Series 6 Episode 7: General insurance and protection - addressing the value challenge head on

Transcript

Tessa Norman: Hi everyone, and welcome to this episode of Risk and Regulation Rundown, the podcast where we share our views and insights on financial services, risk and regulatory hot topics. Today we're talking about the general insurance and pure protection sector, we'll be discussing the current regulatory scrutiny of the sector and exploring what the future holds, with a particular focus on issues such as competition, value and outcomes. We'll be talking about how firms are responding to some of those pressures and evolving expectations, and how they can best prepare for what's likely to come next. To help us navigate all of this, I'm delighted to be joined by two of our expert guests, PwC Partner Stephen Arnold, and Director Sam Jones, both of whom work in our Risk and Regulation insurance practice. Welcome to the podcast.

Stephen Arnold: Thank you very much.

Sam Jones: Thank you. Delighted to be here.

Tessa: Stephen, it's been a very busy period, it would be great if you could start us off by giving us a bit of a recap of a lot of the regulatory activity that we've seen in the sector over recent months? And it'd be interesting as well to start with some of your high-level reflections on what's driving this regulatory activity and scrutiny, and what it is that the FCA's seeking to achieve?

Stephen: Thank you. Maybe we should start by taking a bit of a step back and thinking about what's the purpose of general insurance. Ultimately, it's to be there when a customer has a moment of need, such as a flood or a fire, or a crash in their car. And if you look at what the regulator's then trying to do, they're trying to make sure that when a person needs something, that they've bought something that does what it should do at that particular point in time, and everything that they are trying to focus on at the moment has been ensuring that customers have good outcomes when they get to those points of crisis. Now, good is a really interesting word, not one that I think we've used in the insurance industry up until probably about twelve to eighteen months ago, and good is really hard to both demonstrate what do you mean by good and how you evidence that. And that really is what the FCA is driving a lot of their focus on, trying to get people to explain what they mean by good. Now, they've focussed on claims cost, servicing, showing that a person buys a product and that the product that they've bought is what they intended to buy. They've looked at products that they think have provided really poor value, and so gap insurance is a really good example where the regulator had had a bee in its bonnet for ages, and eventually let's say, lost its temper, and shut the whole marketplace down. Now, a product like that had a very high distribution cost, and it had a very low claims frequency, the sorts of things that the regulator didn't believe provided a customer with the value that they were looking for. They've looked at servicing and cash out, I'm sure Sam will talk about that, and the bereavement processes when we get to that later. We've had market studies in pure protection, premium finance. We've got broad things that they've done in relation to consumer duty, so actually the regulator has been, the FCA in particular, is very broad in what it’s trying to do, and I'd say consistently trying to up the bar with customers getting what they think they should get.

Tessa: Thank you. I think that characterises well what the FCA's driving at, and there's lots of interesting themes and initiatives in there which we'll be returning to in more detail throughout our conversation. But first, I'd like to pick up on consumer duty and fair value which you've mentioned, and in terms of the supervisory work that we've seen from the FCA so far on consumer duty, there's certainly been a strong focus on value. And I think it's fair to say there's been a particular focus on general insurance and protection, perhaps compared to other sectors, and Sam I know you've been supporting a lot of our clients on consumer duty and fair value in particular. Can you talk us through some of the common issues that you're seeing the FCA pick up on?

Sam: Happy to Tessa. I think, just one overarching statement I would make is in general, the industry has underestimated what the FCA was expecting in respect of fair value. Now the reason that GI and protection are getting focus first is because those rules have been in place a little bit longer than consumer duty, but I do think some of the things we're seeing in GI and now protection are things that we're going to see in other sub-sectors as well. It's interesting though, that whilst there's been lots of different types of intervention, and we've helped a number of clients through those, there have been some really common themes coming through all of them. And if you break down what those themes are, they focus on a small number of really core focus areas. One that took a lot of people by surprise was the focus on target markets. Now, everybody in the industry is used to having target markets, that's nothing new, but what has been different is the focus of that in the context of fair value, the level of granularity that's been expected, but also the analysis of is everybody in the target market really getting value, or are there groups that might not be? Thinking about a product that might have a broad target market, we have seen things like different age groups needing to be considered or different vehicle values needing to be considered, about whether all of those get fair value, and in some cases, when that analysis has been done, that hasn't always shown through in the data. Distribution remuneration is probably the one that everybody is now familiar with, because that's been a big focus by the FCA. We've seen that in the gap market, we've seen it in the multi-occupancy insurance. It's been a big focus, and one of the biggest challenges is how you demonstrate that that distributor commission and remuneration is actually commensurate to costs. And the costs associated with that particular product, not other products that may be distributed alongside it, whether those be other insurance products or non-financial services products at all, as we saw in the gap market with cars, and really having that challenge of, actually, are those expenses passing the sniff test? Do they really stack up? And that's probably been one of the biggest themes that we've seen. Another thing we've seen is a lack of data. Sometimes insurers haven't had all the data through the distribution chain, and there's been a real push to get that. We have though, in recent times, seen a bit of a shift there, as the interventions in the market have started to change how insurers interact through the distribution chain, but also how that data comes into the fair value assessments, and we see it at both ends of the spectrum. We see where there's very little data, or it’s all data and no qualitative analysis, and it's that goldilocks moment you're looking for in your fair value assessments of getting the right balance between the two. And the final thing, is often where we've seen firms get into challenging conversations with the FCA, is where there is something that might make you feel a little bit uncomfortable when you're doing your review, but those things haven't been addressed head on.

