Insurance Regulatory Briefing – 10 things to know in 2023

In our latest webinar Sicsic Advisory managing partner Michael Sicsic, senior consultant Sue Mallender and senior adviser Hugh Savill discussed the key themes and highlights of 2023’s busy forthcoming regulatory agenda.

Here are 10 key take outs.

1 – Regulators are doing what they said they would

Within a turbulent context of inflation, market volatility and the cost-of-living crisis, there haven’t actually been any changes in the regulatory agenda. If there is one current anchor point for firms it is regulation – as both the FCA and PRA continue to do exactly what they said they would.

The FCA is firmly focused on making Consumer Duty its top priority, embedding past initiatives and improving the well-documented delays in authorisations.

For its part, the PRA remains focused on the impact of inflation, market volatility, risk, governance and control.

2 – This is the year of Consumer Duty

The new Consumer Duty Principle enters into force on 31 July 2023. It is the first new principle for almost 20 years, and will join 11 other Principles that apply to all regulated firms.

Going beyond just rules and guidance, Consumer Duty represents a new way of working which touches every aspect of a firm’s conduct.

The FCA took an unusual step of publishing a quasi-thematic review last month, giving early feedback on firms’ implementation plans six months ahead of the deadline. The review, based on 60 firms across financial services, included some helpful and clear examples of good and poor practice. The FCA has also said that it will survey an additional 600 smaller firms. There is no room to hide – and no one can say they weren’t warned.

At Sicsic Advisory we’re encouraging clients to review their plans against the FCA findings and make changes where they see material gaps. We also advise that company boards and executives are made aware of the FCA’s findings and incorporate them into their oversight of Consumer Duty implementation plans. You can read more about that review here.

While the fair value and product governance outputs of Consumer Duty will already be familiar to insurance firms, recent communication following the publication of value measures data gives further insight into the FCA’s thinking on the subject. A firm with a higher claims complaints ratio could come in for questioning about consumer support, for instance, and high claims repudiation could be an indication of poor customer understanding.

Firms will now be required to test and evidence that consumers are making fully informed purchasing decisions and actually understand what their products do and don’t cover. This raises the bar on demands and needs statements. It is particularly pertinent when customers may be changing to lower-tier products to save money.

3 – Cost-of-living crisis is impacting FCA areas of focus

The cost-of-living crisis is a key theme across many FCA communications, such as its consultation on support for customers in financial difficulty, its warning on not undervaluing claims, and its assessment of general insurance value measures data. The original financial difficulty guidance was developed as a result of Covid. Extending it is logical, but it shouldn’t make much of a difference to good firms as it largely mirrors existing guidance on vulnerable customers.

Additionally, the Consumer Duty raises the regulatory bar for firms here, with the need to evidence and test that firms are providing proactive support to those facing financial difficulty.

4 – It’s also a year of embedding

The busy 2023 follows a busy 2022. In addition to new reforms, we are now getting into a rhythm of annual pricing attestations and product reviews. For its part, the FCA is amassing and reviewing more and more data and using it to inform firm-specific engagement.

Meanwhile large firms are two years into a three-year implementation period for Operational Resilience and must review their progress annually.

The shift is away from meeting a deadline and moving onto the next one. Many of these changes are moving into BAU – and by doing so they are changing business models.

5 – Vulnerable customers are everyone’s business

The FCA’s Financial Lives survey showed that 1-in-4 UK adults are in financial difficulty, or could quickly find themselves in difficulty if their circumstances changed. Around 32 million people are finding it a burden to keep up with bills, while the Resolution Foundation has reported that average real household disposable incomes are forecast to fall by 7% over 2023-24.

This all means that the fair treatment of vulnerable customers has to be a priority for all firms, focusing on all aspects of potential vulnerability or where extra support may be required.

Identifying vulnerable customers and tailoring products, communications and services is highly relevant for all firms – as is testing and evidencing the impacts of any changes made. In our experience the firms that link their work on vulnerable customers to the Consumer Duty programme of work find that doing so provides it with necessary focus.

The FCA refers to vulnerable customers in virtually all of its updates to firms no matter the topic. The Consumer Duty is the new way of working which impacts everything – and likewise the treatment of vulnerable customers is very much seen as an integral part of how a firm does business.

6 – Good governance needs testing and fine-tuning

MS Amlin’s £9.7 million fine (October 2022) for failings in governance, controls and risk management was explicitly used by the PRA as a warning to others.

In its notice the PRA was very critical of what it called an “underwriter-led culture” at MS Amlin. That shouldn’t be an inherent problem in an insurer, but it becomes one if there isn’t appropriate oversight and controls over whether the underwriters are within the risk appetite set by the board.

In our experience the problems identified were not unique to one firm. The failings in the PRA report are seen fairly widely, and there are a number of PRA interventions in the form of Risk Mitigation Programmes, Watchlist and Section 166 reviews at the moment.

Most of governance is about people working together, and a change of senior manager can affect the whole governance dynamic. It is something that should be regularly reviewed to make sure it is always fit for purpose. The key thing is not only designing an effective risk framework, but embedding it effectively, too.

It is worthwhile reviewing your own experience and seeing whether you’re up to the mark.

7 – Progress has been made in Operational Resilience but we’re not there yet

Two years into a three-year implementation period and our work with ORIC International to survey and benchmark firms progress is encouraging.

Oversight of third parties such as cloud providers, software houses and claims providers, remains a key challenge. An ongoing consultation to define critical third parties will provide part of the answer.

Sicsic Advisory and ORIC International will conduct another maturity assessment at the end of March, marking the one-year-to-go anniversary, with a further assessment at the end of 2023.        

There is still work to do, and we remind Boards that this is a key initiative not to lose sight of as other regulatory milestones come to the fore.

8 – Solvency II benefits are limited but present

Most of the Solvency II reforms are targeted at life insurers, but there are some benefits for general insurance too. These include the lower risk margin and improvements to matching adjustments – with the latter applying to PPOs (periodic payment orders). Such long-term risks will mostly be reinsured, but it’s worth remembering that reinsurers will benefit from the changes in future negotiations.

9 – SM&CR and credit reform are on the horizon

Much of the government’s Edinburgh Reforms are more relevant for wholesale financial markets than for general insurance. However, reviews of SM&CR and the Consumer Credit Act are also worth watching.

While we have scant details on what SM&CR reforms might entail, we predict that individual accountability is here to stay, though there may be an opportunity to simplify and accelerate the FCA authorisation process.

Until then, it’s clear that authorisation delays have been a huge source of frustration – and that those delays have had a real business impact. However, in our experience the tide is turning.  We have seen some material improvements on timings, although there is still some way to go.

The other big reform is of the Consumer Credit Act. The current act is nearly 50 years old and largely self-policing. Bringing it up to date will impact insurance through premium finance. It’s set to be a long journey from the prescriptive courts-based world of the Consumer Credit Act to the Consumer Duty.

Our advice to anyone looking to influence the consultation is to suggest improvements that do not harm what the regulators consider to be important, such as individual attestations and accountability.

10 – It’s time to think about BAU

Lots of firms made a great effort to meet product governance deadlines last year, but now have a feeling of needing to ‘start again’ with the next cycle. We would encourage firms to adopt a process that leads to continuous improvement and get into a rhythm of attesting value and customer outcomes.  

For more detail, more discussion, and more depth, you can watch the full webinar here.