Out-Law Legal Update 5 min. read

FCA outlines priorities for insurance including market study on wholesale insurance

LEGAL UPDATE: The FCA has outlined five key planned activities for insurance  in its business plan published this week . They are a market study in the wholesale insurance subsector; a review of value in distribution chains in the insurance sector generally; a review of pricing practices in the retail insurance sector; a cross-sectoral review of firms'  IT/operational resilience; taking in insurance; and the regulator's ongoing work in implementing the Insurance Distribution Directive (IDD).

General insurers, in common with other parts of the financial services sector, have had plenty to chew over in terms of FCA statements and market studies in recent years. This FCA business plan makes plain there is no let up on the horizon for its scrutiny of wholesale insurers. Value in distribution chains continues to be a 'boomerang' issue for the FCA, subject to a thematic review only two years ago. Likewise, IT issues, especially legacy systems, remain a real concern for the FCA. With an intention to do much of the work in plan in 2018/19 and with IDD preparation already generating work for general insurers, regulatory demands on the sector and the senior compliance personnel and boards required to implement them, remain high.

Market study in wholesale insurance

The FCA says that it plans to conduct a market study in the wholesale insurance subsector which, according to its business plan, will be completed in 2018/19. No date is provided for the commencement of the work and, although the exact scope of the study is not detailed, the FCA says it plans on assessing "how effectively competition is working in the markets, including how firms ensure practices do not create market integrity and conduct risks" and then taking "appropriate remedial action".

In a separate document published with the business plan, the FCA has provided further detail about its assessment of the wholesale subsector generally and the areas it is particularly focused on. These may provide clues about what the market study will encompass and include:

  • challenges to the subsector from technological advances as it gains experience in managing new exposures that are continuing to evolve, such as cyber risk, and as it sees new entrants in the market with the potential to disrupt traditional business models, such as insurance technology (insurtech) companies;
  • challenges caused by lengthy and complex distribution chains making firms vulnerable to breaching financial or crime sanctions and causing a lack of transparency in relationship structures within the chain. The FCA is separately going to carry out work on the value in distribution chains;
  • sensitivity of income in this subsector to cyclical and structural changes in the economy;
  • challenges and opportunities offered by forthcoming insurance-linked securities business once the government's new framework is in place.

According to the FCA, the wholesale insurance subsector is fragmented although the larger firms dominate the market and it is "serving the needs of the largest and most complex multi-national business around the world" and underpinning "the functioning of global aviation, marine and energy markets and provides alternative and reinsurance cover to international markets".

Review of value in distribution chains

The FCA plans to conduct a further review of end-to-end relationships in insurance distribution chains following its thematic review of delegated authority arrangements in 2015. This review is likely to span retail, commercial and wholesale subsectors and focus on particularly complex and fragmented distribution arrangements. The FCA says that it will decide what further work may be necessary once the review is completed which is likely to be in Quarter 2018/2019 according to its Business Plan.

FCA says that across the sector it has 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.

Review of pricing practices in retail general insurance

The FCA intends to 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 has emphasised that, at this stage, the work is discovery only and that it will only intervene if it identifies "one or more" market issues where it believes a regulatory intervention would improve outcomes.

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.

Cross-sectoral work on operational and IT resilience

Another of the FCA's key planned activities within the insurance sector is in IT resilience. This is a cross-sectoral activity and the FCA states that a number of authority and industry groups have been set up "to oversee, design and deliver a strategy and programme to test operational resilience". The programme that has been set up "involves running tailored and targeted exercises every year and a simulation exercise in alternate years" and these will "rehearse how well the industry and authorities’ arrangements work individually and collectively to deal with major operational disruption".

Separately, the FCA will act as the lead responder in the event of outages or cyber-attacks within the insurance sector particularly where there is significant consumer or market impact. It will work closely with other authorities in these instances like the National Cyber Security Centre and National Crime Agency.   

Within insurance, the regulator is particularly concerned with insurance firms' complex IT and legacy systems which may be the result of merger and acquisition activity and outsourcing. The added complexity of these systems make them particularly vulnerable to outages and cyber attacks. These types of events are particularly concerning because they could lead to sensitive consumer data being compromised.

UK implementation of the Insurance Distribution Directive

In February, the FCA published its first consultation paper covering the implementation of the Insurance Distribution Directive (IDD) in the UK. This will form a core part of its work in insurance this year according to the Business Plan and a second consultation paper is expected in the coming months. In its sector review, the FCA states that the areas of suitability and advice for SME customers and conflicts of interest in the commercial insurance subsector; and inducements in the wholesale subsector are particular areas of focus. Its attention to these areas will likely come under the umbrella of its work on implementation of the IDD this year.

In its business plan the FCA states that it intends to shift some of its focus from issues affecting SMEs to market structures, incentives and distribution. It also plans on monitoring and reviewing work carried out in commercial and retail insurance subsectors over the past three years to "ensure that progress is made and sustained". The Sector Review document is a useful one for firms as it sets out the issues and developments that the regulator is seeing amongst other things. The FCA says that it plans to publish these on the website once a year three months after they are approved by the Board. The one that has been published this week was presented to the Board between June 2015 and November 2016. 

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