This week we report on the results of the FCA review of how commercial intermediaries manage conflicts of interest. The full report following the FCA thematic project on claims processes in relation to household and travel insurance products is also covered, as well as the latest IVASS draft Regulation.
FCA publishes results of thematic review into commercial insurance intermediaries and conflicts of interest
On May 27, the Financial Conduct Authority (FCA) published the results of a thematic review into how conflicts of interest are managed by commercial insurance intermediaries arranging cover for UK small and medium sized enterprises (SMEs). The FCA has undertaken this review to better understand what conduct risks may exist amongst such firms. This latest report by the FCA continues the regulatory interest into the relationships between insurers and commercial brokers and revives the concern that firms are failing to sufficiently manage the conflicts that may arise when acting for both insurers and commercial clients. The thematic review was announced in July 2013 and was completed over the course of late 2013 into early 2014. A sample of seven large intermediaries and intermediary groups were part of the review.
The evolution in intermediaries’ business models over the past decade has resulted in some complex conflicts of interest arising which have the potential to influence the placement process. The FCA has found that some intermediaries have failed to sufficiently understand where conflicts arise in their business and have not taken appropriate steps to mitigate the risks of conflicts influencing placement of SME risks.
Business models have evolved without necessarily taking conflicts into account
Over the past decade there has been a rise in the number of SME risks being placed via either binding authorities or through Managing General Agents (MGAs). In some instances, risks are placed without the intermediary undertaking any broking activity for the individual risks with the result that business is placed without the intermediary considering other options available on the market. In particular, where intermediaries act in a dual capacity (i.e. for both the insurer and customer) there is an increased risk that the SME will not understand the role being performed on their behalf. Firms operating under new business models have not always ensured that their systems and controls have kept up with the changing conflict risks and do not reflect the size or complexity of the business.
The FCA’s review has found that traditional broking models appear less exposed to conflicts of interest. Where such firms act in a dual capacity the review found that they maintained defined roles and dedicated staff in different teams or locations. Similarly, where MGAs operate solely on behalf of insurers few conflicts arose. Consequently, there is an increased risk of a conflict of interest occurring where firms fulfil multiple roles in the distribution chain and act as agent for both the SME customer and the insurer. The review has, however, found that firms and groups using integrated models which include a mixture of open-market broking and activities undertaken as agent of the insurer (including MGAs) have greater risks of conflicts. In such business models activities are often performed for both customer and insurer in the same transaction. The FCA has found that in these business models there can be a lack of clarity over who the firm is acting as agent for and the different ways in which a product might be provided to the customer. In some of the firms reviewed, the management could not always demonstrate whether decisions to place SME risks with a particular product were taken by the broker acting for the SME or had been taken when the insurer was selected to underwrite the product.
In some businesses operating under an integrated business model, communications were sent from the MGA to customer-facing broking teams promoting the potential for enhanced remuneration rather than focusing upon the customer benefits of the product. The message therefore being sent to customer-facing teams was not to consider the customer’s interest as their primary concern but to focus on the remuneration return.
Although most integrated firms have segregated the areas responsible for broking and insurer activities the FCA found examples of overlap and a lack of clarity around the roles that each part of the business should perform. Furthermore, where enhanced remuneration arrangements such as over-riders or work transfer arrangements had been secured, Chinese Walls were not always applied consistently.
Concerns about systems and controls
The FCA review has found that most of the firms in their sample were unable to provide accurate information about how customers’ policies had been sourced on the open-market or by using other arrangements such as through panels or binding authority. Some of the firms had not been able to provide information about the number of cases where they had acted in a particular capacity (i.e. as agent of the insured or in a dual capacity). With insufficient information evidencing these relationships the FCA questions whether management in firms can be confident that they are adequately managing conflicts of interest. In a number of cases the FCA found that management relied heavily upon individual brokers’ assurances that a conflict had been suitably managed. The FCA is concerned that individual files may not be able to present a complete view of the reasons for a decision to place business with a particular insurer. The review indicates that firms place too much reliance upon company policies without developing robust procedures and controls supported by management information to ensure that such policies are followed.
The FCA has identified that it is not always evident that customers’ needs are placed at the forefront of consideration when tender processes are undertaken. In a number of cases the processes to renegotiate underwriting capacity for SME business focused predominantly on the levels of remuneration available for the intermediary.
The review identified that in some firms there was too much reliance upon disclosure (as required under the Insurance Conduct of Business sourcebook) to address conflicts of interest. The FCA is concerned that, rather than rely on disclosure, intermediaries should place more emphasis upon having robust systems and controls in place to prevent conflicts from arising and to ensure that they are appropriately managed when they occur (as required by the Senior Management Arrangements, Systems and Controls handbook).
Add-ons and premium finance
The FCA has found that amongst the sample reviewed, all the intermediaries selling add-on insurances describe these products as sold to their customers on an advised basis. However, in some cases the FCA found little or no evidence to establish whether the add-on product was suitable for the customer’s demands and needs. Furthermore, it was not always apparent that firms had ensured that add-on products were compatible or overlapped with the core product being sold.
