We set out the findings from our multi-firm review assessing how firms have responded to our general insurance (GI) distribution chain Guidance (further to the product governance rules implemented by the IDD) and coronavirus (Covid-19) value Guidance. We also set out some of the key actions firms need to take.
Customers should be able to expect fair value from the financial services products they buy. This has been an important focus in our recent work, including our thematic review on the GI distribution chain and our thematic review and market study on GI pricing practices. Delivering fair value in a digital age is a key priority in our 2021/22 Business Plan.
We are committed to reviewing the value consumers receive from insurance products. Our work has found that many firms made material progress in this area since our last work. But we have also seen many firms where shortcomings remain.
This is of concern, given the potential for consumer harm arising from such shortcomings.
It also indicates that many firms still have significant work to do to comply with the enhanced product governance rules coming into effect on 1 October 2021 (further to our policy statement PS21/5 following the GI Pricing Practices market study) and their expanded scope. Our recent consultation paper (CP21/13: A new Consumer Duty) also proposes clearer and higher expectations for firms’ standards of care towards consumers.
In some cases, arising from this review and other product value related supervisory work, we have intervened to ensure firms take action to amend products and improve the value they deliver to customers, including, through reductions in remuneration and the provision of additional cover or benefits. This can involve requiring firms to withdraw products from sale while these amendments are made, or to pay refunds or redress, where we see harm arising. We will consider all appropriate regulatory action where firms fail to meet their regulatory obligations, both for their historic product governance arrangements or under the new requirements from 1 October 2021.
1. Who this applies to
The findings from our review are relevant to all insurers and insurance intermediaries, particularly firms that manufacture general insurance and protection products.
We are sharing our key findings now, while firms are implementing any necessary changes to meet the new product governance rules (in PS21/5).
2. What you need to do
All firms should consider our findings and how they apply to their own activities. This will help firms identify where there are gaps or weaknesses in their current approach and also to consider actions they may need to take prior to the enhanced product governance rules coming into effect on 1 October 2021. While we reviewed only a sample of firms, the requirements set out apply equally to all firms and we will continue to review compliance with these across the insurance sector.
Our expectation is that all firms will have considered our findings in the context of their activities and the applicable rules, be able to evidence this and any actions they have taken as a result.
3. Why we did this work
We undertook this review to assess firms’ approach and response to:
1. Product governance and value since we:
- Introduced the Product Intervention and Product Governance Sourcebook (PROD) Chapter 4; and
- Published FG 19/5 The GI distribution chain: Guidance for insurance product manufacturers and distributors, following our thematic review TR19/2.
2. Our package of temporary guidance in response to Covid-19, including:
- Product value and coronavirus: guidance for insurance firms; and
- Insurance and coronavirus (Covid-19): our expectations of firms.
We introduced our rules in PROD 4 as part of the implementation of the Insurance Distribution Directive (IDD). They took effect on 1 October 2018. PROD 4 also reproduced provisions from a delegated IDD Regulation (now part of UK law by virtue of the European Union (Withdrawal Act) which is directly applicable to in scope firms that manufacture and distribute insurance products. We also included some additional rules where we considered them relevant.
In FG19/5, we gave further clarity on our expectations of firms in the general insurance and pure protection sector, following our rules implementing the IDD. It set out how firms should consider the value that their products and distribution arrangements provide to the customer.
Our Covid-19 temporary product value guidance set out our expectations on firms to review their product lines to consider the impact of Covid-19 and if it had affected the intended value being provided to customers, and to decide on any resulting action(s) they needed to take, by 3 December 2020.
We committed to follow up on our Covid-19 product value guidance to evaluate firms’ actions and likely consumer outcomes and, in this review, we set out our work and findings.
We did this review before publishing PS 21/5: General insurance pricing practices market study and finalising the enhanced rules on product governance. We assessed firms in the context of the applicable rules and guidance at that time.
4. What we did
We requested information from a sample of over 20 firms. This included insurers and intermediaries from different sectors of the general insurance and protection market, all with responsibility for manufacturing products within their business models. We reviewed and analysed this information and followed up with ‘virtual visits’ with Senior Managers and other relevant staff in a sample of these firms.
