Out-Law Analysis | 25 Aug 2015 | 3:20 pm | 6 min. read
In June the FCA released the final report of its thematic review on so-called 'delegated authority' in the general insurance market. The report concluded that firms did not appear to have adequately considered or recognised their regulatory obligations in connection with these arrangements, with a major cause of this being that some insurers did not treat the delegation of authority as outsourcing.
By drawing this link with outsourcing, the FCA aims to remind firms of the importance of having the right systems and controls in place to manage delegated authorities. Having clear and comprehensive contracts is an important part of achieving this aim. It also emphasises the importance of managing delegated authorities through other means as well: effective risk-based due diligence of all new opportunities; appropriate monitoring and control of the delegated authority and the product itself throughout the relationship; and effective post-termination rights in respect of the product and policyholders.
The report: the customer experience
Insurers use delegated authority, or 'coverholder', arrangements, to outsource certain functions to third parties. These can include underwriting and claims handling activities. During its review, the FCA focussed on the potential conduct risks associated with delegating these activities to third parties and the allocation of related functions between those parties. It found that, in many cases, firms did not consider these arrangements to be outsourcing.
When an insurer outsources 'significant functions' to a third party, these functions remain subject to the relevant requirements in the FCA Handbook. The most relevant of these are within the Threshold Conditions, Principles for Businesses, SYSC, ICOBS and RPPD. Outsourcings under Solvency II, the EU-wide regulatory regime that comes into force on 1 January 2016, will also be subject to EIOPA's guidelines, which expressly include the external delegation of underwriting authority.
RPPD is the FCA's regulatory guide on the responsibilities of providers and distributors for the treatment of customers. This guidance sets out the FCA's views on what the rules require of providers and distributors which supply products and services to retail customers. Crucially, it confirms that it is not the firm's status as insurer or intermediary that determines its responsibilities but their function and role throughout the product lifecycle. For example, where an intermediary specifies the criteria for an insurance product, many of the responsibilities fall to the intermediary as 'retail manufacturer' rather than to the insurer as 'pure manufacturer'.
The customer experience has always been a central element of the FCA's agenda, so it was not surprising to read the FCA's focus on customer outcomes as part of its thematic review. The final report emphasised that neither insurers nor distributors should consider the customer's experience as the sole responsibility of the other. This relates not just to the product itself but also to the way that it is distributed under the delegated authority. This can pose a real challenge for insurers and wholesale intermediaries that may not have any direct dealings with the customer, particularly in extended distribution chains. However, the FCA report makes it clear that they will nonetheless have responsibility in these cases as well.
The FCA's future expectations of firms
The regulator's renewed emphasis on the customer's experience of a particular product will require a considerable shift in the relationship between the insurer and its distributor, at least in relation to some distribution arrangements. Going forward, it may be necessary for some insurers to have relationships with their distributors that are much more akin to partnerships, with clearly apportioned responsibilities, in the way in which products are developed, marketed and sold, and also to the way in which claims are handled under delegated authorities.
The FCA has said that it will focus on the issues highlighted in the report in its ongoing supervisory work with firms. Some of its expectations for UK firms are outlined below.
Insurers and intermediaries
Incoming firms that 'passport' into the UK on a services basis
Insurers and intermediaries should note that the recast Insurance Distribution Directive (IDD) also includes measures relating to product oversight and governance (Article 21a). (The final compromise text of the Insurance Distribution Directive (IDD) was published on 16 July 2015 and will now be submitted to the European Parliament for a vote at first reading and to the European Council for final adoption). Additionally, EIOPA consulted earlier this year on product oversight and governance guidelines in relation to insurance undertakings manufacturing insurance products. These have the potential to strengthen the requirements placed on firms that manufacture insurance products and firms are expected to ensure that their practices are adjusted to meet any new requirements.
These increased expectations around oversight and control of delegated authorities will almost certainly give rise to additional costs for insurers and intermediaries. This may well lead to a reduction in the number of delegated authorities in some markets and products, and to change in some insurers' distribution models.