The FCA’s priorities & the real risk of misguided Board confidence

The FCA recently published its priorities for 2023-2025. The sub-text of the Dear CEO letter, which pushes Boards to take real, concrete action to deliver good customer outcomes, aligns with our view that not enough is being done across some quarters of the insurance market to adhere to recent regulatory changes. In this article, we lay out our market-wide view of key areas that Boards should focus upon to ensure firms are truly living up to the standards that the FCA expects of them.

Blending our deep technical and regulatory expertise in insurance, we use our Conduct Risk Playbook to help firms better understand and practically respond to both weaknesses as well as opportunities to achieve and demonstrate compliance whilst creating commercial value.

The FCA’s priorities for 2023-2025

As well as communicating its priorities for the insurance market during 2023-2025, last week’s Dear CEO letter also includes information on the specific risks of harm that the FCA is most concerned about and what it wants firms to do in response.

Turning good customer intentions into tangible, concrete action

A crucial message conveyed by the letter is the FCA’s belief that whilst many Boards are well intentioned in terms of their responsibility to ensure good outcomes for customers, not enough progress is being made to deliver these. The FCA stresses its expectation that Boards across the market are ensuring “concrete, proactive action” is taking place across their firms to genuinely facilitate good customer outcomes. The FCA is clear in saying that Boards should not view this as a compliance exercise or indeed wait for the FCA itself to force action.

Whilst the vast majority of (re)insurers, MGAs and brokers no-doubt hold the belief that they place good customer outcomes at the heart of their businesses, the FCA’s concerns align with our view that many are still missing crucial opportunities to both enhance the quality of customer outcomes and clearly align with the relatively recent step-change in regulatory requirements. Examples of areas of weakness that we have observed across the market which are creating challenges for firms in being able meet the FCA’s expectations include:

Pricing

We have observed instances where product processes and periodic reviews are not sufficiently integrated with pricing focused decision-making and controls. This represents missed opportunities to access insights around fairness and outcomes to build into activities from both customer and commercial perspectives.
We have also seen examples where pricing methodologies have been established that have inadvertently resulted in the risk of price-walking over time, as new business written changes the pathway that renewals will take.
Many firms still consider fair value at a portfolio or large cohort level despite the increasing clarity from the FCA of the need to consider fair value at a much more granular level. For key pricing metrics an increasing number of firms have moved to an individual customer consideration. Amongst other things, this will help firms identify any potential instances of discrimination against customers in relation to protected characteristics, which is a key area of concern for the FCA.

Product coverage

In seeking to develop products suited to customers who have less financial means, we echo an FCA concern having seen a number of insurers remove certain features for cost purposes, thus potentially making the product less well aligned to the needs of the wider target market.
Often excess is seen as one of the few material avenues for achieving this. We are concerned that this is often done without full consideration and documentation of the impact on customers, especially where products may be targeted at those who are unlikely to have the excess readily available to self-insure.

Data

A number of firms are relying on averages and proxies to understand the nature of customer outcomes within specific books of business. Whilst such firms may be hamstrung by data and technological limitations, in our view they should be actively prioritising the development of capabilities to be able to identify all outcomes across a distribution of customers.

Documentation

Many firms are facing challenges in ensuring the quality of their externally facing documentation is appropriate for customer understanding and use. Internally, there remain gaps in the appropriateness of guidance and documentary evidence of outcomes, whether that be for example, outcomes generated via testing or through governance committee discussion. Good practice includes clear interpretation of the rules, what the firm’s intent is in light of those, how this will be achieved and monitored, and how assurance will be gained as to its efficacy – with a timely process for adaptation where required.

Governance and control

Whilst many firms will have implemented new or adjusted controls within their risk management and governance frameworks to help them meet new regulatory expectations, a number have not used this is an opportunity to step back and consider a holistic view of the adequacy of the firm’s control environment. This means they may fail to identify thematic areas of weakness or control immaturity which could give rise to unwanted activities, errors and outcomes.
We have also observed a rise in the number of firms who are using (and plan to increase their use of) data science techniques and practices within the pricing arena. Whilst this results in clear opportunities to support both customer and commercial objectives, some firms have not taken a robust approach to ensuring the associated control environments align with the new and evolved risks that arise from the use of data science. In addition, we see some members of Boards and senior management struggle to understand the use of data science in this space, which presents a threat to the effectiveness of the firm’s oversight and decision-making.
We also see firms who have taken concrete technical actions to ensure compliance with relevant FCA requirements – especially around Consumer Duty. At the same time, some have failed to adequately evolve governance-related reporting. For example, we see some firms using terms, commentary and sign-posting that non-technical pricing colleagues may struggle to understand – thus negating the potential to bring in other important perspectives to committee-based debate and decision-making.