We then evaluated our findings against relevant Handbook requirements and guidance, and the expectations set out in the non-handbook guidance applicable at the time of the review.
5. What we found
5.1. Product governance and value
We found that some firms may not be meeting our existing requirements and expectations in relation to product governance and value. Any firms who are not fully meeting existing requirements and expectations have significant work to do to comply with our enhanced product governance rules that come into effect on 1 October 2021.
Where firms fail to fully meet all the existing requirements, and those which come into effect on 1 October 2021, consumers are exposed to increased risk of harm from poor value products, or products that do not meet their needs and objectives, irrespective of any impact from Covid-19.
5.2. Covid-19 guidance
Few products demonstrated a material loss of utility and value across the target market.
Many firms had proactively reviewed their products to ensure they retained their utility and value for customers during the pandemic before our Covid-19 value guidance was published.
Many products continued to provide important elements of cover where claims were unaffected by the impact of the pandemic, such as home insurance cover for storm or flood damage. For some products, reduced claims experience in some areas (e.g. fewer burglary claims under home insurance when more people are working at home) are offset by increased claims in another area (e.g. more accidental damage claims when people are working at home) to provide similar value. Firms did not need to take action in relation to these products.
Where firms identified that their products had materially reduced value, a small number made partial refunds. Most used other less direct mechanisms such as extending the period of cover without further charge or providing alternative benefits to deliver value to policyholders. While many firms have already taken such actions, some are still considering how to return value to customers, and we expect these firms to conclude this process and take appropriate action as soon as possible.
We outline our key findings and examples of what we have seen in more detail below, as well as setting out our next steps.
6. Key findings by area
6.1. Insufficient focus on customers, outcomes and product value
Some firms could evidence a clear customer and value focus in their product governance activities. But, overall, there was still a lack of evidence of customer centricity in many firms, with few able to show they had adequately and consistently focused on the needs of their customers in their approach to product governance.
We often found that management information used and challenged was predominantly focused on underwriting performance, and therefore profitability, rather than product value and customer outcomes.
Value and oversight of remuneration
We saw evidence of firms reassessing commission levels as part of new product governance processes, and on some products, this remuneration had reduced by 25% or more. We also saw examples of firms introducing new caps on commission levels or setting thresholds at which higher commissions needed to be referred internally to relevant management for approval. However, in some cases we did not see consistent evidence that firms had properly assessed products in light of commission levels to ensure they provided value.
One firm had assessed their remuneration arrangements in reference to our guidance (FG19/5), considering the difference between the risk price and the end premium paid by the customer, including commission received by other parties in the distribution chain. The firm decided that some of the remuneration arrangements on some of their products were too flexible when allowing intermediaries to set their commission, creating the potential for poor value and customer harm.
- the relationship between risk premium and ultimate price the customer paid; or
- if the distributors were contributing enough benefit to the distribution chain to warrant this level of commission.
Some of these firms asked us during engagement what an acceptable level of commission was. This indicates that they may not understand our expectations of firms to assess the value provided including where remuneration such as commission contributes to the total price being paid by the customer. For example this raises doubts about whether firms have adequate processes in place to assess whether the difference this remuneration makes to the total price to the customer may bear no reasonable relationship to the costs or workload to distribute the product as set out in our guidance and under the enhanced PS21/5 product governance rules applicable from 1 October 2021.
Despite the actions taken by some firms, and our FG19/5 guidance on value and remuneration published in November 2019, we still found examples of products launched before October 2018 with particularly low loss ratios and/or commission levels which bear no reasonable relationship to the cost of the benefits or services provided by the firm. This risked providing poor value to customers.
Some firms were still unsure how to appropriately assess the relationship between commission levels and the benefits being added by the parties in the chain. This can be more complex in longer distribution chains with numerous parties involved, particularly where the role or value added by some of these parties is unclear. Unfortunately, despite some firms identifying products launched before October 2018 providing questionable value to customers, they had not all taken appropriate actions to formally review and mitigate the identified and potentially continuing consumer harms. This does not appear consistent with firms’ existing obligations including to act honestly, fairly and professionally in the best interests of customers. Firms who do not address these issues will fail to meet the enhanced product governance obligations being introduced from 1 October 2021.
