FCA business plan says it will investigate insurance claims inflation

Out-Law Legal Update | 27 Apr 2018 | 11:26 am | 6 min. read

LEGAL UPDATE: The FCA has said in  its business plan for 2018-19  (62 page / 3.9MB PDF) that it will focus on regulatory work to prepare for Brexit, meaning that it has limited resources for new initiatives and projects in the next year or two. It will only undertake one new general insurance project, the assessment of claims inflation in insurance. This relates to the FCA's forthcoming regulation of claims management companies (CMCs) in spring 2019 and is designed to assess how far brokers and motor insurers are inflating claims through referrals to CMCs and keeping volume discounts from their own repairers.

While there is plenty of activity in its recent Business Plan that impacts upon the general insurance industry, much of the FCA's work is current and ongoing rather than new, including IDD implementation; the wholesale insurance market study and assessment of value in distribution chains among others.

Sector-specific activities

Implementing the Insurance Distribution Directive
Key dates: publication of final rules after 1 July 2018 / IDD applies after 1 October 2018
The deadline by which the Insurance Distribution Directive (IDD) must be transposed into member state law was recently extended to 1 July 2018, and the application date to 1 October 2018. Correspondingly, the FCA has delayed the completion and publication of its final rules on implementation of the IDD until after 1 July 2018. Firms will however be substantially aware of the proposed rule changes because of the numerous FCA IDD publications over the past twelve months. Many may opt to take advantage of the FCA's 'transition period' in which firms can elect to follow all, or some, of the new IDD rules, provided that they are similar in purpose to the current rules and provide greater, or at least similar, customer protection.

Wholesale insurance brokers market study
Key dates: interim report expected in Q3 2018
In 2017, the FCA began a market study into the wholesale insurance market to consider whether wholesale insurance broking is "working well, and fosters innovation and competition in the interests of its diverse range of clients." The FCA said in its terms of reference that larger brokers could potentially be using their market power to compel insurers to sign up to and pay for additional services, such as data or analytics facilities. There could also be the potential for conflicts of interest, with brokers receiving additional fees for enrolling their clients into facilities "even where it may not be the best option." The interim report will be published before the end of the year.

GI distribution chains
Key dates: findings and next steps expected in Q2 2018
This year, the FCA plans to finalise the first phase of its diagnostic work of end-to-end relationships in insurance distribution chains – another project which was announced in its business plan last year. It has looked at three insurance products – tradesman insurance, travel insurance and motor ancillary insurance, including GAP insurance. The regulator previously said of this work that, across the sector, it had seen "some evidence of poor oversight of delegated and outsourced activities as well as activities of Authorised Representatives" and that this can erode the value of a product of service for the customer. Additionally, customers may not necessarily be aware of the complexity or the risk this introduces. Findings and next steps from this FCA project are expected in Q2 2018.  

Access to travel insurance – call for input

Key dates: feedback from call for input expected in summer 2018
The FCA's ongoing work on travel insurance is closely related to its 'Future Approach to Consumers' and its focus on the characteristics and needs of vulnerable consumers in particular, for example, providing and accessing fairly-priced cover for people with pre-existing medical conditions. Firms should "exercise extra care" and avoid exploiting "vulnerable" consumers, which the FCA has described as people who "face challenges which mean they may not make the best decision for their particular needs". Firms should put policies in place to deal with consumers where there are "indicators of vulnerability" in place, for example, serious illness, bereavement or loss of income. It will publish a feedback statement this summer.

Guaranteed asset protection (GAP) insurance
Key dates: evaluation of new rules expected in 2018/2019
New rules designed to encourage consumers to shop around before purchasing 'add-on' guaranteed asset protection (GAP) insurance with a car or other vehicle came into force on 1 September 2015. The FCA intends to evaluate whether these new rules are improving competition and increasing consumer understanding.  

Cross-sector activities

Culture and Governance

Senior Managers & Certification Regime for insurers
Key dates: new regime begins on 10 December 2018 / policy statement and new rules expected in summer 2018
The senior managers and certification regime (SMCR), which is designed to make individuals at financial firms more accountable, will apply to insurers from 10 December 2018. The SMCR's conduct rules will apply to all regulated firms from 10 December 2018, and the rest of the SMCR will apply to those firms in 2019, as outlined in our comprehensive guidance on the new regime is available.

Establishing a public register
Key dates: consultation expected in Q2 2018
The FCA says that it has received substantial feedback on the public value of it maintaining a central public record of employees and individuals in firms regulated by the FCA who will no longer appear on the FS Register (a public Financial Services Register of authorised firms and approved individuals) including non-executive directors, financial advisers, traders and portfolio managers. It plans on consulting by summer 2018 on policy proposals to address this feedback.

Focus on firms' remuneration arrangements
Key dates: FCA to take broad look at these arrangements in 2018/2019
The FCA says that it wants to identify potential or actual harm from the remuneration schemes of firms that are not subject to its Remuneration Codes.

Treatment of Existing Customers

Pricing practices in retail general insurance
Key dates: work will continue in 2018/2019 and scope of work will be published in due course
In last year's business plan, the FCA announced that it would carry out a review looking at the pricing practices and rating factors, as well as the drivers and types of systems and data used, by a limited number of firms in the retail insurance subsector to decide on a final price for their products. It says that it plans to conclude the first phase of its diagnostic work in due course.

This work has emerged from the FCA's feedback statement on its call for input on big data in retail insurance. One of the issues that emerged from that work was an identification that, while big data can improve customer outcomes, it may also improve firms’ ability to identify opportunities to charge more to certain types of customers based on non-risk, non-cost elements, for example looking at their ability and willingness to pay more.

Claims management companies (CMCs) regulation
Key dates: consultation on draft rules expected later this year / FCA to regulate CMCs from spring 2019
The Financial Guidance and Claims Bill amends the Financial Services and Markets Act 2000 (FSMA 2000) to transfer regulation of CMCs from the Ministry of Justice to the FCA. The FCA states that it is in the process of developing a package of information to ensure CMCs are clear about the rules and principles they will have to meet when it takes over their regulation. It says that it will also continue to build its knowledge of the sector and consult on draft rules later this year to deliver robust regulation when the new regime applies.

Assessing claims inflation in general insurance - new project
Key dates: diagnostic work to begin in Q4 2018
In conjunction with its preparation for the regulation of CMCs, and the related issues, the FCA plans on carrying out diagnostic work to assess how far brokers and motor insurers are inflating claims through referrals to CMCs and keep volume discounts from their own repairers.

Consumers and informed decision-making
Key dates: FCA to decide this year whether or not to conduct a third value measures pilot
In its 2014 market study on general insurance add-ons, the FCA found that too many consumers were purchasing poor value, unnecessary products. It subsequently consulted on three potential methods for calculating the relative value of these products, and as part of a pilot, published two sets of data - in early 2017 and in early 2018 - on insurers' claim rates and average payouts, designed to encourage firms to improve the value of their products. This year, it plans to "evaluate the extent to which the data collected have influenced behaviors and decide whether to conduct a third pilot."

SMEs cccess to the Financial Ombudsman Service
Key dates: policy statement and final rules expected in summer 2018
Under changes proposed by the FCA, approximately 160,000 additional SMEs, charities and trusts would be able to refer complaints to the Financial Ombudsman Service (FOS). At the moment, businesses that cannot access the FOS must take a financial services firm to court although many within this group "struggle to do so in practice" according to the FCA. It is consulting as a result on new rules which will allow more SMEs refer their disputes to the FOS.

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