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Insurance Insights | Kevin Crawford |
30 March 2023

Regulation in the insurance industry is as certain as death and taxes but The Financial Conduct Authority's (FCA) new Consumer Duty is a profound shift in the approach to regulation, prompting fervent discussion since consultation initiated in 2018. Due to be implemented at the end of July, it applies a new Consumer Principle which requires firms to: "act to deliver good outcomes for retail customers." (FCA PRIN 2.1) This applies cross-cutting behavioural elements designed to prevent harm to customers, and most importantly defines the substantive outcomes the customer will experience upon purchasing a product or service.

The Duty is specifically customer-centric in nature, setting higher standards to ensure: "a higher level of consumer protection in retail financial markets, where firms compete vigorously in consumers’ interests." (FCA PS22/9) The FCA expect these higher standards to be humanised to "act in a way that reflects how consumers actually behave and transact in the real world, better enabling them to access and assess relevant information, and to act to pursue their financial objectives." (FCA PS22/9)

THE 'REASONABLE INSURER'

The focus on outcomes is implicitly stated expecting insurers to: "pro-actively act to deliver good outcomes for customers generally and put customers’ interests at the heart of their activities," (FCA FG22/5) prompting firms to ask themselves questions such as ’Am I treating my customers as I would expect to be treated in their circumstances?’

This holistic approach recognises the generalised shift toward the Total Experience, a strategy that creates superior shared experiences where customers and businesses are interconnected and dependent upon each other, increasingly prevalent throughout financial sectors. Underpinning it is common-sense interactions between individual people, regardless of whether they are the customer, an Underwriter or a CEO. The legal or insurance professions will recognise this concept as the Reasonable Person, a hypothetical ordinary citizen against whom the actions of others are judged to be reasonable or unreasonable.

This suggests the FCA, instead of applying insular checkbox regulation, is seeking to create a regulatory model where insurers can be more effectively compared not just against each other, but ultimately against an emergent hypothetical ‘Reasonable Insurer’. The Reasonable Insurer treats customers as real people, rather than entries on a general ledger. However, building the kind of humanistic intentions, approaches, and interactions intended by the Duty takes time. The FCA’s resistance to incorporating a private right of action into the Duty supports this, by allowing space and time for the notional Reasonable Insurer to manifest without the threat of private action, and the potential distortion that might bring.

The FCA’s non-Handbook Guidance specifically states reasonableness as a keystone and an objective test. With obligations on firms interpreted in accordance with the standard that could “reasonably be expected of a prudent firm". (FCA FG22/5)

DIRECTION OF TRAVEL

That is not to suggest that insurers generally act unreasonably, in my experience that is far from the truth. From plain-English policy wordings to omnichannel communication, over the past few decades insurers have already moved to being more customer-centric.

Will coherence to reasonableness lead to cookie-cutter insurers? Unlikely I think, insurers will remain as unique as they always have been.

Where does this leave us? Will the insurance industry adapt? I believe so. Not only has the industry been moving in this direction as a natural congruence of market trends, but the regulatory undercurrent also leans to a more humanistic approach. Active adherence to the Consumer Duty will, I’m sure, be a customer attractor and an opportunity to differentiate against competitors. We will explore this in our next blog Higher Fidelity: Good outcomes and harnessing the challenge of FCA's Consumer Duty.

Kevin Crawford

Global Head of Insurance Delivery

Kevin has spent the last 25 years working with insurers and brokers and helping them maximise the value they are gaining from investments in technology. For a significant amount of this time, he worked in the London market for a leading software provider, implementing their core policy and claims systems. At Endava, Kevin is leading our global Insurance delivery operation, ensuring that we have the right delivery organisation in place for our customers. Outside of work, Kevin has an eclectic range of hobbies – from sedate activities like paddle boarding and yoga to more lively ones, such as diving off stages at punk concerts.

 

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