractual benefits, either in the expected form, to the expected timeframe, or at all. For example, where fulfilling claims involves service providers whose movements are restricted because of lockdown (e.g. boiler servicing), or some medical cover where customers cannot access certain benefits.
- There has been a reduction in the chance of underlying insured events happening for any holders of the policy, due to Government lockdown or other circumstances connected with coronavirus, resulting in a fundamental change in risk for the firm and that product provides little or no utility for customers. For example public liability insurance for business that are unable to open at all (or in a normal way) such as hairdressers, bar, restaurants.
The full FCA guidance can be found here: https://www.fca.org.uk/publications/finalised-guidance/product-value-and-coronavirus-guidance-insurance-firms
Action for Firms
At your firms next Product Oversight and Governance (POG) Committee, you should be prioritising a review of product lines that may no longer deliver a benefit to the customer or where there a has been a significant reduction in the risk of the underlying insurance event happening, as a result of Covid-19, so that the product now provides little or no utility to customers. A Key MI indicator of a product providing little value to customers could be a low or even zero claims frequency in a class of business where the claims frequency was higher before lockdown measures were taken.
If firms find that their product is offering little value or benefit to customers, then the FCA has stated that firms must take remediation action before 3rd December 2020. The Regulator has not mandated specific actions for firms to take but firms must be able to demonstrate how they have met their obligations at product level to treat customers fairly. Remediation action that firms could take may include;
- Changing how benefits are delivered;
- Refunding some of the premium; or
- Freezing premium payments for a certain period of time.
What action a firm takes should, in our view, look not only at the literal interpretation of the regulatory guidelines, but also consider the longer-term relationship between product manufacturer and customer. We are touching on questions of culture here – a separate area of interest for the FCA – and it is our expectation that the approach taken by firms in deciding what action to take, if any, may in the future form part of the diagnostic work of the regulator in in reviewing a Firm’s Culture.
Firms continuing obligations under PROD 4
If it has taken this guidance from the FCA to nudge your firm into carrying out a product review, we would also suggest that you review your firms Product Oversight and Governance Policy and Framework, paying particular attention to the monitoring/product review aspect and assessing if it is fit for purpose to enable your firm to meet its obligations under PROD 4. Firms should already be regularly reviewing their products to meet the FCA’s requirements, not just in light of this pandemic.
A key takeaway for firms should also be getting from this guidance is that relying solely on analysing Product Value MI numbers as a trigger to action being taken when it comes to product value, is not enough. This is for two reasons, the first being, there will be a time lag on the MI that firms receive, meaning if firms rely solely on numerical analysis before taking action, this could lead to action be taken too slowly whilst customer detriment could be occurring. This slow action could also lead to firms missing the opportunity to get out in front of a situation and build up goodwill with their customer base, by being one of the first in the market to take remediation action. We saw a good example of a motor insurer reacting quickly during the start of this pandemic and provide a stay at home premium refund to its customers, which was widely reported in the press to great acclaim.
The second reason is that firms solely analysing Product Value MI numbers in a vacuum will not provide the firm with the whole picture. This could cause firms to miss a shift in the environment which has caused the underlying risk that their product was protecting against, to be significantly changed or diminished and materially changed risk or exposure is now obviously a trigger for action according to the FCA.
Therefore, a firms should ensure that their POG Committee is made up of key individuals who have the skill set not just to analyse the MI numbers but also evaluate how changes to environmental or political conditions may be impact product value now and in the near future. This type of analysis would allow firms to take quick and decisive action to ensure that they are treating customer fairly at a product level. A best in class Product Governance Framework would have triggered a product review of certain lines of affected business, with its POG committee then taking corrective action when MI and analysis of the environmental changes indicated there is a risk that products are no longer providing their intended benefit or value to customers.
To meet obligations under PROD, Manufacturers should continuously monitor and regularly review insurance products they have brought to the market, to identify events that could materially affect the main features, the risk coverage or guarantees of those products. Firms should be regularly assessing at least the following:
- Whether the insurance product remains consistent with the needs of the identified target market; and
- Whether the intended distribution strategy remains appropriate.
The rules do not state how often firms should review their insurance products, but we would suggest that a review by your POG Committee is carried out at least once a quarter, dependent on the size, scale, contractual duration and complexity of your insurance products.
The current pandemic may in the history of time prove to be a relatively short-lived virus, but customers have long memories. What value does your firm place on their loyalty?
ICSR is well placed to support firms looking to review their Product Governance or for support conudcting a review of product value in the context of the FCA guidance. If you would like to discuss how ICSR can assist with this, please contact us in complete confidence.