[co-author: George Bamber]

The FCA has outlined the current trends, risks and its overall assessment of the General Insurance sector in its 2017 Sector Views, published last week.  Some of the key points are highlighted below:

Technological Advances as Drivers of Change

The General Insurance sector has been affected by technological advances which have given firms access to an unprecedented amount of new consumer data. In retail, car-telematics are giving insurers sophisticated data on their customers’ driving behaviour and risk profiles. In the protection market, insurers can use Big Data to predict life expectancy and income security with more accuracy.  This is likely to have an impact on premiums for customers, introducing more marked price differences based on the particular risk a customer presents.  In addition, some insurers have increased their product range as they have been able to conduct more sophisticated analytical modelling, capturing risks that have previously been “unknowable” and therefore allowing for more accurate pricing.

It is the FCA’s view that price comparison websites have become central to the distribution of core products, especially in retail insurance. Insurers now find it harder to reach customers in the motor and home insurance markets without paying to list on price comparison websites.

New Regulation and Policies

New conduct regulation has aimed to address consumer detriment by introducing additional requirements – especially in relation to general insurance add-ons and disclosure requirements at renewal. Most significantly, the European Insurance Distribution Directive will become UK law by February 2018 and this aims to introduce cross-border standards for insurance across the EU, imposing significantly higher standards.

Risks

The FCA highlights the following as key risk-areas in the current market:

• Technological change has brought increased risk potential for insurers. New mechanical products and processes, such as 3D printing and driverless cars, may change the liability exposure for insurers and re-insurers. In addition, firms are becoming more exposed to cyber-attacks.
• Retail consumers who do not engage with insurance (particularly at renewal) are a vulnerable group. A limited understanding of complex products can lead customers to place an excessive focus on the headline price of products without giving enough consideration of whether these meet their needs. The FCA is also focused on fairness, access and pricing for retail customers who are vulnerable or have health-related needs.
• Competition and conflicts of interest remain areas of concern for the FCA. One particular risk is vertically integrated value chains (where one company owns every part of the supply chain), including arrangements between brokers and MGAs. Vertical integration may restrict choice if this leads to business being given to insurers who are willing to pay for services, rather than those offering greater sustainability or value.
• The global nature of the wholesale insurance market, which contains lengthy and complex distribution chains presents challenges to firms involved. Their insurance activities must comply with UK and local legislation on sanctions, bribery, corruption, terrorism and money laundering.

FCA’s other areas of focus

In addition to the FCA’s general insurance initiatives as outlined in the 2017/2018 Business Plan (described in our recent blog post), the FCA has outlined a number of specific areas of focus for the year ahead which include:

• Regulatory arbitrage: Some products which perform a similar function to insurance but which fall outside the FCA’s regulatory function may leave customers unprotected. Such products do not carry the equivalents of Financial Ombudsman Service rights or Financial Services Compensation Scheme protection, and this is not always clear to customers.
• Financial crime: Wholesale firms often have some scope to breach financial crime or sanctions requirements due to their complex relationships with multiple parties; this makes compliance oversight challenging. Firms may also be susceptible to pressure from counterparties outside the UK to weaken their financial crime controls. It is the FCA’s view that the current political environment and the increasing threat of terrorism will exacerbate these risks.

The steps which the FCA proposes to take in relation to these issues are unclear however we will continue to monitor future developments, as they unfold.