The following is part of a Speech delivered by Karina McTeague, Director of General Insurance and Conduct Specialists Supervision, at the British Insurance Brokers’ Association (BIBA) Conference 2019.

Sustainable business models

Andrew Bailey, the FCA’s Chief Executive, has previously talked about the UK having had two financial crises:

• the first, was prudential
• the second, was conduct

In an environment where lighter touch regulation was encouraged, this provided fertile ground for both crises.

A keystone of any sustainable business model and strategy must be customers’ trust.

The seeds of the conduct crisis were sown when banks were chasing increasing returns, their focus distracted away from what the right thing was for their customers. Payment Protection Insurance (PPI) is but one example of a cash cow product that milked the consumer. London Interbank Offered Rate (LIBOR) and foreign exchange (Forex) are two other examples where the pure profit motive rode rough-shod over ethics.

I’ve heard it said that the insurance sector had a good financial crisis – that you escaped the prudential issues, and escaped the consequential public opprobrium (although that, in itself, may only be true to an extent. Arguably, the insurance industry is suffering indirectly from the contagion of public cynicism about financial services, generally).

But, regardless of the causes and effects of the financial crisis, there are lessons to be learned which the insurance industry can benefit from.

Coming from the Retail Banking Sector, bringing a different perspective to the Insurance Sector, I see a number of common features relatable to the insurance industry and their business models.

So, for example:

1. Rapid technological change – that goes beyond digitisation – into the realms of Artificial Intelligence, Big Data and machine learning. To what extent will incumbents be disrupted, or even dislodged, by InsurTech or the Tech Giants such as Amazon, Apple and Google? Who will be the winners and losers?
2. Societal change – customers’ expectations are now more than speed and convenience. Customers expect fair treatment, and customer displeasure can be swiftly vented through social media.
3. The ‘new normal’ of low interest rates and the impact this has had on the returns insurers are able to generate through investment activity.

As a regulator, we expect firms to look forward, by testing the sustainability of their business models and strategies in light of these threats – and opportunities.

Their analysis should include consideration of possible consumer harm arising from:

1. operational resilience
2. fraud
3. the impact of incentives and rewards on individual’s behaviours, such as driving inappropriate sales
4. budget pressures on critical functions such as risk, compliance and HR

A keystone of any sustainable business model and strategy must be customers’ trust.

Trust underpins the entire insurance industry.

• ‘Trust’ is not just a firm-specific thing. It is fragile and ethereal and can only be built up over time; but trust can be lost through gradual erosion, or suddenly with one significant event – and its loss is often high impact and viral. Each firm in the insurance industry relies on each other to maintain standards – whether insurer or intermediary.

This point is well illustrated through the results of the Chartered Insurance Institute’s (CII) Public Trust index which has highlighted the impact that loyalty pricing is having on public trust in the industry.

Arguably, from a reputational perspective, no firm in the distribution chain should want to be associated with the manufacture and distribution of a product where the inherent value to the customer is salami-sliced away; where each player in the chain takes ‘their cut’; but that cut bears little or no relation to the value that the player brings to the end-user.

IDD requires insurers and brokers alike to exercise sound judgement in the interests of their customers.

• A tick-box compliance approach isn’t the answer.

Any incentive for the industry to protect its reputation by self-policing has now been overlaid by the imperative of the IDD.

IDD now precludes insurers and intermediaries from shrugging and declaring ‘not our problem’. Our Implementation of the Insurance Distribution Directive has introduced requirements to enhance the design, targeting and selling of insurance products regardless of the insurer’s or intermediary’s position in the distribution chain, and whether or not they have direct contact with the end customer.

IDD is a regulatory manifestation of changes in society’s expectations:

1. An expectation that as a consequence of the insurance sector’s information and skills advantages, they have greater responsibilities to ensure the products and services they provide are in their customers’ best interests.

The introduction of IDD is, essentially, a regulatory statement of how to be trustworthy – which translates into good customer outcomes:

2. Customers are directed to products that meet their demands and needs.
3. Customers pay a price that is fair – and not augmented by a ‘cut’, or multiple ‘cuts’, paid to firms further down the distribution chain for little or no added value.

IDD requires insurers and brokers alike to exercise sound judgement in the interests of their customers. A tick-box compliance approach isn’t the answer.

Regrettably, we have observed areas of the markets falling short of certain IDD requirements. For example:

1. Firms failing to ask appropriate questions to identify the customer’s needs (such as failing to ask whether the customer has alternative cover or would be willing to make a contribution to the cost of a claim).
2. Firms overloading the customer with product information rather than focusing on disclosing the key, appropriate and relevant product information.
3. Firms must address any shortfalls in compliance quickly. To be clear, we will take action if we identify harm occurring.

I also encourage you to read our recent Dear CEO letter concerning the GI Distribution Chain to ensure that your firm is not falling short in any of the areas identified in that letter. The sort of harms we’ve observed include:

1. Customers being offered products with limited value.
2. Customers paying potentially excessive prices due to the remuneration taken by various parties in the distribution chain.
3. Customers receiving poor service where lack of clarity on roles and responsibilities means no-one in the distribution chain takes ownership for dealing with a customer issue.

These potential harms can often be traced back to shortcomings in firms’:

1. systems and controls
2. governance, including clarity in relation to firms’ roles and responsibilities as manufacturers and distributors of GI products
3. culture and purpose

https://www.fca.org.uk/news/speeches/leading-way-regulation