Administration fees and premium finance
The thematic review has identified that premium finance and administration fees provide a material source of revenue for intermediaries. However, intermediaries often did not consider that when offering premium finance they were under any duty to act on behalf of their customers or should seek out the cheapest possible deal. The review indicates that intermediaries are not doing enough to ensure that SME customers are getting the best deals on premium finance. Many of the arrangements in place provide revenue and cash flow benefits through advance commissions based on anticipated sales volumes. Any such arrangements have the potential to create conflicts of interest where the intermediary does not ensure that their customer has the most suitable arrangement in place for their demands and needs.
What happens next?
The FCA expects intermediaries to reflect on how they manage conflicts of interest in light of the findings of the thematic review. Firms should take note of the areas identified and may expect greater FCA scrutiny especially where firms are operating on an integrated business model. In particular, firms should ensure that conflict management procedures are more than just written policies. The FCA will expect firms to have systems and controls in place throughout the organisation supported by management information that evidences where conflicts may arise and how they are managed. Much of the thematic review points to an inability to prove that intermediaries are in control of the conflicts that may arise. It is in evidencing that suitable measures are in place to avoid conflicts that firms may avoid coming under FCA scrutiny.
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FCA findings from thematic review of household and travel insurance claims
In April the FCA announced the preliminary results of its claims handling review which found no evidence of systematic failings in retail claims handling practices. The thematic review focused on personal lines, specifically household and travel insurance products.
On May 22, the FCA published a full report on the thematic project (TR14/8). The FCA reviewed claims practices within ten insurers, selected against a range of criteria including size, product range and business model. Firms reviewed included London Market companies, Lloyd’s managing agents and third party administrators to assess how claims are handled across these chains of delegation.
The FCA found that 64 per cent of claimants were ‘satisfied’ or ‘very satisfied’ with how their claim was handled overall. Not surprisingly, satisfaction levels were much lower for unsuccessful claimants. The FCA looked at insurers’ claims philosophies and strategies and found ‘virtually no evidence of insurers trying to push down aggregate claims costs by not settling valid claims, or systematically trying to squeeze the settlement cost. There was also no evidence of insurers deliberately delaying settlement, however, the FCA found that poor claims management often led to delays.
Key issues emerging from the review are:
- Recording and use of inbound claims calls. The FCA notes that insurers receive high volumes of claims-related calls which do not result in a claim and there is no consistency in how these in-bound calls and results are categorised. Inbound call traffic is potentially an important source of information for insurers and, if analysed carefully, can reveal unclear policy terms or product complexities.
- Communication and ownership throughout the claim. Consumer research revealed that good communication throughout the claim is an important driver of policyholders’ overall satisfaction and includes, among other things, setting and managing expectations and keeping policyholders informed.
- Management of supply chains. The FCA looked at the use of loss adjustors and third party suppliers in settling household claims and found numerous instances of incorrect instructions being sent to suppliers and consumer dissatisfaction with supplier services. The FCA suggests that insurers still have a way to go to improve the consumer experience and ensure failure rates are low.
- The emergency assistance activities of travel insurers. The FCA saw evidence of good consumer outcomes and culture in this area but warns of how important it is for consumers to ensure they have the right insurance when travelling abroad.
- Travel insurance in relation to medical conditions. Senior claims managers interviewed in the review said that disclosure, especially around pre-existing medical conditions, is a significant problem. The FCA questions whether insurers’ requirements are expressed in language that most consumers understand and if information requirements are sufficiently clear.
- Consumer outcomes in long chains of delegation. The review found that chains of delegation, particularly in the London Market, can be very complex involving numerous parties. The FCA found that processes to collect and feedback information about policyholders’ experiences during the claims process do not appear to be place in long delegation chains.
- The clarity of product documentation. Consumer research found that the length and legalistic nature of policies and other documents deterred consumers from reading them. The FCA notes that some interesting ideas emerged during its interviews with firms and some insurers acknowledged that the industry has not yet achieved the right balance in its documentation between setting out the legal basis of the contract and clearly explaining policy terms for the customer.
The FCA concludes that household and travel insurers, as well as other firms, should review the findings of this project and consider where changes could be made to their claims processes to enhance customer satisfaction. The thematic review has provided the regulator with a foundation for future supervisory work, both for individual insurers and across a wider cross-section of firms.
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Italian Authority reduces life insurers' publication obligations
IVASS, the supervisory authority for the Italian insurance market, recently issued for consultation a new draft Regulation aimed at amending the Transparency Regulation.
The proposed amendments concern information obligations imposed on life insurers in connection with unit linked, index linked and with profits life insurance contracts (contratto a prestazioni rivalutabili). The information requirements are currently provided for under articles 12 and 26 of the IVASS Regulation on transparency, which require insurers to regularly publish certain information relating to life contracts both on their websites and in national newspapers.
The draft Regulation changes the means by which insurers must publish information but does not modify the content of the information. The Regulation proposes removing the requirement to disclose information in national newspapers meaning insurers will only be required to publish information on their websites, as well as at the registered office or place of sale. Public consultation on the draft Regulation ends on May 24.
These amendments are aimed at reducing insurers’ costs and aligning legislation to market practice and online sales, meaning information is promptly available to customers.
How will latest changes to Volcker Rule affect non-US banks?
Kathleen A. Scott discusses the final Volcker Rule, focusing on some of the issues raised by non-US banks in their comments.