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Consumer duty for insurers: from application to implementation

This article looks at how insurers should approach the new Consumer Duty from understanding its application to implementation.


First, let's look at what the Consumer Duty or 'the duty' is composed of.


Principle 12 - A new Consumer Principle: “A firm must act to deliver good outcomes for retail customers”


Cross-cutting rules that firms must:


- Act in good faith towards retail customers

- Avoid foreseeable harm to retail customers

- Enable and support retail customers to pursue their financial objectives

Four outcomes:

- Price and value

- Products and services

- Consumer understanding

- Consumer support

The Consumer Duty applies to all firms under FSMa, including insurers. Its application ranges from product origination to distribution and post-sale activity.


Article 12 requires insurers to deliver good outcomes. Accordingly, insurers must proactively deliver good outcomes and put their customer's interests at the heart of their activities. Insurers must show an understanding of customer behaviour and their product function. Where poor outcomes are identified, insurers must put in place processes to tackle them. Insurers must continuously and consistently challenge themselves to ensure that their actions are compatible with delivering good outcomes.

The cross-cutting rules require insurers to act in good faith. This requires insurers to work with customers in an honest and open way and not exploit their customers' lack of knowledge. Insurers are recommended to create a culture where staff are encouraged to act in good faith. Insurers may wish to assess their existing remuneration and incentive structures to ensure that they do not hinder this. At the product design and development stage, insurers can act in good faith by delivering fair value and not causing customer harm. Creating products and services where customers are able to easily understand product and service features and prices is encouraged. Insurers should support customer understanding by promoting products in a way so that they do not mislead the product/service benefits or risks e.g. burying specific contract terms.


The cross-cutting rules also require insurers to avoid harm. They should therefore consider the pricing and value of their products and services from the product design stage and ensure that they will meet consumer needs. Consumer harm should be avoided throughout the product lifecycle, starting from product design. Insurers may wish to monitor potential harm through different data sources, including, managing information, dear CEO letters and customer complaints.


Accordingly, insurers can avoid consumer harm by:

  • Communicating products terms clearly and highlighting risks

  • Consider consumer information needs at POS and throughout the product life cycle

  • Test communication to support customer understanding in order to make effective decisions


The third aspect of the cross-cutting rules requires insurers to support consumers in helping them make decisions and pursue their objectives. This entails supporting consumers with information or support to help them pursue their financial objectives. Insurers should help customers navigate the information they provide, making it clearer and easier to understand. The Duty requires insurers to have processes and systems in place to test and monitor the impact of the communication and use it to improve their processes. Customer support should not create barriers for customers to realise product or service benefits.

The third limb of the Consumer Duty looks is the four outcomes, namely, price & value, products and services, consumer understanding and consumer support.


Insurers are now required to demonstrate that they are providing customers fair value to help them achieve their financial objectives. Price should be reasonable compared to the overall product or service benefits, including product features and quality. Customer needs should be met whilst products should be sold in a clear and transparent way, without leading to foreseeable harm. Insurers should be satisfied that the product or service fees are not high compared to its benefits.

How insurers can assess fair value

  • assess features and benefits v price charged

  • take into account any product/service limitations

  • assess the expected total price the customer will pay over the lifetime of their relationship

Key considerations for insurers

  1. Are you satisfied that all factors and data have been taken into account as part of your insurer's fair value assessment?

  2. Have you gathered data from all the parties involved in the distribution chain?

  3. How do your products and services compare to similar products in the market?

  4. Is the fair value to different groups achieved e.g. vulnerable customers?

  5. What corrective actions have your firm taken as a result of its fair value assessment?

  6. What data, MI and other sources is your insurer using to monitor the fair value on an ongoing basis? how regularly is this data reviewed?

The second aspect under the 4 outcomes involves products and services. In short, insurers must ensure that their products and services are well-designed and are for a purpose. They must meet the product design needs, characteristics and objectives of the customers in their target markets, including those with vulnerable characteristics. Distribution strategy for products and services must be appropriate for the target markets. Insurers will be required to carry out regular reviews to ensure that their products and services continue to meet the needs, characteristics, and objectives of their target markets. These rules apply to manufacturers of products and services. A manufacturer is defined as a party involved in the creation, development, issuance, management, operation, carry out and underwriting of a product or service. The requirements will apply to both a manufacturer's existing and new products. Insurers will be required to identify their target markets in dept, taking into account any potential harm associated with their products and services.


Key considerations for insurers

  1. Is the target market adequately defined for its products and services?

  2. Do your products meet the consumer needs, characteristics and objectives? If not, then what are your mitigation measures?

  3. Have you identified whether its products are services have features which could harm vulnerable consumers?

  4. Does your firm share all necessary information with other parties in the distribution channel?

  5. Are you monitoring whether your distribution strategies are being followed correctly?

  6. What data and MI is your firm using to monitor whether its products and services are continuing to meet the needs of its customers and contributing to good consumer outcomes?


