Tag Archives: Financial Conduct Authority

FCA guidance on “Product value and Coronavirus”

On 3 June 2020, the Financial Conduct Authority (FCA) operating in the United Kingdom issued guidance on its expectations of insurance firms in relation to product value arising from the COVID-19 pandemic. This guidance applied to all non-investment insurance products, including all general insurance and private medical insurance (PMI) products. The guidance is available here.

What does the guidance say?

The main purpose of the guidance is to “identify any material issues from coronavirus that affect the value of [insurers’] products, and their ability to deliver good customer outcomes.” The FCA defines product value as “what the customer is paying for and the quality of the product or service it is intended they receive.” The measures were placed into effect from the day of the release of the guidance and the FCA stated that it would review the response from insurers after six months. At a minimum, the FCA is expecting insurers to review their products and take appropriate actions.

In this blog post, we have put together some further guidance on how UK non-life insurers can go about reviewing their products.

Key highlights
  • If insurers are unable to provide benefits or pay claims in the usual way, they should seek alternatives to ensure that policyholders are getting product value.
  • If the level of insured events is reduced during the pandemic, then insurers should make suitable adjustments to their policies and premium levels to ensure that the value of the policy to the policyholder is not materially worse.
Analysis: Product review process

Firstly, insurers should review the impact of COVID-19 on their claims experience both during and after lockdown. There are many types of insurance products that will have seen lower levels of claims as a result of the lockdown during the pandemic. Insurers should regularly review loss ratios, as a decrease in loss ratios could indicate that customers are getting less value from their products. However, insurers should not ignore the possibility of a spike in claims post-lockdown, e.g., warranty or breakdown cover insurance policyholders might have been reluctant to have a technician enter their homes during the lockdown period, leading to reduced claims. However, as the lockdown eases, and policyholders become more comfortable with such repairs, there may be a spike in claims. Insurers should also be mindful of cross-subsidies within their portfolios, and of their overall solvency, as some lines of business will likely experience claim levels well in excess of normal levels.

Insurers should also analyse the driving factors behind decreased claims experience. The FCA identifies two main drivers of decreased claims experience:

  • The insurer’s own ability to provide claim benefits is reduced, e.g., the reduced availability of repair services for motor vehicles due to lockdown measures. In this case, insurers should seek alternative ways of providing benefits and paying claims. This issue could also affect insurers in other lines such as:
    • Motor own property damage
    • Extended warranty
    • Household contents
    • Boiler breakdown
  • A genuine decrease in the insured activity below the level expected at underwriting. For example, annual travel insurance policies that are no longer useful to policyholders. In this case, policyholder refunds or decreased premium rates may be the ideal way to ensure product value. When the reduction of risk under the policy is such that there is “little or no utility to consumers,” the FCA’s expectation is that firms carry out a product level assessment of value. Lines affected in this way could include:
    • Travel insurance
    • Motor insurance
    • Public liability
    • Marine & Aviation policies linked to passenger travel

At the time of writing, the first major lockdown of the UK is easing, although the risk of further waves of the pandemic and future lockdowns, local, regional or national, remains. Therefore, insurers need to be aware of precedent-setting and managing consumer expectations. These considerations remain equally valid for any future waves of the virus, and insurers should take advantage of their learnings from the first wave of COVID-19 infections to enact responses to decreasing product value in a manner that is rapid and more specific to the nature of the outbreak.

Additionally, due to the virus and the ensuing recession, policyholders could find themselves in financial difficulties, and may miss insurance payments. In this case, firms have been instructed to consider the value of the product to the customer when deciding on a course of action. The FCA has also issued some additional guidance on treating customers fairly in this type of situation, which may be found here.

Case study: Private medical insurance in the UK

In the UK, all nonemergency procedures were postponed as hospitals made preparations to deal with the worst-case scenarios. During this period, loss ratios have lowered significantly, as a material number of operations have been deferred. While insurers have ramped up their telehealth coverage, many policyholders have had treatment delayed and, therefore, have received much more limited value from their products than they would expect. One option for insurers would be to provide some form of a refund to customers during the period where hospital facilities were shut, as has happened in Ireland. A number of larger UK medical insurers have promised a future refund if claims remain low for an extended period. However, early indications are that, not only will the vast majority of the deferred treatments occur, but that there is a significant potential for the claims cost to be higher than anticipated, due both to delays in treatment and to increased provider costs resulting from new social-distancing and cleaning guidelines for treatment.

