Viewpoint: Product governance challenges in the London market
Finalising a product review population internally and project managing the reviews within set timescales is critical
The Financial Conduct Authority is putting pressure on insurers, MGAs and brokers to prove they are providing fair value, clarity and service. Firms that drag their heels in complying with the new regulations risk reputational damage, increased regulatory scrutiny and a reduction in business
As we all know, the insurance industry faces increased scrutiny from regulators because of recent regulations such as fair value and consumer duty.
The Financial Conduct Authority (FCA) is putting pressure on insurers, managing general agents (MGAs) and brokers to prove they are providing fair value, clarity and service to their customers, which is particularly challenging for carriers writing high-risk products. These are some of the core challenges delegated authority business faces in complying with these regulations.
Scope and proportionality
In many cases, agreeing the extent of the review process initially generated endless discussions about what was in scope and what was out. Too much time can be spent on this, partly because of the mixed messaging from the regulators generating confusion. This means finalising a product review population (or “universe”) internally and project managing the reviews within set timescales is critical.
Once scope has been agreed, deciding to what extent each product should be reviewed can result in a further drawn-out conversation. Distilling this down into the three main drivers is helpful – they are location (UK/European Economic Area/rest of the world); type of customer (consumer/micro/small to medium-sized enterprise (SME)/large) with a level of sophistication consideration; and the level of advice received.
The core challenge here is to balance the carrier’s approach with its product governance risk appetite. Particularly for insurers with delegated authority portfolios in the specialty arena, a proportional approach setting out expectations for high, medium, low and out of scope is key.
By taking steps to ensure the business complies with all relevant regulations and guidelines, carriers, coverholders/MGAs and DCAs/TPAs can build trust with customers and ensure their business remains viable in a competitive and constantly evolving marketplace
We have come across many delegated authority portfolios that include micro and SME businesses with sophisticated purchasers – for example, those insuring solicitors, accountants or surveyors – where broad policy wordings (largely set by their associations) can in our view provide a significantly lower risk of harm than many consumer portfolios.
Our opinion (which depends, of course, on a firm’s risk appetite) is a proportional approach can be taken in these instances, given the sophistication of the customer and the professional associations that look after their members’ interests. This allows manufacturers of all types to be more efficient in their approach while not compromising on their key focus on customer duty.
Examples of proportionality may include simpler attestation processes, reduced management information requirements and less frequent reporting.
The next challenge is data gathering, in particular acquiring evidence of value in products. Indeed, it was a massive learning curve for specialty market participants, many of which had never been challenged before to demonstrate value in their products. Data has been and remains difficult to source; although it is often held at a coverholder level, it may never have been asked for.
However, trying to get any other evidence of value was difficult; customer feedback through surveys, audit findings, evidence of special demand, regular use of external reviews and so on are all relevant. We have, however, seen many firms using “class level” data as a backstop while product level granularity is developed and embedded in core underwriting systems.
In all events, however, co-ordination of management information data from multiple sources continues to be a complex challenge. Monitoring a product may require data from in-house underwriters and wordings teams, multiple brokers, a coverholder, two delegated claims administrators (DCAs), an in-house claims team, compliance and the in-house actuarial team, to name just a handful.
The table shows a simple example of the parties that can be involved in delivering product governance information under a delegated authority facility.
It is clearly a complex picture, added to which is the requirement to gather distribution value data. This is difficult because often it is the first time that the information has been requested from producing brokers or distributors, thus requiring a cultural change in insurance.
In the past, carriers have often only focused on the overall distribution cost shown on their binding authority contracts. They frequently do not know exactly how much commission and/or fees are being charged by individual distribution partners beyond the coverholder and, consequently, what the ultimate customer was paying for the product. Last, this is not static data.
This, of course, could fundamentally undermine the whole process of a fair value assessment, as carriers may not have had the full picture of what was being paid and were often basing their loss ratios, for example, on misleading coverholder level commission data.
The lack of consistent metrics for monitoring product risks in the specialty arena is another ongoing challenge. For example, claims customer service monitoring metrics such as “time from first notice of loss to first indemnity payment”, may work well for short-tail business but are far less effective for long-tail business such as liability or professional indemnity claims, where tracking circumstances and claims separately to different points in the process may be more appropriate.
