Regulators and insurers must work together to ensure consumers benefit from digital innovation, says expert

Out-Law Analysis | 26 Mar 2015 | 11:50 am | 2 min. read

FOCUS: Despite recent moves by the Financial Conduct Authority (FCA) to encourage firms offering a transformative approach to financial services not to regard regulation as a deterrent, regulatory uncertainty - and the perception of a "hostile" environment - continues to restrict innovation.

The burden of regulation on insurance businesses as both a commercial challenge and a barrier to innovation was one of the repeated themes to emerge from a survey conducted by Pinsent Masons, the law firm behind Out-Law.com, at our recent industry forum on the future of general insurance distribution. This was not surprising given the volume of regulatory activity affecting insurers, but what was surprising was the number of firms that told us that burdensome regulation was also detracting from their ability to provide the innovation that consumers want.

Since taking over insurance regulation from the Financial Services Authority (FSA) in April 2013, the FCA and prudential regulator the Prudential Regulation Authority (PRA) have placed the customer experience at the heart of their regulatory approaches. It is our experience that firms are now reconciled to that approach. But while it's one thing to treat customers fairly, it is another to provide them with innovative products that will genuinely meet their needs in an increasingly digital world.

When asked for their views of the single most important change that could improve fair outcomes for consumers, some forum attendees recognised the need for better consumer education and understanding of insurance coverage and products, along with more effective measures to combat insurance fraud and identify theft and ultimately reduce premiums for honest customers. This ties in to a scene-setting report published by the government-appointed 'Insurance Fraud Task Force' alongside the 2015 Budget, which promises to ultimately challenge the perception by some customers that insurance fraud is effectively a 'victimless crime'.

But the most interesting comments called for a reduction in the regulatory 'small print' that insurers are forced to provide to consumers at the point of purchase. This would encourage more informed discussion between insurers and their customers in a less prescriptive format, giving firms a better understanding of the customer's perspective in order to meet their needs with less commoditised, more bespoke insurance products.

Theoretically, there is nothing to prevent insurers from innovating within the bounds of existing regulation. Indeed, with its new 'Project Innovate' hub, the FCA appears to be actively encouraging new ideas from both emerging and established providers – albeit subject to strict consumer benefit and 'significantly different' criteria. But our research shows that firms are increasingly concerned about the 'lag' between technological developments and announcements by the regulators, without which it is difficult to see how product providers and distributors could treat consumers consistently. Keeping up with competitors can be difficult for firms struggling with cumbersome legacy systems that may be too expensive to upgrade, and a lack of staff trained in the necessary technical skills. In addition, traditional regulatory disclosures may be incompatible with the technology hardware increasingly used by consumers, such as tablets and smart phones.

All this comes against an economic background which continues to be commercially challenging, and in which firms have told us that uncertainty about a new government in May and the longer-term fear of regulators applying retrospective standards has put them off acting. Over the coming year, firms must address a new EU-wide regulatory regime in the form of Solvency II and potential new rules for insurance distribution, assuming that EU lawmakers finalise a replacement for the Insurance Mediation Directive by the summer. The FCA has confirmed that it will ban opt-out selling of general insurance add-ons this year, while firms have told us that they expect on-going focus by the regulator on online selling, consumer protection issues, commission payments and distribution chain accountability and much of this has been confirmed by the FCA's Business Plan for 2015/2016, which was published on 24 March.

Research by Accenture at the end of 2014 found that the majority of insurers expected innovation to transform the market within the next five years. What is clear from our own research is that firms need the regulators to work with them to ensure that the benefits of digital technology can be safely passed on to consumers.

Alexis Roberts is an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com