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It’s back to school for insurance – what’s on the agenda?

Michael Sicsic

It’s been back to school for thousands of British children this month, but they’re not the only ones that need to knuckle back down to work in the living-with-Covid reality. Now is an excellent time for the insurance industry to get back to grips with environmental, social and regulatory developments, – and take look at their strategy and priorities for the year ahead and beyond.

For many, the coronavirus crisis has derailed the best laid plans of last year. Now is the time to remind ourselves of the biggest challenges in the short, medium, and long term. So what should be on the curriculum for brokers and insurers?

Pricing practices

The FCA’s market study into pricing practices, specifically dual pricing, was a wake-up call about customer harm, whether the situation has unfolded by indifference, cynicism, or an accidental side effect of competitive new business pricing. It estimates that the ‘loyalty penalty’ in home and motor insurance cost 6 million longstanding consumers an extra £1.2 billion in 2018.

Whatever remedy is announced – and the announcement is expected imminently – the ramifications could take years to work through.

Some firms are already working to improve practices or close the pricing gap they’ve identified, others are waiting to be told how to act.

All should be limbering up to react and have a task force ready to pore over the document and work out what it means for their firm’s business model.

Culture

One of the most frequently asked questions about culture is how a regulatory body can accurately observe and assess it. Much like an Ofsted inspection, it’s hard to get a true feel for what happens in an organisation when unobserved and unquestioned.

The key point to note here is that the FCA doesn’t talk about good or bad culture, but rather healthy culture. That means finding out whether what a firm says it wants to do, as laid out in its purpose, mission and strategy, is what happens in reality. And that’s something that can be measured through outcomes.

SM&CR caused a flurry of activity at the end of last year, ahead of the extension of the regime to all firms on 9 December 2019. Most firms have implemented the main elements of the regime and will have the documents to prove it. That shouldn’t be viewed as the end of a project, but rather as the start of a journey.

In her general insurance portfolio letter to intermediaries, Roma Pearson, FCA head of retail general insurance, explained that the regulator will assess how firms have embedded SM&CR “in due course”.

Firms should therefore be looking to provide assurance that their embedded culture matches the stated aims of the organisation. How clearly are those aims expressed, to what extent are they understood and how are they translated into expectations about how leaders and employees should behave. Most importantly, how does that translate into the people and customer experience.

Covid-19 heightens the need to define and measure this. If culture is ‘how we do things around here’, and ‘here’ has lost its physicality, there’s some serious work to do.

Remote working is now likely to be semi or completely permanent for a significant proportion of your workforce, and you need to think about how to embed your organisational values and behaviours, how you bind your teams, enable collaboration and feedback, and support and empower individuals in a virtual or hybrid environment. Where people are physically together, what is the role that that time should play and how does your office space support and encourage that.

For financial organisations, this is crucial. Home working and the physical and psychological distance from organisational culture anchors carries with it an increased risk of misconduct. Combating that with effective leadership, robust management and training processes, active internal communications, solid operational controls and good governance, is more important than ever.

Operational resilience

This is a bubbling issue that will quickly rise in importance. The FCA’s consultation on building operational resilience has ushered in a new focus on systemic risks to the insurance sector, akin to how the PRA and Bank of England might be concerned about the IT disruption locking banking customers out of their accounts.

The crux of the issue for insurers and brokers is to identify what constitutes an important business service – the collapse of which would pose a risk to the sector, a firms’ safety and soundness, or could cause intolerable levels of harm to consumers.

From there follows a workstream to collect baseline data, define what level of disruption would be tolerable, scenario test, and plan.

The consultation period on operational resilience was extended due to Covid, but it is still expected that measuring and planning to mitigate against disruption will become mandatory by the end of 2021. The preparation should begin long before it becomes a regulatory requirement.

Financial resilience

If financial soundness is a permanent focus for insurers, Covid-19 has catapulted this up the agenda for brokers. The recent general insurance portfolio letter was a timely reminder than the FCA regulates their prudential management as well as conduct. This is not just about assessing compliance with threshold conditions. During this time of stress, it wants to see brokers taking steps to save money and plan for demands on liquidity. Brokers should be prepared to robustly demonstrate their modelling. More so those with high leverage and complex supply chains.

The FCA also wants brokers to maintain an up-to-date wind-down plan to ensure customers aren’t left out of pocket and without insurance if a firm does go out of business or finds itself in a fast sales process.

Leaders may be defiantly confident about the future in front of staff and clients. Behind the scenes they should make sober plans to protect customers if the worst should happen.

Climate change

For many organisations, coronavirus came as a shock. It shouldn’t have. Insurers deal in risk and prediction, and a global pandemic has been high on the risk-list for microbiologists, virologists, and business contingency planners for some years. Climate change is on the same list, and it should be on your agenda.

It’s not just about the fact that warmer, wetter weather is going to be mean more floods, and more leaks. Climate change will impact consumer behaviour across the board – how we live, work, eat, spend, drive, and travel; it will change markets, loss ratios, asset values, risk appetites, and investments.

The PRA has recently clarified their expectations in terms of managing climate related financial risk setting a deadline by the end of 2021 for insurers to have a fully embedded approach.

Firms would have to develop specific capabilities in climate scenario modelling to respond to this challenge.

If nothing else, the recent crisis should teach us that our financial and strategic planning has to involve not just blue-sky thinking, but black sky thinking, too.

Closer to home for individual firms, it has implications for procurement and planning and ties into operational resilience. For instance, firms should consider whether their supply chain and technology infrastructure are reliant on a global supply chain and flood or fire prone areas.

Brexit

Yes, it’s still happening. And whether we end up with a trade deal or not, it doesn’t make much difference to what insurance firms should be doing in the run up to 31 December 2020.

Before the pandemic, firms had put in place their legal entities in Europe. Q2 and Q3 would have been spent going through the practicalities and making sure everything worked in practice. Those preparations, for many, were understandably put on the backburner. But that’s left firms with less than four months to ensure their checks and balances, controls and frameworks are fit for purpose.

They must also satisfy themselves that they understand the regulatory regime in their
chosen EU states as well as they do in the UK. France and Belgian regulators take a rather different approach than the PRA and FCA and some countries seen as a light touch are moving away from accepting post box style arrangements.

In conclusion, there’s a lot of swotting up to do after the long summer break. Those diligently doing their homework are going are likely to get the top marks from the FCA and PRA – and from customers – going into 2021.