Overview of Climate Financial Risk Forum guide

In March, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) hosted the first meeting of the jointly established Climate Financial Risk Forum (CFRF). The CFRF was established to build capacity and share best practice across financial regulators and the industry to advance financial sector responses to the financial risks from climate change.

The CFRF produced a guide to help firms understand the risks that arise from climate change and to provide support on how to integrate these risks into strategy and decision-making processes. The CFRF emphasises the importance of greater transparency and consistency regarding firms’ disclosures of climate-related financial risks, the benefits of effective risk management and scenario analysis and the opportunities for innovation in the interest of consumers.

The forum set up four working groups to explore the risks that climate change poses in each of these areas and developed practical guidance. In this paper, Milliman’s Amy Nicholson and Sophie Smyth summarise the key guidance from each of these four working groups.

TR19/3 FCA Thematic Review

In April 2019, the Financial Conduct Authority (FCA) published the findings from its thematic review, TR19/3: Review of the fair treatment of with-profits customers. In this review, the FCA focused on the areas of with-profits fund management it assessed as presenting the highest risk of customer harm at present. These were Investment Strategy & Management, Capital Management: Estate Distribution & Fund Resolution, Capital Management: Allocation of Risk & Reward between Stakeholders, and Governance. Milliman consultant Jennifer van der Ree offers more perspective in this briefing note.

Part VII transfers and the FCA’s approach to the review

What involvement does the Financial Conduct Authority (FCA) have in Part VII transfers and what are its current expectations? This article summarises the key points of the FCA’s approach to the review of Part VII transfers and provides perspective from Milliman’s experience of Part VII transfers.





Extension of the Senior Managers and Certification Regime to insurers

In the United Kingdom, the Prudential Regulation Authority and the Financial Conduct Authority recently issued two complementary Consultation Papers, setting out their proposals to extend the Senior Managers & Certification Regime, which currently applies to the banking sector, to insurers. This article by Milliman consultants provides an extended summary of the proposed changes that will apply to Solvency II insurers, Insurance Special Purpose Vehicles and large Non-Directive Firms.





Big data, consumers, and the FCA

Newton_DerekIn November 2015 the Financial Conduct Authority (FCA),1 a UK financial services regulator, announced that it intended to investigate the use of “big data”2 in retail general insurance in the UK. In September 2016, it announced that it was not, after all, going to pursue this investigation. Why this apparent turnaround?

The opportunities big data provides general insurers are widely acknowledged and the reason general insurers are investing heavily in this area. But with such opportunities come potential threats: big data could potentially lead to better service and outcomes for many consumers, but could it also lead to some consumers effectively being excluded from the market, or to the exploitation of consumers who are less price-sensitive than others? They are the concerns that the FCA sought to address when announcing its investigation in November 2015.

Since then, the FCA has been gathering and evaluating relevant information, mostly relating to private motor and home insurance. It has found a lot of evidence that the use of big data results in benefits to users of insurance, through products and services being better tailored for individual needs, through more focused marketing and better customer service, and through increasing feedback to consumers about the risks that they run and how to manage them effectively, most notably to those with telematics auto insurance.

While its concerns remain, the FCA concluded from this preliminary investigation that the increasing use of big data is “broadly having a positive impact on consumer outcomes, by transforming how consumers deal with retail GI firms, streamlining processes and encouraging more innovation in products and services.” As a result, it has decided that there is no immediate need either to push ahead with the full investigation that it had originally proposed or to change its regulatory framework in response to any issues raised. However, it will continue to look at big data, in particular looking for any related data protection risks and seeking to understand how big data is used in pricing.

Full details of the FCA’s views can be found in its Feedback Statement FS16/5.


1The FCA regulates the financial conduct of the financial services market within the UK and shares with the Prudential Regulation Authority the prudential regulation of the businesses within the UK financial services market.
2There is no universally accepted definition of “big data.” In the context of its investigation, the FCA considered big data very broadly, embracing data sets that are larger or more complex than have hitherto typically been used by the insurance industry, data sets derived from new sources such as social media, and the emerging technologies and techniques that are increasingly being adopted to generate, collect, and store the data sets, and then to process and analyse them.