Hogan Lovells

The FCA has recently published its latest supervisory portfolio letter (dated 28 September 2021) and addressed to the Boards of Lloyd’s and London Market insurers (LLM insurers).  The letter gives an updated overview of what the FCA considers are the key risks of harm LLM insurers pose to their customers and the markets in which they operate, outlines the FCA’s expectations of LLM insurers and provides an overview of the FCA’s supervisory strategy for the next two years.  This letter is an update to the FCA’s last letter to LLM insurers in November 2020.

The FCA has identified the following as ‘key drivers of harm’ and specified the following expectations in response:

Key drivers of harm

FCA expectations/FCA actions

Value of products: the FCA is concerned that its existing requirements and expectations are not being fully met by some firms and that products offered to customers do not provide fair value or deliver good outcomes.

Broadly, firms must consider the value of products during product development and review processes taking into account also the distribution chain and remuneration arrangements.  The FCA expects firms to be ready to implement the new pricing rules which will come into effect on 1 January 2022.  Firms are reminded that the proposed Consumer Duty will also require products and services to be fit for purpose and offer fair value.

The FCA is due to publish a second consultation on the Consumer Duty proposals by 31 December 2021.  The FCA is planning a broad supervisory programme of work to measure compliance with the new pricing rules.

Claims outcomes:  the FCA considers that not all firms deliver claims outcomes that are fair and timely.

Claimants should be treated in a fair, clear and timely manner.  In relation to vulnerable customers, a firm’s processes and approach should not cause distress or create barriers to claims.

Operational resilience: the FCA highlights the risk of significant operational disruption arising from the increased use of new technology by LLM insurers and their third-party suppliers and outsourcers which could impact customer service, cause unauthorised losses or disclosure of customer data.

Firms must ensure they are ready to implement the new standards on operational resilience which will come into effect on 31 March 2022.

Uncertainly over insurance cover including due to ambiguous contract terms: the FCA considers that the issues on contractual uncertainty arising in the Business Interruption test case could be more widespread.  In particular, the FCA highlights the problems which can arise when disclosure and communication do not align with the policy terms and expected cover.

Whilst acknowledging the various market led initiatives to simplify and clarify contact wordings, the FCA expects firms to continue to work to ensure that customers receive the level of protection they should do when they make a claim.

Culture:  the FCA considers that there remains a significant risk that a poor underlying culture may lead to poor customer outcomes and impact the integrity of the market.

Whilst acknowledging the steps taken to improve gender diversity, the FCA considers that firms must do more to attract diverse talent to the industry and to evolve their internal cultures to help drive a strategy which produces fair outcomes for customers.

Following the discussion paper on diversity and inclusion published jointly with the PRA in July 2021, the FCA will publish detailed proposals for consultation in H1 2022.

Access to certain business lines: the FCA notes that an effect of the pandemic has been that some customers have experienced large premium increases in certain lines of business, e.g. employers liability, professional indemnity and building insurance.

Firms must make sure they continue to meet all regulatory obligations.  For example, when considering premium increases, firms must take into account the information and communication needs for customers.

Next steps

The FCA will review and provide a further update in 2023.  In the meantime, the FCA will be monitoring and engaging with LLM insurers.  Firms should be prepared to demonstrate to the FCA how they are managing the risks identified in this letter.

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