Why the Climate is Changing for General Insurance Regulation | Wolters Kluwer
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  • Why the Climate is Changing for General Insurance Regulation

    By Martyn Oughton

    Published December 04, 2017

    Twelve years ago, in the U.K., general insurance firms and brokers found themselves on the receiving end of statutory regulation, which at the time must have felt like a significant shift from the previous regime. However, compared to the wave of regulatory change that has been aimed at the life and pensions sectors in this period, general insurance has had a relatively quiet time of things, and firms have been largely left to get on with running their businesses. However, recent developments suggest that this is all changing, and that the sector is going to be facing some tough challenges ahead. 

    “A” day in the past

    Arguably one of the biggest changes that the general insurance sector has faced in recent times came at the start of 2005, when responsibility for regulation of the sector passed to the Financial Services Authority (FSA) from the General Insurance Standards Council. This resulted in the need for insurers and brokers alike to become authorised by the FSA and then become subject to the FSA’s capital and conduct of business requirements.

    With the passage of time, this has resulted in acceptance that the FCA, having taken over from the FSA, is responsible for both conduct and prudential regulation for insurance brokers and conduct regulation for insurers, with the PRA taking the prudential regulatory responsibility for insurers and Lloyd’s managing agents. In other words, statutory regulation is now the accepted way of doing business in the sector.

    At the time, this meant a substantial set of changes, and not just in terms of making sure that all necessary authorisations were applied for and received on time. New rules had to be adhered to on matters such as handling clients (and in particular, client money), issuing financial promotions, and dealing with a whole set of functions now becoming regulated activities, such as issuing cover notes and arranging for claims to be submitted. The only people who seemed to escape these requirements at the time were retailers selling extended warranties and travel agents selling customer travel insurance.

    The media talked of a big shake-up, and to a certain extent it was right to do so. However, the sector has responded robustly to the challenge, and has grown ever since. In fact, figures produced by the ABI showed that there were 836 non-life insurers authorised to carry out business in the UK in 2005. By 2016, that number of insurers had grown to 934, showing that regulation had not acted as a barrier to new entrants.

    Also, the life, pensions and investment sectors could have had cause in the last dozen years to look enviously at the general insurance sector, which has been left to run its businesses without a significant degree of regulatory attention. Granted, there has been legislation introduced from Europe, including the Insurance Mediation Directive, which has impacted the way intermediaries operate their businesses. In the meantime, however, life and pensions businesses have had to deal with an enormous range of changes, including the Retail Distribution Review, preventing commission being paid for advised sales, the Thematic Review on the treatment of long-term customers, and the changes being introduced by the Packaged Retail and Insurance-Based Investment Products to highlight a small selection. For the pensions sector in particular, the amount of regulatory change has been spectacular, ranging from two new and different tax regimes, one in 2006 and the other one in 2016, numerous regulatory interventions on pre-retirement communications, the Value for Money Audit, Independent Governance Committees, mandatory Independent Trustees, the proposed information prompts in the annuity market, changes to the advice regime for drawdown sales – the list is seemingly endless. And now the FCA says it intends to review non-workplace pensions too!  

    Whilst all this has been going on, the investment sector has had to contend with two variants of the Markets in Financial Instruments Directive, the Capital Requirements Directive, the European Market Infrastructure Regulation and now, a series of remedies being proposed by the FCA to address a lack of competition in the sector.

    At the same time, the biggest piece of change for the general insurance market has arguably been Solvency II, but only for insurers and reinsurers. Intermediaries appear to have been left to run their businesses without having to look over their shoulders every five minutes for the next regulatory intervention.

    However, this situation looks like it is changing – and the outlook for the sector is looking much more challenging than it has been in the recent past.

    Storm clouds gathering 

    First of all, a challenge to the earlier statement about the burden of regulation on brokers. The British Insurance Brokers’ Association 4 has quoted research carried out by London Economics which has found that costs of regulation for small general insurance brokers have risen by 70 per cent in the last three years. London Economics have also tracked the number of discrete items of change affecting brokers in this time, and these have amounted to 60. A distinct sea change has been brought in by the FCA since it took over from the FSA in 2013.

    There is now also evidence that the FCA is looking more closely at the sector from an enforcement perspective. One particular firm was fined over £8million in 2014 for failings in its sales processes.  So, it is not just life insurers and investment firms that are on the receiving end of the big fines as part of the FCA’s credible deterrent policy. Clearly, firms in the general insurance sector can also be subject to close scrutiny and actions if the misdemeanours are deemed serious enough to threaten the regulator’s statutory objectives.

