COVID-19: FCA Dear CEO letter and consequentials hearing for BII test case
On 18 September 2020, the UK Financial Conduct Authority (FCA) published a Dear CEO letter setting out its expectations of insurers (including managing agents) following the High Court's judgment in the business interruption (BI) insurance test case. The High Court handed down its judgment on 15 September 2020 (see our separate briefing: Analysis: the FCA Business Interruption Test Case ruling).
Where insurers have found clarity in the judgment to now conclude their claims processes, the FCA encourages them to do so as quickly as possible.
For insurers that are waiting to understand whether a specific point in the judgment will be appealed, the FCA expects them to be clear to their policyholders about the next steps.
The FCA expects all insurers to take a pragmatic, transparent and consistent approach to their interactions with policyholders over any remaining evidence that applies to individual claims, rather than these creating additional barriers or delays to paying valid claims. It says that this includes evidence for proximity and prevalence for "disease" coverage clauses. The FCA will publish additional information to help policyholders and insurers with the process of providing and assessing appropriate evidence on proximity and prevalence in the coming weeks.
In relation to claims handling, the FCA states that insurers should reflect on the clarity the judgment provides and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid. This should include taking all reasonable steps to ensure that all those claims are ready to be paid and settled at the earliest possible opportunity after any relevant appeals.
In line with FCA guidance, insurers must assess the implications for relevant non-damage BI policy wordings, where the test case may affect the outcome of claims generally, including questions of causation. They should also reassess all potentially affected claims and complaints, unless properly settled on a full and final settlement basis, and, where applicable, keep the Financial Ombudsman Service fully informed.
Insurers should also consider the FCA's August 2020 statement, which highlights the need to consider the appropriateness of making deductions for Government support policyholders may have received. The letter also includes commentary on deductions against businesses.
Insurers must communicate directly, and as soon as possible, with policyholders to explain the next steps. By 22 September 2020, they must provide at least an initial update on the judgment's implications.
Insurers should also update the FCA on affected policies. The FCA will give further details on how to do this once it knows the scope of any potential appeal.
Where the FCA identifies that insurers are not meeting the expectations set out in the letter, it will use the full range of its regulatory tools and powers to ensure they do so.
The FCA has separately updated its BI webpage to advise that the court has confirmed that, following its judgment, the consequentials hearing will take place on 2 October 2020. At the consequentials hearing, the court will hear submissions from the parties on the appropriate declarations to be made by the court in the light of the judgment and on any applications for appeal.
The FCA will update its webpage with the time of the hearing (which will "probably" be 10.30 am) and details of the livestream, when available.
General insurance pricing practices: FCA final report of market study
The FCA has published the final report of its market study on general insurance pricing practices, MS18/1.3, which focused on pricing practices in the retail home insurance and motor insurance markets and the impact of these on consumer outcomes and competition.
In its study, the FCA found that some firms charge lower prices to new customers and then gradually increase the price to customers who renew with them year on year (price walking). Many firms adopt "lifetime value pricing" aimed at winning customers through introductory discounts and recovering initial losses over time by increasing margins. Some firms also use practices that make it more difficult for consumers to make more informed decisions and raise barriers to switching, including making it difficult for consumers to stop their policy from automatically renewing.
In addition, many customers are unaware of price walking practices and so are unlikely to switch because they do not know that their renewal price may not be competitive. While consumers who frequently switch provider or negotiate their premium can get lower prices, the FCA found that customers who have been with the same insurance provider for five years or more are paying significantly higher premiums. Overall, the FCA concludes that the markets are not working well for consumers and that current pricing practices distort competition, and result in higher prices and higher searching costs.
The FCA proposes (and is consulting separately – see below) a package of remedies which is intended to stop firms from systematically increasing prices in home and motor insurance for loyal customers, as well as helping to ensure that firms in the general insurance market focus on providing fair value to all their customers. In particular, the FCA proposes to introduce rules whereby when a customer renews their home or motor insurance policy, they should pay no more than they would if they were new to their provider through the same sales channel. It also proposes product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term, requirements on firms to report certain data to the FCA, and requirements to make it simpler to stop automatic renewal across all general insurance products.
General insurance market study: FCA CP20/19 on Handbook changes
The FCA has published a consultation paper, CP20/19, on the following Handbook changes as a result of its general insurance market study:
- amendments to the Insurance: Conduct of Business sourcebook (ICOBS) requiring when a firm offering a renewal price to a customer to ensure that the renewal offer price is no greater than the equivalent new business price that the firm would offer a new customer. This restriction will apply to consumer motor and home insurance and additional products sold alongside them;
- amending to the Product Intervention and Product Governance Sourcebook (PROD) to ensure that firms have processes in place to deliver products that offer fair value to customers. The FCA will extend the scope of the rules to all general insurance and pure protection products regardless of when they were manufactured. The FCA also intends to introduce disclosure requirements, set out in new ICOBS 6A.6 relating to premium finance sold alongside insurance products;
- amending to ICOBS to require firms to offer a range of options for consumers who want to cancel auto-renewal on their contract. This proposal will apply to all retail general insurance products; and
- introducing new reporting requirements, set out in the Supervision manual (SUP) at new SUP 16.28, for firms to submit regular reports relating to home and motor insurance.
Appendix 1 to CP20/19 sets out the draft Handbook instrument relating to these proposals: the Non-Investment Insurance: Product Governance, Premium Finance, General Insurance Auto-Renewal and Home and Motor Insurance Pricing Instrument 2021.
The consultation closes on 25 January 2021. The FCA intends to publish a policy statement in Q2 2021, with a view to its final rules coming into effect four months after publication of the policy statement.
General insurance value measures reporting: FCA PS20/9
The FCA has published a policy statement, PS20/9, on general insurance value measures reporting and publication. In PS20/9, the FCA sets out the final text of amendments to:
- the Supervision manual (SUP), requiring insurers and insurance intermediaries to report data on value measures to the FCA. These requirements are set out in new SUP 16.27 (General insurance value measures reporting). The FCA will use this data to publish guidance to promote competition relating to product value and to protect consumers by reducing the potential for harm caused by the sale or purchase of poor value products; and
- the Product Intervention and Product Governance sourcebook (PROD), requiring firms to have effective procedures in place to ensure, on a continuing basis, that their products offer sufficiently good value to customers and take into account value measures information. These requirements are set out in new PROD 4.5 (Additional expectations for manufacturers and distributors in relation to value measures data).
Appendix 1 to PS20/9 sets out the FCA Handbook Instrument making these changes: the Value Measures Reporting and Monitoring Instrument 2020 (FCA 2020/40). The instrument comes into force on 1 July 2021, with the exception of Annex C (which contains the amendments to PROD), which comes into force on 1 January 2021. For the purposes of the product governance rules, during the transitional period between 1 January 2021 and 1 July 2021, SUP 16.27R will be deemed to take effect enabling the referred to product governance rules to operate.
The FCA published a consultation paper on GI value measures reporting (CP19/8) in January 2019. PS20/9 summarises the amendments it has made to those proposals.
The FCA published PS20/9 alongside the final report of its GI pricing practices market study and a consultation paper on remedies (CP20/19) from that market study (see below). The FCA will consider the value measures product governance rules and the need for any amendments in the development of the GI pricing practices product governance rules consulted on in CP20/19. The FCA also intends to work with stakeholders in the private medical insurance market to develop value measures metrics for that product.
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Authored by Yvonne Clapham