And where you address those issues head on, and you make a judgement that's backed up with your data and your analysis, yes you might have a conversation with the FCA around whether they agree with that judgement, but you have taken the judgement, and it's a very different conversation to not addressing it at all. I'd say those have been the common themes that we've seen come through all of the interventions that we've supported firms with.

Tessa: Where firms are getting some of those more difficult conversations with the regulator, have you seen more formal actions coming out of that? And Stephen mentioned earlier the particularly strong interventions in the gap insurance market? But yes, it would be interesting to hear a bit more about where's the FCA taking this. Is it taking formal action against firms?

Sam: It's an interesting question Tessa, and actually, as we all know, our listeners, yourself, the FCA has a really wide range of powers, and we have absolutely seen the increase in section 166 activity, but we've also seen some other forms of intervention that are perhaps newer in terms of their use. One thing we've seen a huge use of by the FCA in the context of fair value is asking firms to voluntarily stop writing new business until they address the issues, and that has been a significant tool that's actually been used in the market, that might not have traditionally been used. We have also seen the FCA ask firms to do internal or independent reviews more outside of the remit of a 166, so it's really interesting, because what's clear is the FCA is looking at how can we change outcomes more quickly. But what's also been positive is that when firms have engaged in those interventions, they have been able to get out of them actually quite quickly compared to what they might have thought, and certainly versus some of the more formal interventions that might exist.

Stephen: That's an interesting point though Sam, that if you look at how the FCA has been acting, they've been very quick to act recently, and often you end up in a conversation with the regulator that's begun with, I don't know, a formal complaint or an article in the press. And from that very first interaction with the FCA, the speed with which they go from, 'I've got an itch, I'm trying to scratch it, I've asked for a piece of information from you, I actually am not satisfied so here's a voluntary, a VREQ or here's a section 166, or here's a requirement.' That speed is extremely quick, and far faster than I think I've seen the FCA act across probably the previous five to ten years, and they've clearly got their teeth into something at the moment, and a belief that they can use their tools effectively, and they're having an impact.

Sam: It's that shift isn't it, that mindset shift of consumer duty, of we're no longer just trying to avoid harm, but achieve good. But some of those lagging indicators like complaints or concerns around value in some cases, are being treated as crystallised customer harm now.

Stephen: Yes, that's true Sam. And your point earlier about data, I think the challenge that you were describing is one that the industry is really beginning to, I'd say not just wake up to, but realise that the sets of data that are necessary, and the linkage between the different types of data that they are using, is in a way that I personally hadn't really looked at things in that form before. And I think many people in the industry also had not done so, and that joining of the dots is something that has been a benefit that's come out of the focus on consumer duty recently.

Tessa: I think all the points that you've both reflected on so far around data bring us quite nicely into the two market studies that Stephen mentioned at the beginning, it'd be great to talk about those in a bit more detail. Sam, if we take the pure protection market study first, what are your reflections on what you think that study's likely to focus on, and are there areas that firms should be thinking about now to help prepare for the potential impact?

Sam: It's an interesting market study, and one of the things that's going to make it interesting is it's one of the first since consumer duty came into force, and the FCA has indicated that it forms part of how they're looking at fair value under consumer duty in the insurance market. And as a result, we might see some slightly different considerations, and certainly when they look at what comes out in terms of any remedies, perhaps a different approach, given that consumer duty is intended to remove the need for lots of new detailed rules. That said, as with all these studies, there's always a foundational concern that exists there, but the draft terms of reference were incredibly broad in nature, and from the conversations we've been having in the market, in terms of the FCA's preparation for that market study, I think it is going to be quite a broad look at the market. But clearly there's going to be focusses on some areas, like commission structures in particular, certain types of products, like the over 50s products, and just looking at how that market is working, both in terms of the consolidation that's happened, whether that's had an impact on customer choice and pricing. Whether there are data metrics that are indicating more systemic issues of value in the market, but because of this consumer duty lens as well, it will be important to just think about, is it an opportunity for the FCA to do a bit of a deep dive in that context. But I think they are going in with a relatively open mind to that one.

