Clive Adamson, Director of Supervision, FCA, has given a speech at the Insurance Institute of London entitled “Trust and confidence – ensuring firms’ ethics are built around their customers”. In his speech Mr Adamson outlined the need for the FCA to work with the insurance industry to enhance public trust in the sector and the steps that the FCA is undertaking in order to achieve this aim, namely by:

• the development of a new and more focused FCA supervisory model;

• continuing stringent supervision of the delegation of authority, with particular attention to be paid to the capability of underwriting or claims handling agents of acting in the manner expected and to insurers having adequate information to ensure that their agents are acting properly;

• giving directions to firms to ensure that they have effective oversight of financial crime risks;

• focusing on how firms demonstrate integrity and consider their customers through the way they handle claims; and

• undertaking a piece of thematic work looking at how UK insurance brokers manage conflicts of interest, focusing particularly on those in the SME and micro-business markets.

EXTRACTS AND HIGHLIGHTS

1. Delegation of authority

Insurers must consider whether those to whom they have delegated authority for underwriting or claims handling are capable of acting in the manner they expect and have adequate information to ensure that their agents are acting properly.

I mentioned earlier that our overarching objective for the insurance industry is to enhance trust and confidence. I am conscious, however, that this can be a particular challenge where value chains can be long and where delegation is a feature of the way things are done.

As Julian Adams outlined last month, effective oversight over delegation is vital for this market. For many years, firms have viewed such controls as purely prudential in nature. However, these are also important in a conduct setting. We are still finding that oversight of delegated authorities regularly falls short of our standards and should be more robust, with insurers needing to give further consideration to how they fulfil their obligations as product providers and deliver good consumer outcomes through their distribution networks.

In particular, insurers must consider whether those to whom they have delegated authority for underwriting or claims handling are capable of acting in the manner they expect and have adequate information to ensure that their agents are acting properly. We have seen recent examples where:

Insurers in the London market have not been performing effective due diligence or oversight of their delegated agents in relation to their provider responsibilities for both customer outcomes and financial crime control.

Coverholders and third party administrators have been acting in a way that is contrary to what the insurer thinks they should be doing because the insurer has not been clear about its expectations and has not effectively overseen the agent.

Insurers have been willing to underwrite products through coverholders even though they will not underwrite the product directly themselves as the product does not fit with their ethics, culture or customers’ needs.

To us, this does not seem right. Where insurers are outsourcing services to other companies acting on their behalf, they remain responsible for the actions of their agents. As a result, this continues to be the core focus of our supervisory engagement with London market insurers.

2. Financial crime risks

Firms may be exposed to a greater risk of becoming victims or unwittingly facilitating financial crime.

I want to turn my attention to financial crime, which we know is an issue facing firms across all sectors. The international reach of the London insurance market creates an environment where firms may be exposed to a greater risk of becoming victims or unwittingly facilitating financial crime. Because of this, and more than ever, firms need to ensure they have effective oversight in place in this space.

Work done by the FCA has shown some firms are performing ineffective sanctions screening against their policyholders and claimants as well as taking insufficient care to ensure that insured
interests do not breach sanctions law. We have seen this in insurers, not only in their direct offerings, but also where they have delegated underwriting and claims handling. They expect their delegated agents to perform screening but are not making this explicit nor doing sufficient work to satisfy themselves that their agents can perform the requisite checks.

In the broking space, we continue to see inadequate due diligence of third-party business partners and commission payments for supposed services that may or may not be tangible. While firms may have reacted positively to our previous thematic work in this area, we will be performing more work in this area in the coming year. Given the significant guidance and messaging already provided on this, we expect firms to have improved due diligence performed on third parties, as well as payments made to third parties, monitoring and review of expenses, and gifts and hospitality.

3. Claims handling

We are also focusing on how firms demonstrate integrity and consider their customers through the way they handle claims.

We are also focusing on how firms demonstrate integrity and consider their customers through theway they handle claims. This can differ depending on the sophistication of the customer. For example, for an unsophisticated retail customer, a strict policy interpretation may not be fair or in alignment with wider legal requirements (for instance, the Consumer Insurance Act). However, this interpretation may be entirely appropriate for a sophisticated commercial customer. Therefore, it is important for the claims handlers in the London market to know the requirements for retail claims and be able to recognise such claims.

Where a London market insurer is underwriting retail business, we will compare the part of the business that writes that business against their competitors for that product, including the large national and composite insurers. This is already taking place, with a thematic review of claims handling in personal lines across ten firms including some from the London market. This project will report next year, although we are already seeing a change in behaviour with those firms that underwrite retail business as a major line having considerably more information to enable tracking of customer outcomes than those who write small pockets of retail business, particularly through coverholders.

4. Managing conflicts of interest

Another important area is the management of conflicts of interest. While brokers have improved their governance and oversight arrangements since the advent of intermediary regulation, we are aware that broker business models are evolving with revenue increasingly being generated from non-core broking activities, including performing more services as agent of the insurer under delegated authority. This potential blurring of the lines between broker and carrier can give rise to conflicts of interest or drives behaviours that conflict with firms’ duties to their customers

Many brokers generate revenue both via insurers and their clients for arranging insurance so it is important that they manage their conflicts of interest while ensuring they are complying with their regulatory obligations and keeping the customer at the heart of their business model.

As such, we are undertaking a piece of thematic work looking at how UK insurance brokers manage conflicts of interest, focusing particularly on those in the SME and microbusiness markets. We are still undertaking analysis in this area before we publish our findings, but expect there may be significant read-across or correlation to other insurance broking markets. We will look to see whether these contain risks on which we need to perform further work.

Aligned to this, we are aware of market developments in relation to broker facilities and the use of alternative capital. While we welcome competition and do not want to stand in the way of market innovation, we are alive to the issues this could give rise to, including conflicts of interest.

For our part, we look at these issues through two lenses:

Firstly, whether competition is operating in the interests of consumers and whether they are getting a better deal through greater efficiencies in the placement of risk and speed of claims settlement or lower prices.

Secondly, the impact of these arrangements on the integrity of the market and how firms manage the potential conflicts of interest that these arrangements give rise to.

http://www.fca.org.uk/news/trust-confidence