Trust and confidence - ensuring firms’ ethics are built around their customers

Speech by Clive Adamson, Director of Supervision, at the Insurance Institute of London, London. This is the text of the speech as drafted, which may differ from the delivered version.

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Insurance is essentially there to liberate individuals and companies from the fear of things going wrong.

I would like to thank the Insurance Institute of London for allowing me to speak for a second year running. Last year, I spoke to you about what the Financial Conduct Authority (FCA) meant for the London insurance market and outlined some of the more operational elements of our supervisory approach. Today, from a perspective of being almost eight months on since the creation of the FCA, I will elaborate on some of those key themes and reiterate the need for firms’ ethics to be built around their customer.  

So, before I start, I want to emphasise that we recognise the importance of the insurance sector for the City of London and for UK Plc. Richard Ward, CEO of Lloyd’s, recently said that ‘insurance is the jewel in the crown of the City’ – and I want to echo his words. The sector has shown great resilience over the past decade, positioning itself as a leading global centre while surviving numerous man-made and natural catastrophes, as well as navigating the financial crisis and the current low interest rate environment.

One CEO recently said to me that insurance is essentially there to liberate individuals and companies from the fear of things going wrong – and I absolutely believe this. For this to happen successfully, however, we need trust and confidence in the sector. This is why our overall aim for the insurance industry is to work with you to enhance public trust, so when consumers purchase insurance products and services, they can be confident that these products do exactly what they say they will.

So, how are we going about achieving this? The creation of the FCA was the first step in this journey and I hope you have started to see how different financial services regulation will be going forward.  You heard here in the Old Library last month my colleague Julian Adams outline the Prudential Regulation Authority’s (PRA) vision for the insurance industry. While we are separate regulators with separate objectives, we do have areas of alignment in the way we are supervising and approaching the markets we regulate. As a conduct regulator, we aim to be more judgement-based, forward-looking, and outcome-focused than we have previously been. What this means in practice is that we are continuing to develop and deepen our understanding of the sectors we regulate and what consumers, both wholesale and retail, are really experiencing. We are looking closely at how firms make their money, and using more data and intelligence to join the dots so we can head off risks before they crystallise to cause consumer harm or damage market integrity.

New supervisory model

In order to be a truly successful conduct regulator, we have developed a new and more focused supervisory model. I covered in detail some of the key operational elements in my talk last year but to recap, this entails:

  • moving from a reactive approach to a pre-emptive and judgement-based approach
  • moving from dealing just with symptoms of problems to addressing underlying causes, and
  • moving from an approach that is focused only on ensuring compliance with rules to an approach that encourages firms to do the right thing in respect of their customers and the markets they operate in

This philosophical change is important because, in our experience, when things go significantly wrong in a firm within our remit, it is not because it hasn’t complied with a set of narrow regulatory rules, but because there is a fundamental flaw in the business model, in the culture or its business practices. So we need firms to ask themselves the question: ‘should we’ carry out a certain activity as well as ‘could we’ do it. To put it another way, ensuring your firm operates to the highest standards is a cultural question, not a control or process challenge.

In our view, this requires much more than a good control environment – what’s really needed is an approach that puts the interests of the customer first running throughout the firm and all aspects of the business. This should include how business strategies are developed, how individuals are compensated and how front-line processes are designed and performed.

So before I move on, I want to touch on what underpins all of this. It is clear to us that meeting our requirements is heavily dependent on a firm having a culture that sees the interest of the customer as paramount. This needs to be led from the top of the firm and go beyond what could be vague corporate aspirations. It needs to be grounded in clear business practices or standards that can be easily understood and operate as a guide to all levels of management when judgements need to be made about what is acceptable and what is not.

We are often challenged over how we assess firms’ culture. We do this by drawing conclusions on what we observe about a firm – in other words, joining the dots rather than assessing culture directly. This can be through a range of different indicators such as how a firm responds to, and deals with, regulatory issues; what customers are actually experiencing when they buy a product or service from front-line staff; how a firm designs products and the considerations around this; the manner in which decisions are made or escalated; the way in which claims or complaints are handled; the behaviour of that firm in certain markets; and, the remuneration structures.

We are also looking at how a firm’s board engages in those issues and satisfies itself that the firm is operating in the way it would want.

Achieving trust and confidence in the sector

I want now to turn my attention to how we are looking at all of this in the context of the London market through four key areas - how firms are 1) delegating authorities, 2) considering their financial crime risks, 3) handling claims, and 4) managing conflicts of interest.

1. Delegation of authority

Insurers must consider whether those to whom they have delegated authority for underwriting or claims handling are capable of acting in the manner they expect and have adequate information to ensure that their agents are acting properly.

I mentioned earlier that our overarching objective for the insurance industry is to enhance trust and confidence. I am conscious, however, that this can be a particular challenge where value chains can be long and where delegation is a feature of the way things are done.

As Julian Adams outlined last month, effective oversight over delegation is vital for this market. For many years, firms have viewed such controls as purely prudential in nature. However, these are also important in a conduct setting. We are still finding that oversight of delegated authorities regularly falls short of our standards and should be more robust, with insurers needing to give further consideration to how they fulfil their obligations as product providers and deliver good consumer outcomes through their distribution networks.

In particular, insurers must consider whether those to whom they have delegated authority for underwriting or claims handling are capable of acting in the manner they expect and have adequate information to ensure that their agents are acting properly. We have seen recent examples where:

  • Insurers in the London market have not been performing effective due diligence or oversight of their delegated agents in relation to their provider responsibilities for both customer outcomes and financial crime control.
  • Coverholders and third party administrators have been acting in a way that is contrary to what the insurer thinks they should be doing because the insurer has not been clear about its expectations and has not effectively overseen the agent.
  • Insurers have been willing to underwrite products through coverholders even though they will not underwrite the product directly themselves as the product does not fit with their ethics, culture or customers’ needs.