Tessa: Okay, interesting. And we've also recently had the FCA's findings of its review into life insurers bereavement claims processes, and that's going to be very relevant to a lot of firms operating in that market, and I think it's quite an interesting example of what the FCA is looking for on the servicing side. Can you talk us through what firms need to do in this space to make sure they're meeting the FCA's expectations?

Sam: That was an interesting study by the FCA, and certainly with my conversations in the industry, it's clear that firms want to make claims payouts faster, but there are some real genuine challenges to doing that, that aren't always in the control of the firms. They might need certain information from the customer, the claimant. They might have reliance on third parties, so for example getting probate, or getting medical evidence from GPs, all of which is subject to their own strains and delays in their processes. And making some sustainable changes to how those claims are managed can often be reliant on transformation activity. Now we know there's a huge amount of transformation activity happening in that sector already, but that takes time to do it safely, and to do it in a way that achieves all the outcomes that you want to, so it's going to take a bit of time to get the right sustainable solutions. But there is appetite to look at it, to try and achieve those good customer outcomes. And it is a good example of how the FCA's starting to look at, at the moment of truth as Stephen referred to earlier, when insurance really crystallises and it's there to serve its purpose, actually how are firms able to prove that they're achieving good, not just avoiding harm.

Stephen: I think your point there, Sam's, a really interesting one on what the FCA both understands it's trying to do with its studies and the things that it puts out there, and the way in which it approaches and thinks about them. We had an interesting discussion behind closed doors with the regulator a week or so ago, where I was pleasantly surprised. Not just for them to be sitting there saying it's not okay, it's not good enough, but understanding that there is a requirement potentially for substantial transformation, particularly in relation to things like GPs and getting access to information, say for example, probate, as you say. That they are impediments that are not in the control of the insurer, and they were openly discussing, 'We know that you can't do something about that, so actually how do we work together to find a solution that works for you and for us.'

Sam: It goes back to that point isn't it, the FCA's clearly focussed on how quickly can they change outcomes, and that doesn't always mean that the formal action would be the right move, but actually working with firms in some areas, or looking at other routes to get solutions that do change the dial and outcomes.

Tessa: Yes, I think the FCA has always said that the consumer duty will be a shift for both itself and for the industry, so it's interesting to hear how that's playing out in terms of the regulator's approach as well. As we mentioned earlier, there's a second market study taking place on premium finance. Stephen, what are your thoughts on what the FCA's seeking to achieve through that study?

Stephen: This one I think is a bit more interesting than the bereavement one, on the basis that it sounds a bit like the regulator thinks there's a problem, and therefore that it's trying to do something to fix a problem that it thinks exists. Now, they've been privately saying that for a while. I think some quarters inside the regulator would describe premium finance as something that might be considered a bit of a poor tax on some people because of the way it's added onto those policies, and therefore they have a general presumption, when you look at what they're trying to achieve, that something has to change. What's clear to us from our conversations with people is there is total inconsistency with what people think the outcome here should be, and the best way in which to try to do that. And it's probably the first time in my life that I've seen a complete lack of consistency in view from all the clients that we talk to, both in how to address it, why to address it, what to address. The key thing that's come out of all of that for me, is that there can't be a one size fits all fix here. The moment that happens, there will be an unintended consequence, either prices go up, people don't get access to the products that they require. Premium finance most definitely has a place, because individuals are unable to pay sometimes for those large insurance premiums in one go, and so the ability to spread that across a time horizon must remain. The question is how good a job does the industry do in explaining to the regulator why it is there, what risks they're carrying, so credit risk is a great example. Some premium finance genuinely does have credit risk in it. Some has less credit risk in it, and until you look at that data and explain what is going on to the regulator, it's very hard to see what the outcome should be, so for me the jury's out on this one. Something will have to change. What does change, I think there is a total lack of consistency about what's going to come next.

Sam: It's interesting, isn't it Stephen, how we're coming back to data again, and the importance of being able to evidence what's going on with data. We talked about the credit risk, that's clearly an area where we've seen there's been a bit of a data gap, and the importance of firms being able to start telling that story with data is just increasing in the context of the market study.

Tessa: I think listening back to some of our previous episodes, data comes up pretty much every time, and I think, certainly a lot of the themes and points that you've both talked about, whether it's data or target market, or distribution chains and costs, feel like they'd definitely be very relevant to financial services firms outside of GI and protection. Stephen, what are your thoughts? We've touched on this, but it would be useful to hear in a bit more detail, what do you think firms in other sectors can learn from the work that the FCA's doing in GI and protection?

