Dear Board of Directors | Release Date: 25th August 2021
To read a shorter summary of this Dear Board of Directors letter, click here.
To access the original FCA document, click here.
Long Summary
This document outlines the Financial Conduct Authority’s (FCA) latest supervisory strategy for Personal and Commercial Line (PL&CL) insurers, focusing on the evaluation of persistent risks, regulatory expectations, and detailed approaches to ensure compliance and harm mitigation. The FCA emphasises the integration of consumer-focused cultures and proactive regulatory adaptation as critical for industry stability and fairness.
Context and Background
In the ever-evolving landscape of the insurance industry, the FCA identifies continual areas for improvement despite observed progress. This letter serves as a follow-up to previous communications, reflecting on ongoing challenges and setting forth a structured plan to address them effectively.
Updated View of Portfolio Risks
The insurance sector has demonstrated resilience, particularly in adapting operational practices amid the COVID-19 pandemic. However, several significant issues have emerged:
Key Challenges Identified
Business Interruption Claims: The pandemic has underscored severe complications in business interruption insurance, leading to substantial consumer dissatisfaction and heightened regulatory intervention aimed at clarifying insurers’ obligations and expediting fair settlements.
Pricing Practices: Persistent concerns about the transparency and fairness of pricing within the sector underscore the potential for adverse consumer outcomes.
Operational Resilience: Increased cyber risks due to rapid digital transformation necessitate robust systems to safeguard data and ensure service continuity.
Regulatory Adaptation: Insurers continue to grapple with the implications of Brexit, requiring diligent updates to regulatory compliance measures.
FCA Expectations for Insurers
The FCA outlines several expectations that insurers must meet to align with regulatory standards and ensure consumer protection:
Pricing and Consumer Value
Insurers are required to establish that their pricing strategies do not lead to unfair consumer outcomes and that their products offer fair value relative to the costs.
Vigorous oversight of product governance is essential to confirm that products genuinely meet consumer needs and do not result in excessive costs or poor value.
Operational and Financial Health
Insurers should maintain sophisticated systems to manage risks associated with their operational infrastructure robustly, focusing on data security and system integrity.
Financial resilience is critical, with sufficient resources needed to handle potential disruptions or claims effectively.
Governance and Cultural Integrity
Developing a culture that prioritises consumer welfare and integrates this focus across all business operations and decisions is crucial.
Strong governance structures must be established to ensure compliance with regulatory expectations and facilitate adaptive changes in the operational environment.
Supervisory Strategy and Implementation
To enforce these expectations, the FCA plans a comprehensive supervisory approach:
Ongoing Engagement: The FCA will maintain regular interactions with firms to assess adherence to regulatory standards and practices.
Data-Driven Oversight: Utilising advanced data monitoring techniques, the FCA aims to oversee firm activities, especially in pricing and claims settlements, to promote transparency and fairness.
Regulatory Enforcement: The FCA will actively pursue enforcement actions against firms that fail to meet consumer protection standards or regulatory requirements.
Conclusion and Forward-Looking Statements
Firms are urged to critically evaluate their current practices against the FCA’s outlined expectations and make necessary adjustments to align with regulatory standards. This includes ensuring compliance with new regulations arising from Brexit transitions and operational resilience frameworks.
Action Items and Recommendations
Consumer Protection Enhancement: Focus on improving areas that directly impact consumer interests, such as efficient claim processing and the intrinsic value of products.
Robust Risk Management Practices: Develop and implement comprehensive mechanisms for risk assessment and management, with a particular focus on operational resilience and data security.
Alignment with Regulations: Ensure all business practices comply with existing and forthcoming regulations, especially those related to fair pricing and ethical business conduct.
Engagement with Regulators: Maintain proactive and transparent communication with the FCA, responding promptly to inquiries and adapting quickly to regulatory changes.
Insurers must remain vigilant and proactive in addressing both consumer needs and regulatory demands to foster trust and ensure the stability of the insurance market.