Second, different stakeholders such as coverholders or DCAs may use the same metric but calculate or measure it in different ways, leading to inconsistencies. Carriers with a large variety of products and facilities have to develop enough metrics to work on the one hand, but also need to minimise complexity to ensure monitoring is effective – it is certainly not a simple picture.
Third, developing benchmark metrics such as complaints ratios or cancellation ratios for niche specialty products can take time because they often need to be developed from scratch. This creates a risk problems related to customer harm might be missed.
At the same time, much insurance management information within carriers is based on class of business, not product. This has led a number of projects to embed product coding within underwriting systems.
One example we have is where an MGA has put together a property/casualty package with different sections provided by different carriers. This has made it difficult to develop meaningful monitoring statistics, by product, by carrier. For example, does a cancellation due to an issue with a section provided by carrier A really affect the product value or service being offered by carrier B? A Gordian knot we need to unravel if manufacturers are to demonstrate they have a full handle on their fair value assessment and consumer duty.
Resource, awareness and the future
Resourcing is a big issue here. Very few carriers have the requisite expertise with time available internally and external help is limited (and often expensive). Accessing the knowledge in many organisations is difficult as much of it is siloed, along with the data within various teams including carrier underwriting teams, coverholder/MGA underwriting and operations teams, claims teams for carriers and DCAs, complaints teams and actuarial teams, to name a few.
In addition, where there are joint or co-manufacturing arrangements where the carrier and coverholder/MGA are both manufacturers it takes time to develop a full understanding of who is responsible for each aspect.
Since the FCA’s regulatory updates in 2021 and 2022, there has been an enormous learning curve for many, underwriters in particular, to understand they needed to know a lot more about their products, how they were sold/distributed and how they perform in real life, beyond a simplistic underwriting profit analysis.
Underwriting, coverholder/MGA and claims or delegated claims teams have pushed back due to commercial pressures elsewhere – and this continues to be a major challenge. With awareness growing, further product governance training is needed to continue to enhance engagement. In our view this should ideally be provided to all “non-compliance” carrier teams, coverholders and their brokers. It should walk through the carrier’s thinking to give a greater understanding of risk appetite, fair value and consumer duty management and the monitoring processes.
Second, demonstrating why certain management information is being requested and how this is gathered, checked, analysed and used is important. We find a focused training session with in-house claims teams and their DCAs is an important step in building understanding. This helps deliver a better understanding of how the business demonstrates product value, clarity and service throughout the customer journey. But let us not mince our words: gathering details of the exact commissions and fees charged, from hundreds if not thousands of brokers, continues to be a massive headache despite the support of a number of letters from the FCA.
This is not going to go away. Indeed, the FCA is likely to expect carriers to get information from any brokers that did not respond in 2022 and 2023. If this is not achieved, the expectation is the carriers may have to consider ceasing trading with such brokers.
Second, bringing people together to complete the assessments and reviews and establishing a framework for challenges both externally and internally is often difficult. Co-ordinating the approach, data and final assessment between the manufacturers and the relevant product oversight groups or other similar bodies is time- and resource-intensive.
Finally, it may sound surprising, but as highlighted above there is still a struggle with the actual definition of a product, which is due to the fact that while a simple facility may only have one product, many provide multiples. Initial issues in segmenting product data currently combined in facility level statistics abound. Further guidance may be required.
A proactive approach
The market has so far largely been reactive to the fair value regulation. The FCA is committed to working with the industry during the implementation period and beyond to get this right. In 2023, we can expect further developments in product risk as the FCA continues to scrutinise insurers’ compliance with the fair value assessment and consumer duty regulations.
By taking steps to ensure the business complies with all relevant regulations and guidelines, carriers, coverholders/MGAs and DCAs/third-party administrators (TPAs) can build trust with customers and ensure their business remains viable in a competitive and constantly evolving marketplace. Demonstrating their commitment to clarity and service helps ensure the business is operating in a transparent and ethical manner.
Across the insurance and delegated authority sector, the repercussions of getting this wrong could be significant. We expect the FCA is likely to take enforcement action against firms that fail to comply. Insurers, coverholders/MGAs and DCAs/TPAs that drag their heels may face reputational damage, increased regulatory scrutiny and potentially a reduction in business.
Charles Rowley is managing director at DA Strategy