Stephen: It's a great question, Tessa, and if I think about where the general insurance industry's been probably for the last two or three years, they have, as we've mentioned on at least a half a dozen occasions so far, struggled with data. They've struggled with an inability to be able to explain things effectively, and to story tell what is going on. We've seen interventions, which I'm not sure we've seen the end of certain interventions so far., What we do know is that, and again, we've said it earlier today, the regulator's very quick with things, and if you can't explain, if you can't provide evidence, then they find on the side of the consumer very quickly. The last thing I would say, the biggest lesson Sam and I have learnt when we've been looking at clients, is if there is an itch that needs to be scratched that can't be answered, and the firm has a bit of a go at answering that question to the regulator, and it doesn't land very well, the next question from the regulator goes straight to governance.

Because if you look at what the rules are trying to do and the way in which they're trying to get people to explain what's going on, and you have a product that doesn't have value, or you don't have data to support something, then how has the governance of that organisation effectively discharged its responsibilities? And so, for me, that's one of the biggest lessons that I would take into other sectors, that it's not just about fulfilling a PROD requirement or a fair value requirement, it's thinking about how that fits into the rest of your firm, and therefore the governance and oversight of all of your processes.

Sam: And I think Stephen, it goes back to that point we were talking about at the start, doesn't it, that there was an industry wide underestimation of some of the expectations around fair value, and I do think that's something that some of the other sub-sectors can learn from.

Tessa: Yes, absolutely. We've talked a lot about the FCA's current work and steps firms need to take to meet those evolving expectations, but it'd be great to finish up our discussion with both of your reflections on where does the sector go from here? And again Stephen, you've touched on it in terms of, not all of this has quite played out yet, but I think it'd be interesting to hear your thoughts on what changes do you see over the next year or two. And thinking not just about what's driven by regulation, but by other factors such as consumer expectations, and thinking as well about how firms can really prepare for that. Stephen let's start with you.

Stephen: That's a very big question, but I’m going to take a slightly different tack just for a moment if that's alright? Insurance on one level has a massive opportunity still, but it's also got a huge threat. The opportunity requires the industry to innovate. The threat comes from the economic reality of the model that we run from an insurance perspective. Most people today want highly bespoke experiences, and if you have a bespoke experience, that pushes back against the principle of insurance, which is all about the law of large numbers, so somehow an insurer has to manage being extremely bespoke to the customer, and at the same time not putting itself in a position that economically is no longer viable. That requires innovation, it requires new entrants, it requires different distribution capabilities, it's required digital in order to manage the cost base down. Ultimately though, as we've seen in the last couple of weeks, we've had two very large transactions in the last two weeks, Aviva's acquisition of the Direct Line group, and we've had Nippon Life's acquisition of Resolution. I personally think that there has to be a greater degree of consolidation across the coming couple of years, because without that consolidation, it becomes increasingly hard to manage that economic outcome with the cost bases that exist in the insurers today.

Tessa: I think themes around consolidation, transformation, business models and challenging economic conditions certainly resonate with firms outside of insurance as well. Sam, what would you add to the points that Stephen's made there?

Sam: Stephen's made some great points there around the change that we're seeing in the market, whether that be organic or inorganic change, but what I would say is I truly believe that if firms can get the data and the customer focus right, there is a commercial advantage to doing that. Firms that are able to go through the process that we've been going through on consumer duty and fair value, and really embed those processes, the insights that they're getting in a way that really allows them to think about the customer, have an opportunity to become incredibly customer centric. It helps with the innovation and with the approach to giving that personalised experience, but we see it outside of financial services, customer-centric organisations win in the market. Now, that doesn't mean that some of the processes we're going through as part of the implementation of things like consumer duty, some of the market studies, won't provide challenges to some business models. They absolutely will, but firms that can navigate that have opportunities, and I think it's important to focus on that, as well as what we often tend to focus on with regulation, is it just being difficult and not necessarily always of commercial benefit. But I think with this set of regulations embedded in the right way, there is an opportunity for firms to really win in the market.

Stephen: That's a great point Sam, it's far cheaper to hold a customer than it is to acquire a new customer, but to hold a customer, you have to have a happy customer. And so, the concepts that we're driving to here, people have talked long and hard about using consumer duty as a strategic imperative for a business, you've just perfectly described why you should do that, Sam.

Tessa: Thank you both so much, and great to end on that positive note there about market opportunity as we look further ahead. So, thank you both, and it's been fascinating to hear your reflections on the work that you've been doing with our clients to help them navigate all the recent regulatory activity that we've seen, as well as to help them prepare for the future, whether that be upcoming market studies or the broader market changes that we've talked about. To our listeners, I really hope you've enjoyed this conversation and thank you very much for listening. Please subscribe to future episodes, and you can rate and review this series, as it helps other listeners to find us. If you'd like to hear more from us on risk and regulation, please look out for our regular publications on our website, which we'll link to in the show notes, and look forward to speaking with you again in our next episode.