Risk of harm arising
These issues may potentially lead to some consumers paying a higher price for products and receiving poor value, where these higher levels of commission are not commensurate with the costs or workload to distribute the product. As set out in our 2021/22 Business Plan we expect firms to deliver fair value by providing products and services of suitable quality and price.
Product benefits and coverage
We identified a few firms that appeared to have created new products or made underwriting, pricing or coverage changes without appropriate regard to customer outcomes.
Some firms used market norms or benchmarked competitors rather than analyse their own product or the risk to their customers, so did not appear to have met our rules and expectations in PROD and FG19/5.
A small intermediary looking to bring a new product to market focussed exclusively on the likely product demand and sales volumes, size of the market, pricing and competitor pricing to assess whether they could develop a product that could compete in the market.
Risk of harm arising
Where a firm’s processes do not sufficiently consider the needs of customers in the target market, or the outcomes that may arise, this could cause harm (including customers not receiving appropriate value from the product or buying an unsuitable product).
As we set out in our 2021/22 Business Plan and in CP21/13: A new Consumer Duty we expect firms to consistently place their customers’ interests at the centre of their business.
Where a firm places unreasonable reliance on benchmarking and product comparison this could degrade a firm’s own assessment of the target market’s objectives and characteristics. This could result in customer harm or wider market failure if firms copy products without making their own appropriate assessments.
6.2. Governance and oversight
The firms in our sample had appointed (or were appointing) Senior Managers at an appropriate level to oversee products. However, while many firms had implemented appropriate governance and oversight of product development and review, including robust and well-evidenced internal challenge, other firms had not.
This lack of robustness was illustrated by factors such as:
- An absence of evidence of challenge or senior input to product decisions. We could not always see evidence that challenge took place even when committees had appropriate scopes and remit.
- Committees were often large in membership but with small minimum quorums and sometimes no mandatory members, this could lead to issues of accountability for decision making.
- Committees that sat outside the core business units often sat too infrequently or matters were brought by the business too late in the process. We therefore saw evidence these committees ratified product actions already implemented by frontline underwriters, rather than being involved at a stage where they could exert greater influence.
- Conversely, lack of focus in frontline business unit committees meant some appeared to put much greater emphasis on increasing production or delivering new distribution opportunities, rather than considering the appropriateness of those products and distribution strategies.
In some cases where there was a co-manufacturing arrangement or the delegation of authority to a third party, the way decisions were taken did not always correspond with the allocation of roles set out in the contractual agreement. Unilateral actions were sometimes taken by one party, without others in the chain with shared responsibility being consulted.
Some firms were still focusing relevant resources on developing new product lines and distribution strategies during the first lockdown, despite having stopped writing new business.
It was clear that several firms had not yet understood their role and duties as manufacturer in a chain, whether co-manufacturer responsibilities applied and whether there should be a co-manufacturer agreement in place in line with PROD 4.2.13/14.
Some intermediaries who were manufacturers (per PROD 4.2) in relation to new products appeared to incorrectly assume that the insurer would be the sole manufacturer because that insurer undertook their own review or due diligence. In other examples we saw intermediaries undertaking all of the product Covid-19 value assessment work and then asking the insurer to confirm their conclusions, without the insurer having engaged with or overseen the process. In some cases, the insurers did not appear to have assessed the knowledge and competence of the other parties in the chain.
Risk of harm arising
Where firms have not implemented appropriate frameworks, product governance may be incomplete or ineffective, creating a risk of harm due to poor quality products or firms selling products to the wrong people.
Lack of clarity and adequate recording of the respective roles and responsibilities between firms where there is more than one manufacturer could result in customers receiving poor value products or products that do not meet their needs.
6.3. Firms’ approach to regulatory change
While all the firms in the review could demonstrate they had considered TR 19/2 General insurance distribution chain, the related Dear CEO letter and our subsequent guidance FG 19/5; this was with varying levels of success.
In our letter to CEOs, we stated:
Some firms were able to demonstrate they had undertaken extensive work in considering and acting on the guidance, with clear oversight and outputs from their work.
These firms could evidence a well-thought-through and thorough approach with good project methodology and a process they have since used to carry out ongoing reviews including in relation to assessing the effects of Covid-19 and subsequent lockdown periods. Some firms engaged skilled external resources to help manage this workload.