To us, this does not seem right. Where insurers are outsourcing services to other companies acting on their behalf, they remain responsible for the actions of their agents. As a result, this continues to be the core focus of our supervisory engagement with London market insurers.

2. Financial crime risks

Firms may be exposed to a greater risk of becoming victims or unwittingly facilitating financial crime.

I want to turn my attention to financial crime, which we know is an issue facing firms across all sectors. The international reach of the London insurance market creates an environment where firms may be exposed to a greater risk of becoming victims or unwittingly facilitating financial crime. Because of this, and more than ever, firms need to ensure they have effective oversight in place in this space.

Work done by the FCA has shown some firms are performing ineffective sanctions screening against their policyholders and claimants as well as taking insufficient care to ensure that insured interests do not breach sanctions law. We have seen this in insurers, not only in their direct offerings, but also where they have delegated underwriting and claims handling. They expect their delegated agents to perform screening but are not making this explicit nor doing sufficient work to satisfy themselves that their agents can perform the requisite checks.

In the broking space, we continue to see inadequate due diligence of third-party business partners and commission payments for supposed services that may or may not be tangible. While firms may have reacted positively to our previous thematic work in this area, we will be performing more work in this area in the coming year. Given the significant guidance and messaging already provided on this, we expect firms to have improved due diligence performed on third parties, as well as payments made to third parties, monitoring and review of expenses, and gifts and hospitality.

3. Claims handling

We are also focusing on how firms demonstrate integrity and consider their customers through the way they handle claims.

We are also focusing on how firms demonstrate integrity and consider their customers through the way they handle claims. This can differ depending on the sophistication of the customer. For example, for an unsophisticated retail customer, a strict policy interpretation may not be fair or in alignment with wider legal requirements (for instance, the Consumer Insurance Act). However, this interpretation may be entirely appropriate for a sophisticated commercial customer. Therefore, it is important for the claims handlers in the London market to know the requirements for retail claims and be able to recognise such claims.

Where a London market insurer is underwriting retail business, we will compare the part of the business that writes that business against their competitors for that product, including the large national and composite insurers. This is already taking place, with a thematic review of claims handling in personal lines across ten firms including some from the London market. This project will report next year, although we are already seeing a change in behaviour with those firms that underwrite retail business as a major line having considerably more information to enable tracking of customer outcomes than those who write small pockets of retail business, particularly through coverholders.  

4. Managing conflicts of interest

Another important area is the management of conflicts of interest. While brokers have improved their governance and oversight arrangements since the advent of intermediary regulation, we are aware that broker business models are evolving with revenue increasingly being generated from non-core broking activities, including performing more services as agent of the insurer under delegated authority. This potential blurring of the lines between broker and carrier can give rise to conflicts of interest or drives behaviours that conflict with firms’ duties to their customers

Many brokers generate revenue both via insurers and their clients for arranging insurance so it is important that they manage their conflicts of interest while ensuring they are complying with their regulatory obligations and keeping the customer at the heart of their business model.

As such, we are undertaking a piece of thematic work looking at how UK insurance brokers manage conflicts of interest, focusing particularly on those in the SME and microbusiness markets. We are still undertaking analysis in this area before we publish our findings, but expect there may be significant read-across or correlation to other insurance broking markets. We will look to see whether these contain risks on which we need to perform further work.

Aligned to this, we are aware of market developments in relation to broker facilities and the use of alternative capital. While we welcome competition and do not want to stand in the way of market innovation, we are alive to the issues this could give rise to, including conflicts of interest.  

For our part, we look at these issues through two lenses:

  • Firstly, whether competition is operating in the interests of consumers and whether they are getting a better deal through greater efficiencies in the placement of risk and speed of claims settlement or lower prices.
  • Secondly, the impact of these arrangements on the integrity of the market and how firms manage the potential conflicts of interest that these arrangements give rise to.  

What are we not trying to do

Before I finish today, I would like to take this opportunity to address some of concerns we have heard from industry about what a conduct regulator means for them.

Firstly, we are not seeking to stifle innovation. We recognise the importance of the London market as the global centre of insurance innovation and believe it can enhance competition in the interests of consumers and help to ensure that London remains the world’s premier insurance centre. Our interest is that, where firms innovate, they do so to address genuine consumer needs and they develop products that are suitable for the type of customer they are aimed at.  

Secondly, we are not looking to drive profitability out of your businesses. We are, however, looking more closely at how firms make money in our sectoral and business model analysis as well as in our thematic work. What we want is for firms to have business models that have their customers at their heart as well as being commercially sustainable.

Thirdly, but not least, I want to emphases that we are not trying to work against you.  We want to work with the industry to constructively solve issues and enhance the trust and confidence of consumers in this market. We also recognise the value of industry-led initiatives such as the Chartered Insurance Institute’s (CII) recent work on integrity culture and behaviours, in driving firms forward in the right direction.


I hope you found my talk today helpful. Insurers have a vital role to play supporting economic growth, primarily by taking on the risks of other businesses and individuals. I believe that our focus in the FCA on ensuring trust and confidence in the markets is aligned with the traditional strength of the London market. In my view, regulation is most effective when it works with the grain because, similar to other vital services across our economy, it is seen as regulating with the consent. I hope you support this and I look forward to working with you as we continue to work to achieve trust and confidence in the insurance market.