Insurance: progress and the future
Speech by Andrew Honey, Head of Insurance, Small Firms Division, FSA
Cover Protection Forum
6 October 2005
Good morning ladies and gentlemen. I am delighted to be here today. I'm grateful to Incisive Media for giving me the opportunity to speak to you. I'd also like to congratulate them for putting together an extensive programme with such a wide range of speakers. It certainly has ensured a well attended event from across the industry.
As you will be aware, we are approaching nine months of general insurance regulation and I would like to take this opportunity to provide you with an overview of how we believe our work has gone so far. I would also like to take this opportunity to remind you that A-day is fast approaching.
We were aware when the FSA took on responsibility for general insurance regulation in January that we were facing a significant challenge. We estimated that each year about 35 million UK consumers take, or renew, 77 million policies for content, vehicles, medical, payment protection and other types of general insurance. There are over 10,000 authorised brokers whose primary activity is general insurance with the ABI estimating annual net premiums totalling £28.5 billion. General insurance is clearly a very diverse and substantial industry and one which serves an important economic and social purpose.
It is information like this that helps inform our risk based approach to regulation. We have set standards for firms to meet and since January have continually reviewed how well these standards are being met across a number of key areas.
Our retail agenda focuses on delivering an effective and efficient retail market for financial services and products, and therefore a fair deal for consumers, hence the general insurance regime was designed to deliver four specific outcomes and benefits to the consumer which I am going to focus on today.
These four objectives are that:
Consumers buying insurance on a non-advised basis should receive sufficient information to be able to make an informed decision, and the firms selling the insurance should check that their potential customers are eligible to claim on the policy.
Secondly, consumers should understand the key features of a policy, including significant exclusions, before buying.
Next, consumers buying insurance on an advised basis should be recommended suitable policies that meet their demands and needs;
And last of all, consumers claiming on their insurance policies should have their claims dealt with promptly and fairly.
These desired outcomes led to the formulation of our priorities which were set out in our 2005/06 Business Plan. These priorities have, in turn, informed a range of projects instigated over the past 9 months, and in communicating the results of this project work we want to help firms understand what we consider to be good and bad practice. The Business Plan also announced our new policy on fraud. We are taking a closer interest in firms' fraud risk management and have started to assess this through our project work on client money.
Let me start my update to you today by revisiting the first objective - consumers buying insurance on a non-advised basis should receive sufficient information to be able to make an informed decision, and the firms selling the insurance should check that their potential customers are eligible to claim on the policy.
The current review of the PPI market is a good example of our work in this area. This has been the subject of bad press for many years with concern that some firms are pushing PPI policies onto consumers as part of a transaction that could be unsuitable or offer them poor value.
The impact to consumers is high with the take-up estimated to be 15 million people, with DTI figures estimating that 4% of customers claim on their policy. Credit Suisse First Boston have reported that 25% of credit card customers and half of loan customers buy payment protection for their bank.
The Citizens Advice Bureau has been highly critical of the PPI sales practices in their recent report, having found widespread evidence of very high premiums (up to 56% of loan value), high pressure sales tactics, policies apparently designed to exclude people from cover and problems with the administration of claims. More generally, customers do not shop around and, as a result, there is little consumer pressure on pricing or the quality of the product.
We decided to look at this market shortly after taking on regulation with the objective of assessing whether firms are complying with our rules, particularly in relation to Conduct of Business and training and competence. But we also want to know whether firms are treating their customers fairly.
We were especially concerned about the risk of poor or aggressive sales practices. For example, staff may give the impression, knowingly or unwittingly, that PPI is compulsory or that purchasing PPI will affect a loan decision. This might lead to unsuitable products being put in front of the customer with small print and complex terms which they do not understand. A risk could arise where these products are sold to consumers on the back of another transaction.
We have just completed a series of visits to look at PPI selling practices in firms ranging from high street banks to motor dealers and small mortgage intermediaries (45 firms visited). We are also undertaking mystery shopping and visits to firms later this year.
Our findings so far are variable. Some firms are demonstrating good compliance with the rules and addressing problems that may have existed in the past such as checking that customers are eligible for the policy before they are sold it. As Clive Briault mentioned in his speech to the CII last month, we found that regular premium PPI sold with sub prime mortgages seems generally compliant with rules. However, selling practices in other sectors were generally poor.
Many of the problems previously observed in the PPI market, and as mentioned in the recent CAB report, are linked to the fact that policies are normally sold as a secondary product. Customers often do not consider buying PPI when purchasing the main product and are not provided with the information they need to make an informed purchasing decision.
In general we found the quality of disclosure to be low. For example, in some firms we visited the price the customer was paying for the PPI policy was not always clear in documentation and was sometimes only disclosed at the last minute after the customer had agreed to make the purchase. This is contrary to the rules which state the price disclosure should be made clearly and ‘in good time’ before contract conclusion.
