[co-author: George Bamber]

In its recently published 2017/2018 Business Plan the FCA outlines its priorities for the general insurance sector over the coming year and beyond.

In general, the Business Plan identifies a shift in focus towards market structures, incentives and distribution and away from issues directly affecting retail/SME consumers (though the FCA will continue to monitor and review its previous work in this area):

“The general insurance and protection (GI&P) sector protects individuals and businesses against the cost of uncertain and often unpredictable events. Without the protection of insurance, many social and economic activities could not take place.  It is vital that this market, including the wholesale market underpinning it, works well.”

The Business Plan identifies three specific general insurance initiatives:

Market study on wholesale insurance market

• This market study will assess how effectively competition is working in the wholesale market, including how firms ensure practices do not create market integrity risks or conduct risks.
• Following publication of the market study in 2018/2019 the FCA will consider appropriate remedial actions.

Value in the distribution chain

• The FCA’s previous review into delegated authority and outsourcing in the general insurance market showed that insufficient focus and consideration has been given to how the interests of customers might be impacted by outsourcing.
• Accordingly, the FCA intends to conduct a further review to understand the “end-to-end” relationships in the distribution chains. This review is scheduled to complete in early 2019.

Firms’ pricing practices

• In September 2016 the FCA published its Feedback Statement on its Call for Inputs on Big Data in retail general insurance.
• Building on this, the FCA now intends to look (during 2017/2018) at pricing practices in a limited number of retail general insurance firms to gain a better understanding of how these developments are affecting the market.
• In particular, the FCA will look at how firms’ pricing approaches and rating factors work in practice, as well as the drivers and the types of systems and data firms use to decide the final price for consumers.
• Following this, the FCA will consider whether any further steps need to be taken.

In addition to these specific initiatives, the FCA has also identified a number of issues and risks affecting the general insurance sector.

Chief among these is IT resilience and the risk that IT failures, data protection issues and cyber-attacks may lead to customer detriment.

In particular, the FCA notes that the use of legacy systems and the rise in outsourcing of functions all contribute to a level of complexity that increases the risk of poor consumer outcomes.

This is linked to the FCA’s recent work on cyber security in relation to financial services firms, more generally. In conjunction with the Financial Policy Committee, the FCA has examined the critical national infrastructure and sought to investigate firms which hold large quantities of sensitive data – which if compromised could then have a ripple effect to other areas of the financial sector.

Other issues and risks identified include:

• Customers may choose unsuitable products by focusing on headline price rather than on suitability.
• Intense competition which could lead to poor advice and gaps between consumer expectations and reality.
• Vulnerable or high-risk consumers may not be able to access general insurance products and services.
• Firms which do not have effective systems and controls to mitigate issues of financial crime, conflicts of interest and inducements.
• Small businesses (SMEs) are susceptible to purchasing inappropriate cover for their needs, and underestimating the levels of cover required.