    The downpour starts

    The intensity of the regulatory focus in the sector is now clearly showing signs of increasing.

    At the start of 2016, the FCA published the final results and remedies from its study into the way in which product add-ons are sold, after concluding that this market was not working effectively for consumers. The headline change here was the banning of opt-out provisions for the sale of add-ons, which came into force at the start of April 2016. This, combined with the need for improved disclosures around additions to products, meant a fair degree of intrusion and disruption into the way that products are sold and communicated to consumers.

    Staying with this thread, just a year later (April 2017) and the FCA introduced rules requiring insurers to tell their customers what they paid when they renewed their policy the previous year, and then encouraging them to shop around for the best deal. The potential consequence here is not just a loss of customers, but existing customers looking to negotiate better deals to stay.

    The net effect of these changes may be greater competition and encouragement of consumer choice, but for insurers, the challenge is retaining business and premium income streams, together with an increased cost of regulation. Such changes feel akin to those that the pension sector has been faced with for years, and are no less intrusive.

    There is also the bigger picture of regulation coming from Europe too. The Insurance Distribution Directive, set to take effect in 2018, has been described by one consulting firm as the “MiFID ofinsurance” , as it will bring in changes in the way that conflicts of interest are disclosed, broker remuneration is communicated to clients, increased disclosures for bundled products, as well as a stricter penalty regime. The FCA is currently consulting on how to implement the Directive in the UK, and whilst some areas may not result in significant change, the introduction of the Insurance Product Information Document is something that will bring further change to the way firms and brokers provide information to consumers pre-sale, regardless of the means by which the product is sold. The extension of the existing good repute requirements to employees of firms who provide insurance distribution will also focus minds in terms of the necessary training and competency arrangements.

    The outlook

    The storm clouds are not just gathering in the regulatory environment. The FCA’s sector view for 2017 for general insurance points to major technological advances on the horizon which will affect the way general insurers do business, for example, in-car telematics which will drive motor insurance pricing, but ultimately could put downward pressure on pricing overall. The continued growth of the use of aggregators in the retail sector poses a direct threat to consumer loyalty that has partly driven sustained business levels in past decades. All of this, plus the continuing challenge of how to deal with and reduce insurance fraud, as well as challenging wider economic conditions mean that general insurers, particularly in the retail sector, face more and more challenges to maintaining profit margins than they have done in the past.

    A quick look at the ABI’s General Insurance Overview Statistics shows the overall picture. Between 2007 and 2016, the overall annual net written premiums across the general sector have reduced from £34 billion to £30 billion. Also, the ABI’s Key Facts for 2016 showed that the property insurance market made a loss in 2016 – the first time since 2010. Clearly signs that in places, the picture is not as rosy as it might look at a high level.

    Sunshine after the rain?

    The long-term outlook for general insurance is not easy to predict, as it is unclear how much more regulatory change the sector will have to contend with over the coming years. One thing is clear, however. Whilst general insurers have had to deal with challenges arising from both market forces and natural events, the weight of regulation is starting to bear down harder now than it has in previous decades. Regulatory intervention has in some instances posed a direct threat to existing business models, particularly as more disclosures are required at pre-sale stage, to add to the concerns about a greater degree of transparency in pricing and the erosion of in-built consumer loyalty. In addition, regulators are becoming more intrusive in their supervision of the sector, including brokers, which is increasing operating costs.

    Whilst the life sector can look to the embedded value of their long-term books of business to give a degree of certainty over their future profit forecasts, general insurers do not have that luxury, and with downward pressure on incomes, combined with additional factors making it harder for underwriting profits to be generated, the outlook is not as positive as it has been previously.

    Whilst consumers may see these developments as good, as they enable them to get better value for money on their cover, regulators both in the UK and in Europe need to have one eye on the sector’s ability to generate sustainable profits when they consider any future regulatory initiatives – and to remember that different types of insurance sometimes require different regulatory approaches.

    About the author: Martyn Oughton is a financial services professional with over 20 years’ experience in the industry. He has been a compliance professional since 2007. In 2009, he became a Professional Member of the International Compliance Association (ICA), and has recently been an examiner for the ICA, marking exam papers and assignments for their UK and International Compliance, Anti-Money Laundering and Financial Crime Diplomas. A regular contributor to Wolters Kluwer Financial Services’ Compliance Resource Network, he also regularly writes for the ICA’s members’ journal “inCompliance”, and is also a freelance business-to-business copywriter and article writer.


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