We also found that many PPI products contain a wide range of complex exclusions - for example particular health problems are often excluded. The broad descriptions of these policies that we saw in our sample provided at the point of sale did not reflect the reality of the limited cover provided by many policies. Furthermore, the competence of the staff to sell PPI products and the quality of training provided to staff and appointed representatives, was variable.
We are determined to improve standards in this area of the market and intend to publish examples of some of the practice we have seen during November so firms know what we expect from them.
Our work on critical illness and policy summaries is intended to meet our second objective: consumers should understand the key features of a policy, including significant exclusions, before buying.
We have now reviewed over 100 policy summaries on contracts sold by 30 firms to consider whether exclusions listed in the summaries were appropriate and documents were compliant. The sample covered 9 different product types including critical illness, income protection, motor and payment protection insurance.
Our intention has been for policy summaries to be short and highlight the main points for the customer. We want to increase the likelihood that customers will read these documents.
Simple, accurate and concise disclosures are essential if consumers are to understand the products they are buying. For this reason, disclosure documentation is a key part of the new regime and is integral to our work on protecting consumers. The disclosure of relevant and understandable information needs to be in place in order that retail financial products and services operate efficiently and effectively. Both insurers and brokers have a role to play here, especially in making sure that the policyholder understands the level of cover and exclusions.
We will be communicating further details of our findings over the coming weeks. Overall, we found that firms are frequently not producing policy summaries and key facts documents in line with our rules.
In many cases that we saw the presentation and style of the product disclosure documents did not meet an adequate standard, with some policy summaries up to 14 pages. Clarity and readability are key to the customer understanding the product that they are buying, at the time of sale. We found a significant proportion of the documents we reviewed were of poor appearance. Mostly due to the font being too small and the layout too cramped, and so uninviting to the customer.
Significant and unusual exclusions are not always being brought to customers' attention in the product disclosure documents. We found on average that each document omitted three or four significant and unusual exclusions - often relating to eligibility criteria or limitations to cover.
We will be doing some more work on the area of disclosure in due course. Including taking enforcement action, if that proves necessary.
Our third objective states that consumers buying insurance on an advised basis are recommended suitable policies that meet their demands and needs.
In this context, we are considering how critical illness protection fits with customer needs. These are relatively complex products and we are concerned firms are not accurately reflecting the coverage of these policies when presenting them to customers; and that products and descriptions are frequently too complicated to be meaningful for customers.
Our review of disclosure documentation has identified shortfalls in the way that reviewable premiums are dealt with. It was frequently unclear how often premiums would be reviewed with no limits set on premium increases. While a great deal of information was given about why the insurer may wish to review and increase premiums, little was made of the policyholders need to review their cover to ensure that it continued to meet their needs.
We also did some work on financial promotions and found that adverts have used ‘scare mongering’ tactics. For example we have seen the phrase “100,000 cases of cancer each year” being used as well as promotions that imply that critical illness insurance is equivalent to income protection when, in fact, it generally provides a lump sum. We also found examples of unsubstantiated claims about aspects such as price, uniqueness and coverage together with examples of key terms and conditions or exclusions not sufficiently prominent in brochures.
Building on this and the work on disclosure documentation we plan to look at the selling practices of critical illness and will communicate our findings and next steps on completion of this. We are also thinking about doing some mystery shopping and we are in discussion with the ABI on their statement of best practice on critical illness.
Our fourth stated outcome is that consumers claiming on their insurance policies have their claims dealt with promptly and fairly.
Our research suggests that claims handling is an area of dissatisfaction with the insurance sector. This is important and firms should consider how they manage claims handling as a priority and how they balance the need to combat claimant fraud.
We are currently gathering information to help us understand better industry practices and associated risks. We will be sending out questionnaires to a cross section of small, medium and large insurers dealing with a broad range of insurances. Providers of CI cover may be included in our research, but it will not be limited to this section of the industry.
From our questionnaires we hope to gain an insight into firms internal service standards, including those set for outsourced service providers. We will look at their general compliance with the rules which ensure they take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems, while paying regard to customers interests.
Our questionnaire will then be followed up by focussed visits to a small population of insurers where we aim to look in more detail at the systems and controls the firms have in place to ensure compliance.
The qualitative information gained from the follow up interviews will help us understand the reasons for divergences of standards in the industry and differences between distribution methods and product types. We will also be looking for evidence that firms are using management information to analyse and improve their claims handling service and that senior management have access to, and are acting upon, this information.
The main CI insurers are in the process of publishing statistics on refused claims. To date these seem relatively high and could suggest there may be an issue about whether claims are being unfairly rejected.
I hope this has given you a sense of progress against the priorities we set out in our Business Plan earlier this year. Other priorities for us this year have included work on the policing the perimeter to ensure firms are correctly authorised and operating lawfully. We will be releasing our findings in the next few weeks.
Client money is a new priority which I would like to draw your attention to. We expect firms to know how much money is in their client bank account and to protect it for the benefit of your client.
We did some work earlier this year looking at general insurance intermediaries that deal with commercial customers and found significant issues, including deficits in client money accounts and problems with client money calculations.
