The ‘dear CEO’ letters to retail and wholesale insurers are part of the ‘portfolio’ letters issued by the regulator that set out its insurance market priorities from now until the end of 2025. The other two letters are in relation to life insurance and funeral plans respectively.

Insurance expert Matt Saward of Pinsent Masons said that the letters reflect a common theme: despite the deadline for implementation of the consumer duty passing and the insurance industry having a head-start on the rest of the financial services sector, the FCA is still identifying poor outcomes for retail customers, caused by a variety of factors.

“Firms should carefully review the key areas of concern identified by the FCA and consider whether they have taken appropriate action within their businesses to address these. This is particularly important given that the FCA reiterates throughout the letters that it will be led by data and will use its range of supervisory and enforcement powers, against firms and individuals, where it sees evidence of poor outcomes for retail customers,” said Saward.

The FCA priorities specific to personal and commercial lines of insurance (7-page / 179KB PDF) place a strong emphasis on putting customers’ needs first. The FCA cites the consumer duty requirements on firms to deliver fair price and value and to ensure that what they charge for products and services is reasonable and proportionate to the benefits customers receive.

According to the letter, the FCA is particularly concerned by firms’ continued weaknesses in management information (MI), the lack of information sharing between insurers and intermediaries, unnecessarily long distribution chains, add-on sales, manufacturers not taking action following fair value assessments, and loyal customers paying more.

Saward said firms should ensure that they are continuingly reviewing their product development and distribution strategies against the FCA’s requirements, particularly the Product Intervention and Product Governance Sourcebook (PROD) rules designed to improve firms’ product oversight and governance processes.

“Critically, firms should take appropriate action if they cannot demonstrate good value for customers or good customer outcomes. They should consider whether they have appropriately reviewed their distribution and remuneration arrangements to ensure that they are receiving appropriate information; and that each party in the distribution chain is adding value and is only rewarded in a way that is commensurate to the value derived by customers from its activities,” he said.

Given the current high inflation environment and cost of living pressure, the FCA said that it expects insurance companies to continue to support customers in financial difficulty and reflect on what more they can do. It said that premium increases are likely to have disproportionate effect on those with low financial resilience, and so firms should consider how to treat such customers.

Lastly, in its letter to retail insurers, the FCA highlighted improving diversity, equity and inclusion (DEI) at all levels and preventing and handling non-financial misconduct, including discrimination, harassment, victimisation and bullying, as areas on which firms need to focus. It reminded businesses it is ready to take enforcement action against firms and individuals and will hold senior managers to account for their firm’s culture.

In a separate letter to managers and leaders of wholesale insurance companies, the FCA covered a wider breath of priorities across diverse areas including operational resilience, cyber insurance and financial crime.

“Operational resilience has been a key area of focus for both the FCA and the Prudential Regulation Authority in recent years, with the introduction of increasingly stringent regimes for outsourcing arrangements. A question that the industry has had to grapple with is the scope of the rules and which arrangements should be subjected to the most enhanced controls,” said Saward.

With the ongoing focus on operational resilience from the FCA, Saward suggested that firms should have undertaken appropriate remediation programmes in relation to their existing outsourcing arrangements and should consider whether they have appropriate toolkits for entering into new arrangements in order to demonstrate that their operations are appropriately resilient in accordance with the regulatory framework.  

On cyber insurance, the FCA highlighted concerns regarding uncertain cyber wordings, which could lead to firms not meeting their customers’ needs.

Regarding financial crime, the FCA noted that the rapid imposition of sanctions in response to Russia’s invasion of Ukraine has caused financial crime problems in the wholesale insurance market, particularly due to the international nature of wholesale business. Firms are expected to have effective systems and controls to combat these risks.

The FCA also plans to drive firms to build an inclusive culture and improve how they prevent and handle non-financial misconduct. In the letter, it recognised that London market is behind other insurance sub-sectors in having an inclusive culture with the appropriate channels for staff to feel psychologically safe to speak up and raise concerns. The letter showed the FCA’s readiness to take enforcement action against firms and senior managers for failings.

Lastly, the FCA reminded firms once again of the scope of the consumer duty and reiterated that the duty is relevant to much of the wholesale market. Its concerns for the sector centre around inappropriate levels of remuneration and fair value not being properly considered in the distribution chain.

“Distribution chains in the wholesale market can be complex and there’s often the complication of distributors acting for both insureds and insurers at different stages in the sales and administration process,” said Saward. “Manufacturers in particular should make sure that they have good oversight of the distribution chain for their products, so that the parties in the chain do not detrimentally affect product value. They may wish to review their distribution arrangements to ensure they are receiving appropriate information on distributor remuneration and to ensure that they can take appropriate action if this is the case.”