While a stern warning issued by the UK's Financial Conduct Authority (FCA) to the insurance sector affects a small slice of the industry, the regulator is displaying a welcome willingness to use innovation to drive change, according to market participants.
“[The FCA] is being very proactive and working with the industry to ensure a better outcome,” says Erik Abrahamsson, CEO of insurance software firm Digital Fineprint. “The fact that the FCA is reaching out like this and trying to build partnerships, run sandboxes and use innovation to get the best for customers is great. It could be a lot worse. If you look at regulator actions across other markets there could have been a much more heavy-handed reaction.
“We work with the leaders in innovation, and in [insurance] they are moving so fast that I don’t see anything more coming out of [the FCA warning]. The fact is, you can see strong innovation and investment, and leaders who are willing to drive this industry forward. To paraphrase Bill Clinton, there’s nothing wrong with the insurance industry that cannot be put right by the insurance industry.”
In a report on the general insurance (GI) distribution chain, the FCA remarked that customers could be paying potentially excessive prices “due to parties in the chain receiving remuneration which appeared to significantly exceed the costs incurred in distributing the products”. It found that firms were having “poor governance and oversight of product design, manufacture and distribution processes.”
“The FCA’s report is based on findings in a limited range of products, which make up a tiny part of the large GI market,” said Hugh Savill, director of regulation at the Association of British Insurers (ABI), in an emailed statement.
“The majority of customers, buying direct from a broker or from a comparison website, should not be concerned with these findings. People continue to get good value, quality products from their insurers, which help them protect their homes, vehicles and livelihoods. There are clearly remaining problems in some distribution chains, and it is very important that these are addressed.”
David Sparkes, head of compliance at the British Insurance Broker’s Association (BIBA), said in an email that the problem the FCA is looking to solve is not one which extends across the whole industry. “Looking at the examples in the FCA paper, the issues seem to be arising from the secondary sellers. The report provides examples including car show rooms, mobile phone sellers and tour operators.
“We are pleased that the FCA highlights that it is important to note that there are also many other GI distribution chains and products delivering good value insurance products and appropriate outcomes, with no evidence of harm. It is our strong view that as agent of the customer, insurance brokers have always acted in the best interests of their customers. Now with the Insurance Distribution Directive it should be the case that any distributor of insurance products must also act with the customers’ best interests.”
Jonathan Davidson, director of supervision for retail and authorisations at the FCA, wrote in an April letter to CEOs that the watchdog would not hesitate to take further action if it encounters issues and failings at firms which might cause harm to the end consumer.
The FCA has fined a number of companies for mis-selling general insurance products: Liberty Mutual Insurance Europe SE, fined for £5m for failings in their oversight of claims handling and customer outcomes; Express Gifts Limited, where a £12m redress scheme was introduced following the sale of products of limited or no value; and The Carphone Warehouse, which was fined £29m for mis-selling mobile phone insurance and failing to investigate complaints.
When it comes to whether there needs to be a cultural or technological change in the general insurance industry, Abrahamsson says that the latter is much easier to reform than the former. “We don’t try and pretend that you can change the culture of the industry overnight, but what you can change right now is the technology behind it.”