White Paper #1: There is light at the end of the tunnel. A regulatory push for integrity, transparency and a change of mindset
COVID-19 crisis to accelerate digitalisation and improved transparency in the insurance market worldwide.
The current crisis appears to be the ultimate stress test across the industry. While Insurers, brokers and intermediaries alike are focusing on short-term fix of their immediate problems, we should bear in mind that vulnerable business models are the ongoing targets of increased regulatory oversight.
In this paper, we will focus on initiatives recently launched by the UK Financial Conduct Authority (FCA). These initiatives are an important milestone, clearly defining responsibilities, putting transparency and data sharing at the centre of insurance and might be the key to overcoming today’s and tomorrow’s challenges.
Content:
1 – Summary of FCA initiatives
2 – Impact on day-to-day activities
3 – Case studies
1 – Summary of FCA initiatives
On 9 December 2019, the FCA’s Senior Manager and Certification Regime (SMCR) came into force for solo-regulated firms[i]. The SMCR already applied to the banking sector since March 2016 and to dual-regulated insurers since December 2018. The SMCR is one of the most impactful changes resulting from the global financial crisis of 2007-08.
The SMCR strengthens the accountability of senior managers for their actions and has a great focus on conduct rules. The SMCR aims to:
encourage a culture of staff at all levels taking personal responsibility for their actions and;
make sure firms and staff clearly understand and can demonstrate where responsibility lies.
The SMCR highlights the importance of acting with integrity and with best interest of the customers in mind.
Also, in December 2019, the FCA launched an initiative on open finance[ii]. Open finance builds on the principles of open banking – the sharing of data which provides new ways for customers and companies to make the most of their money.
By making it easier for customers and companies to compare price and product features and switch product or provider, open finance could be beneficial in the insurance markets. It could help widen access to advice and support, boost efficiencies for businesses and access to credit, and spur innovation. It allows companies to develop services that benefit customers and businesses and will improve competition between the various market players.
2 – Impact on day-to-day activities
Companies are concerned with the impact that today’s events may have on the relationship with their customers. Customer loyalty and trust are being put to the test. Compliance with the FCA’s initiatives may help to maintain loyalty and regain customer trust.
The FCA’s initiatives can be supported by being transparent about all the information provided and supplied by the various players in the insurance chain – product details, commissions, fee structures and any potential source of conflict of interest are to be shared throughout the full insurance chain.
Information supplied must not only be accurate but should also be complete and presented in a fair way. Too often, information is not cascaded throughout the full insurance chain because one party deemed it to be irrelevant. While this may be the case, transparency standards dictate that it should be up to the recipient of the information, not the sender, to make such an assessment.
Back in 2019, the FCA expected it to take several years to see the full extent of market development and innovation through open finance. The current crisis will likely accelerate the transformation and increase the transformative benefits that could come from open finance.
COVID-19 has already forced a huge acceleration in digital transformation and infrastructures in general, especially in those companies that were suddenly exposed and digitally unprepared.
3 – Case Studies
Case Study 1: Market management of claims
Before settling any claim, a full compliance analysis must be conducted. While standards have not changed in this respect, market conditions have engendered a softening in practice Data, statistical developments of degradation, contract check, AML, review of potential subrogation opportunities, existence of gross negligence at the root cause of the event, etc.
Most of those aspects have been looked at by the market but most probably not always in such a manner that would stand an FCA audit. In particular, assumptions taken in loss quantum calculations sometimes require validation by third parties who are experts in the field when the characteristics of the loss go beyond the expertise of in-house claim’s experts. However, pressure felt by insurers, especially in soft market dynamics, has pushed many actors to reduce their requirements and hesitate before engaging third parties, which is too often treated as a negative marketing argument with the potential to impair business generation.
Case Study 2: Insurance transaction remunerations and interest
Insurance has been affected by complex, and sometimes opaque, remuneration schemes put in place by intermediaries. In an era of ever-increasing customer protection and emphasis on cost reduction, the FCA focus is targeting the lack of transparency and understanding by all actors of the insurance chain (from the insured to the capital provider) of those various fees, commission structures and associated interests.
The global financial impact of COVID-19 can only accelerate the transformation toward an open and transparent insurance market and therefore, the realisation of benefits coming from the open finance initiative.
Conclusion
Solving an immediate problem while underestimating other fundamental changes affecting our industry would, in our opinion, further increase the damage to the market. We have no choice but to tackle them all upfront and together.
Together we can make transactions easier, more accessible and cost-effective to the benefit of all parties in the insurance chain while providing excellent value to customers and fully supporting the aims and initiatives of the FCA.
We always welcome feedbacks and encourage further exchanges on the subjects of our whitepapers and newsletters. Should you have questions, comments, or want to discuss this subject further with us please reach out to:
Rutger van Dijk, Legal Counsel, elseco
[i] Senior Managers and Certification Regime, FCA, December 2019.