The third of the 4 outcomes involves consumer understanding. Consumers can only be expected to take responsibility where the insurer's communication enables them to understand their products and services. Insurers should therefore support customers by helping them make informed decisions about their products and services. Customers should be given information that they need, at the right time, and presented in a way that they can understand. Communication should be tailored I.e. on a 1-2-1 sales basis. Again, the rules apply at every stage of the product or service lifecycle, from product design to marketing and post-sales.


Good practice:


- Layering: providing key information upfront with cross-referencing e.g. actions required by customer and consequences of inaction


- Engaging: communication should be designed in a way that it encourages consumers to engage with them e.g. making use of fonts, graphics, charts.


- Relevant: an appropriate level of detail is required e.g. simple mass product such as current account information will be different to highly specialised product


- Simple: avoid jargon or technical terms; explain key terms in simple form as this will help build consumer trust


- Well timed: delivery in a timely manner and at appropriate touch points throughout the product lifecycle so that customers can digest and assess the information.


Key considerations for insurers

  1. Is your firm applying the same standards and testing to deliver good outcomes as they do to sales?

  2. What insights is your insurer using to decide how best to keep customers engaged in the customer journey?

  3. How is your insurer testing the effectiveness of its communication? How is it acting on the results?

  4. How does the insurer adapt communication equally across all channels and types of customer groups?

  5. What data, MI and feedback do the insurer use for ongoing monitoring? How often is the data reviewed?


The fourth and final aspect of the 4 consumer outcomes involves consumer support. The FCA believes that consumers can only pursue their financial objectives if their insurer supports them in using the product or service they have bought. The support should enable consumers to realise the benefits of products and services and pursue their financial objectives. Insurers should make it at least as easy to switch products or make changes as it is to buy the product in the first place. Similarly, post-sale support therefore should be as good as pre-sale support. Insurers are now required to support customers throughout the lifecycle of the product or service.


Data insurers can use for ongoing monitoring in delivering good consumer support:

  • Analysis of customer’s use of products and services

  • Root cause analysis of complaints

  • Abandoned claim rates

  • Speed to answer the telephone and average wait times

  • Customer call listening exercise

  • Satisfaction surveys


Key considerations for insurers

  1. How is your insurer satisfied that customer support is effective regardless of channels?

  2. What assessment has the insurer made to meet customer needs with vulnerability? What data, MI and customer feedback is being used to satisfy this?

  3. How has the insurer satisfied itself that it is easy to switch or leave its products to buy them in the first place?

  4. What data, MI & customer feedback is being used to monitor the impact of its customer support on the customer outcome?

  5. How effective is the insurer's monitoring and oversight of outsourced of third-party service providers and do they meet the Consumer Duty?


Culture, governance and accountability

The FCA expects insurers to place customers at the centre of their culture. Insurers are expected to align their purpose with the Consumer Duty.

Leadership – should be competent and accountable and demonstrate commitment to the Duty.

People – delivering good customer outcomes should be reflected in the way in which people are trained and delivered


Governance – controls and processes should enable insurers to identify where they are not delivering good outcomes and have a strategy to tackle the root causes and manage poor outcomes. Insurers should have a champion on board to discuss the Consumer Duty.

Insurers are now expected to produce a board report in which they demonstrate a clear assessment that is delivering good outcomes, at least annually. They should discuss the results of monitoring, an overview of actions taken, and how future commercial strategy is consistent with delivering good outcomes. This will be required as part of the evidence the FCA needs to see to assess an insurer's compliance with the Consumer Duty. It must be available on request with the report and MI that sits behind it.


Key considerations for insurers

  1. Does the insurer's purpose align with its obligations under the Consumer Duty? How is it embedded and understood throughout the organisation?

  2. How does the insurer's culture support the delivery of good outcomes for customers?

  3. How does the insurer ensure that individuals throughout the organisation – including those in control and support functions – understand their role in delivering the Consumer Duty?

  4. Are staff empowered and feel safe to challenge and raise issues where they feel the insurer might not be acting to deliver good outcomes for customers? Are those challenges listened to, and where necessary, acted on?

  5. Is the Consumer Duty being considered in all relevant discussions such as strategy and remuneration? Are customer outcomes a part of the insurer's risk assessment and internal audit?

  6. How is the insurer ensuring that its remuneration and incentive structures drive good outcomes for customers?

Monitoring


Under the Consumer Duty, insurers are now required to:

  • Monitor and regularly review the outcomes their customers are experiencing against the requirements of the Consumer Duty

  • Identify customers or groups of customers who are not getting good outcomes.

  • Have processes in place to adapt and change

How Regulatory Counsel can help

We are helping firms in a number of ways to implement the new Consumer Duty requirements, from complete project management and providing specialist project resources to adding consulting and advisory expertise as an external specialist partner.

We are one of the UK's leading regulatory consulting firms, helping companies with regulatory authorisations (licencing), compliance and consulting. Our focus and expertise have enabled us to work closely with regulators and understand the regulatory standards which are required from regulated firms.

Contact us by email at info@regulatorycounsel.co.uk or call us on 0203 6274 724.



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