As a result, we issued a letter in July setting out our concerns to the Chief Executives of all general insurance intermediaries involved in the wholesale market.
Due to the significance of the concerns identified we felt it necessary to extend our review to include the retail market and insurance intermediaries' compliance with the rules. Over the next few months we will therefore be visiting a number of retail firms to look at this issue and expect to report our conclusions early next year.
In summary we are looking to all in the insurance industry to secure a market-driven solution to improving standards and hence deliver a secure and confident market which in turn delivers to the customer.
ICOB effectiveness review
Having provided an overview of some of our work I cannot sit down without mentioning today the recent announcement by Clive Briault on the Effectiveness Review.
It is all very well my providing you with details of our projects and intended outcomes but, in the end, we need to consider whether these outcomes are actually being delivered.
We will therefore be undertaking a review of the effectiveness of the general insurance regime which will begin in April 2006 and will focus in particular on our retail conduct of business requirements in this area, and on the effectiveness of the regime in meeting the intended outcomes for consumers.
It will take into account our determination to find ways in which we can improve the effectiveness of our regulation and can contribute to the better regulation agenda.
If the review leads us to conclude that changes to our rules and guidance are necessary, we will, of course, consult on these in the usual way. However, we need to recognise that our ability to make changes is constrained by European Directive requirements – in particular, those in the Insurance Mediation Directive and the Distance Marketing Directive.
We intend to encourage feedback on what is effective or ineffective in the regime we have introduced and are keen for the industry to come forward with views on the areas which could benefit from re-examination. We will undertake consumer research to see whether the intended benefits of our regime are beginning to come through and we will continue our thematic and firm-specific work to check that the industry is complying with our regime.
We expect to feed back our initial findings from this review towards the end of 2006.
A-Day
I am also going to take this opportunity to mention A-day which, of course, takes effect on 6 April next year.
It is clear that much work is going on in many firms but, with just six months to go, both firms and advisers now urgently need to start planning for the changes if they have not already done so.
While many consumers will not be affected by the new regulations, the FSA considers that the challenges for pension providers and financial advisers are substantial, and we are treating the risks associated with A-Day as a priority. Where consumers are affected we would advise advisers be up to speed with their training and competence on A-day changes.
I'll give you some particular examples that demonstrate areas which may need attention.
Changes to the options available at retirement and to the regulations on release of tax-free sums mean that some customers currently near to retirement may wish to defer release until after A-Day. For example, some may wish to take tax free cash from additional voluntary contributions or protected rights funds, or to benefit from the new rules allowing those with small pension pots to take up to £15,000 as a lump sum, rather than purchasing an annuity.
Changes to the minimum age for drawing a pension (by 2010) mean that some customers currently planning to retire early need to reconsider the best year in which to do this.
Changes to the regulations on income withdrawal mean that some of your customers may have new choices to consider (as they can withdraw more) but also that those choices have more lasting consequences if inappropriate (as they may not be reviewed in good time).
We are currently looking at the state of readiness of a sample of regulated firms, and will use this information in future discussions with the industry.
A-Day will also see the removal of the tax legislation restricting the amount of Pension Term Assurance (PTA) consumers can buy and this, combined with the effect of tax relief on contributions, means that PTA is likely to become popular for a larger number of consumers after A-Day. We recognise the benefits of reviewing the appropriateness of any existing constraints on access to this product.
We are proposing amendments to enable PTA to be sold on a standalone basis. These amendments are primarily of interest to insurance intermediaries selling non-investment insurance contracts who may wish to include PTA in their range of product offerings.
The recommendations will be published on the 7th (tomorrow) with two months allowed for feedback. We will be communicating with advisers and firms regularly during the next few months to help with the transition through for example, articles in our financial adviser and insurance intermediary newsletters.
Summary
That brings you up to date on our work so far this year.
During the past nine months I believe we have covered a great deal of ground and demonstrated our risk based approach to regulation provides a focused way to our work.
Our four desired outcomes, as set out in the Business Plan, have led us to look at ensuring disclosure documentation is provided at the right time, and is clear and accurate. We have started work to quantify the risk posed by specific products such as linked sales of payment protection insurance and critical illness cover and will be looking into claims handling.
We realise it is important to provide feedback on the progress of our work and to help raise industry standards, as well as to take stock of what is and is not working in the new regime. Events such as this provide the perfect opportunity to update you on our progress.
Over the last few months we have met with a number of trade associations and consumer bodies to keep them informed of our work. We have provided regular feedback on specific projects and themes through our newsletters and we will continue to take up further opportunities to communicate with the industry.
As from November there will be a dedicated general insurance newsletter which will be sent to smaller firms, together with regular Regulation Round-up e-mail that summarises what we have published and updates on our website. Larger firms will continue to receive the Insurance Sector Bulletin and our small firms section has just been improved and is more targeted. All of this is intended to give you the most up to date news and point you in the right direction for updates on projects going on, results and forthcoming work.
Well as you can see there is a lot going on in the general insurance sector. I hope this update has been helpful. Many thanks for your attention today.