Culture

The rules and expectations that have been introduced by the FCA over the last few years have also created cultural challenges (and opportunities) for a number of firms, who are seeking to change mindsets at traditionally highly technical or commercially focussed committees – where they now need to ensure they explicitly build in, discuss and debate customer focussed outcomes. This change includes opening access to 2^nd line compliance teams to help observe and contribute to discussions, whilst at the same time ensuring they remain cognisant of balancing conduct risk considerations with other organisational objectives.
Many firms are also finding challenges in developing more open and timely exchanges of information with other firms that operate within their value chain. Historically closed-off areas of analysis and conversation are now required, and that needs both process as well as behavioural change.

The real risk of misguided confidence

Aligning with the sub-text of the FCA’s letter, we are of the view that there is a real risk that Boards and senior management teams are over-optimistic in the belief that their strategies, execution and evidence are in effective alignment with the enhanced regulatory landscape. This reality may only become apparent upon the FCA’s review of information and other data-led submissions, or via their direct own questioning of a firm’s individual senior managers (or those of their distributors and any appointed representatives).

It is therefore important that a firm’s leadership is able to clearly identify and articulate the broad range of evidence that it has to robustly demonstrate alignment with the FCA’s expectations. Where a firm is unable to do so, these should become priority areas of focus for remediation.

Using a wide-lens view to build customer-focussed insight, value and regulatory alignment

With the FCA now shifting its focus to confirming the adequacy of firms’ approaches to the myriad of recent conduct focussed regulatory change, (re)insurers, MGAs and brokers can expect an increase in the frequency of data requests which will be used to help identify outliers across the market. Boards and senior management teams should therefore look to use all appropriate internal and external mechanisms to obtain their own assurance.

Given the wide-ranging nature of changes to the regulatory landscape and the move away from traditional prescriptive articulations of rules, we believe there is real value on offer by seeking insight from partners who can provide a wider-lens view of how a firm’s approach compares with external perspectives such as:

The approaches being taken by others across the market to ensure good customer outcomes are realised to achieve compliance as well as competitive advantage.
How compliance is shifting from a tick box approach to being an embedded part of the value driving activities of a business.
Detailed understanding of regulations – including in relation to core technical areas such as pricing, claims, governance, and control.
Views of the FCA’s expectations and likely interventions based on interactions with the regulator.

How we help clients

Using our Conduct Risk Playbook, we support Boards and senior management teams to gain a clear understanding of how well their firms’ strategies, plans, execution and evidence align with our view of the FCA’s requirements and also good market practice.

Blending our unparalleled knowledge and experience in insurance across core technical domains, we use our Conduct Risk Playbook to help firms better understand and practically respond to both weaknesses as well as opportunities to achieve and demonstrate compliance whilst creating commercial value.

Why WTW?

Our unrivalled technical expertise and experience within the insurance arena means we have an unparalleled ability to help clients across key disciplines such as pricing, product, claims, underwriting and governance.

Given our specialist focus on the insurance market, we occupy a unique position in terms of our capability to provide truly wide-lens insights into evolving market strategies, products and practices.

Whether through the use of new technologies and evolved methods, developing enhanced products or creating more insightful perspectives, our ways of working and solutions are rooted in being practical, efficient and unlocking real value for our clients.

Authors

Stephen Cox

Director, Insurance Consulting and Technology

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Suky Mann

Associate Director, Insurance Consulting and Technology

Suky is a member of the Risk, Governance and Regulation Team within Insurance Consulting and Technology. He has deep experience of working with across core 1st and 2nd line functions to help insurers effectively design and implement risk management, compliance, governance and resilience frameworks.

Prior to joining WTW, Suky worked in-house for an insurer where amongst other things he led the assurance approach for the implementation and ongoing adherence to requirements around general insurance pricing practices. At WTW, Suky works closely with colleagues across pricing, underwriting and other technical domains to help clients ensure they can meet conduct and other risk-related requirements in practical, proportionate ways.