FCA retail insurance ‘roadmaps’ should spur industry wide re-evaluation

Matt Saward and Daniela Ivanova, insurance law experts at Pinsent Masons, were commenting after the FCA unveiled a comprehensive ‘roadmap’ aimed at reshaping the UK’s retail insurance market, with a sharp focus on tackling motor insurance premiums, improving claims handling, and ensuring fair treatment of consumers.

The several reports comprising the roadmap set out actions to address specific issues relating to motor, home and travel insurance and premium finance, as well as looking back on the impact of previous pricing reforms in the motor and home insurance markets. The FCA’s intervention comes amid growing public frustration over surging premiums and inconsistent claims experiences, particularly in motor insurance, where costs have risen sharply over the past 18 months.

The FCA’s review identifies several structural issues driving up costs and undermining consumer trust. These include rising repair and replacement costs in motor insurance, exacerbated by inflation and supply chain disruptions.

While the FCA’s review of motor insurance claims costs shows powerful factors at play which are outside of firms’ control, the regulator has also directed its attention to established market practices such as outsourcing elements of claims handling to accident management companies, claims management companies and credit repair and hire organisations in return for referral fees. Those parties then arrange repairs from a third party. The FCA suggests that repairs sourced from a third party, via a credit repair or accident management firm, cost more than those that are outsourced directly by the insurer or carried out by the insurer ‘in-house’. There is no conclusive evidence on whether repairs outsourced directly by the insurer are more costly than repairs carried out in-house.

“These findings should make insurers more alert to how they manage the outsourcing of claims handling, especially where there is a chain of service providers, and its impact on value of the insurance product,” said Saward.

The FCA’s review of claims handling in home and travel insurance also highlights inconsistent claims handling outcomes. One of the FCA’s central concerns was the use of vague or ambiguous policy language – particularly terms such as ‘storm’ and ‘wear and tear’ – which often led to customer confusion as to what their policy covered. This lack of clarity led to high volumes of customer enquiries during the claims process, and low claims acceptance rates.

The FCA’s review identified weak oversight of third party claims handlers. In several cases, firms failed to monitor the quality of outsourced claims services, resulting in inconsistent decision-making and poor customer outcomes. While some insurers were found to have robust governance frameworks in place, others lacked a documented oversight framework or policy to ensure consistency in their claims oversight.

Further, the FCA expressed concerns that some insures were failing to identify or sufficiently support vulnerable customers. In some cases, while firms where identifying vulnerable customers, too often they were not flagging them on their claims systems, leaving the customer at risk of poor outcomes.

Complex and high value claims call for special attention, as do the use of cash settlements where the customer may be vulnerable. In relation to a fire claim made by a vulnerable customer which was settled with cash, the FCA commented: "It is likely that this customer would have benefited from the range of tailored support and services the insurer could provide to resolve their claim". Saward said: “The themes of unclear wordings, such as what ‘storm’ means and what ‘wear and tear’ means, and loosely controlled outsourcing will not be new to readers. However, firms should pay close attention to the FCA’s comments on how vulnerability should factor into the decision of whether a home insurance claim should be settled by way of a cash settlement or a service."

"Such claims may be challenging where the state of the property was very neglected to begin with, and the standard of reinstatement is impossible to pin down. Insurers may need to look into other ways to provide support to such customers beyond pure monetary indemnification,” said Saward.

Additionally, as part of its package of reports, the FCA has issued an update paper (11-page / 382KB PDF) summarising the initial findings of its premium finance market study, which was launched in October 2024. The FCA has zoned in on so-called ‘recourse arrangements’, in which third party premium finance providers pass on liabilities for bad debts to the insurer or intermediary. Bad debts are made up of the defaulted instalment and certain costs of the premium finance provider between the time of the default and the time the credit agreement is terminated, such as interest. This is distinct from the insurer’s loss in terms of ‘time on risk’ or in respect of a claim paid before the default occurred.

Ivanova said: “Recourse arrangements are gaining popularity as a way for premium finance providers to reduce their funding costs and appear more attractive to insurers and intermediaries. However, insurers and intermediaries end up in-sourcing the credit risk. There is an acknowledgment that costs need to be recouped, however the FCA will be looking into instances where revenue materially exceeds costs and whether such recourse arrangements cause friction and poor customer outcomes.”

The FCA has also laid down a marker around what it terms ‘double-dipping’, which it describes as a scenario in which “in addition to paying finance charges for premium finance, the decision to pay monthly may be factored into the pricing of the underlying insurance premium”. Insurers that provide their own premium finance may have good reasons to consider a customer who chooses to pay by instalments or has a poor credit score as a higher insurance risk. However, the FCA has flagged that its rules require risk pricing on that basis to be “objective and reasonable”.

“In practice, this will require robust evidence of why the risk is deemed higher. Insurers will also need to ensure that their approaches to risk and margin are individually aligned with the FCA’s rules on fair value as the effect of the rules may not be the same for each of those pricing elements,” said Ivanova.

Comments can be made on the updated paper until 30 September.

The FCA is also seeking feedback on its assessment of whether its general insurance pricing practices (GIPP) remedies are reducing harm to consumers in the context of rising insurance prices in recent years. The FCA introduced its package of GIPP remedies in 2021 to address customer harms which it had identified in the home and motor insurance markets through measures relating to pricing, autorenewal, product governance and reporting requirements.

The FCA specifically looked at the effect of GIPP remedies on issues including tenure-based ‘price walking’ – the so-called “loyalty penalty”. This is where firms raise prices for renewing (loyal) customers each year, so that these are higher than the prices offered to equivalent new business customers. Overall, the finding is that the reforms have been effective in reducing price-walking practices.

The FCA also looked at the effect of the reforms on pricing, with the analysis indicating that GIPP appears to have succeeded in reducing average prices for consumers in the motor insurance market. In the home insurance market, GIPP was not statistically significantly associated with a reduction in average prices. However, there may be a number of reasons for this finding.

Product quality was also examined. The overall evaluation of product quality is inconclusive and is neutral as to whether GIPP has led to an improvement in product quality. Finally, the regulator looked at switching costs, concluding that switching rates changed in the expected direction - i.e. they rose for low-tenure consumers and fell for higher-tenure consumers - after the GIPP remedies.

“We encourage firms to review the findings and consider engaging with the FCA to provide their comments and inputs,” said Saward.