Other firms had yet to complete their implementation at the time of our review and several firms attributed delays in their implementation of this work to the pandemic. However, we published TR19/2, our Dear CEO letter and the guidance consultation in April 2019, with the finalised guidance FG19/5 published in November 2019. As a result, firms had plenty of time to put into action regulatory change plans before the pandemic.
Some firms did not prepare implementation or project plans when approaching the guidance.
Risk of harm arising
Firms which had not appropriately prioritised and resourced the work arising from regulatory change were less well prepared and, in some cases, lacked the necessary governance structures and processes for effective product reviews. This resulted in significant skills and resource stretch when these firms were undertaking their product reviews. This can lead to continued consumer harm as firms fail to implement necessary changes and are unable to act effectively to meet our expectations, including that firms consistently place their customers’ interests at the centre of their business and ensure they deliver fair value by providing products and services of suitable quality and price, as set out in our 2021/22 Business Plan.
6.4. Covid-19 product review approach and methodology
Before we published our Covid-19 product value guidance, some firms had already started to review their products. We found all firms in the cohort had completed their reviews by the deadline of 3 December 2020.
Some firms had detailed project plans and structures to ensure a robust and appropriate process was followed when considering our guidance, with some engaging third-party support.
However, some firms had only started their product reviews before our guidance due to unforeseen claims arising from Covid-19, rather than taking a customer-focused approach and assessing whether product value was materially affected by Covid-19. This was evidenced in some cases by rapid changes implemented to exclude elements of cover or remove products from sale without evidence of the firm considering customer outcomes.
Firms that acted proactively had generally carried out more comprehensive and effective reviews than those firms who only responded reactively to the Covid-19 guidance. Firms that had already taken effective steps to consider and implement FG 19/5 were better positioned to undertake effective reviews in line with our expectations.
It was not always clear, however, that firms had established what ‘good’ looked like or what metrics or indicators firm management and staff were expected to use or consider in carrying out their product reviews. Templates that some firms developed to support a consistent approach sometimes appeared to rely primarily on the views of staff responsible for their manufacture or distribution rather than on management information around customer outcomes.
Several firms advised us that appropriately detailed management information was not available at the time of the reviews and that this meant reviews were subjective or would have to be repeated.
It was also not always clear to us from the evidence provided that staff undertaking product reviews had the right level of knowledge and competence for this activity.
Other firms could not demonstrate that all products had been reviewed or considered for review. In some of their reviews, firms grouped products in a way that meant the work was not granular enough to demonstrate that adequate reviews had been done for each product.
We found that the groupings of products, including in relation to the target markets, were often potentially too broad or high level for effective product reviews. This often meant the management information for the products was too highly aggregated.
It was not clear that firms would have been able to identify pockets of harm or cohorts of customers that would have been disproportionately impacted. So, firms did not demonstrate to us there was enough commonality in the products for it to be appropriate for them to be assessed together without creating a risk that harms for individual products were being missed.
In PS21/5 we have included new guidance in PROD 4.2.34E. This outlines when it may be appropriate to group products together for ongoing reviews where this allows firms more efficient use of resources while being able to demonstrate each product is adequately reviewed.
Most firms carried out high-level reviews at an aggregated level to prioritise their Covid-19 product value assessments.
- pre-existing medical conditions
- type of travel (eg ‘self-guided backpacking’, ‘package tour operator’ or ‘cruise’)
- reason for travel
- duration of travel
We also found that packaged products aimed at small and medium enterprises often had very broad target markets. However, it was not always apparent that there was enough similarity between the customers to mean the product was appropriate or represented fair value for all the potential buyers within the cohort.
Risk of harm arising
Firms that do not have a clear understanding of their customers’ needs when establishing target markets for their products will not be able to reliably assess their objectives and characteristics to identify particular cohorts of customers purchasing the product with different needs. This creates the risk that some cohorts of customers may not receive reasonable value from the product or may buy an unsuitable product.
As set out in our new Handbook guidance contained in PS21/5, firms need to ensure that the grouping of any product reviews does not impair the firm’s ability to identify any risk that a product is not delivering fair value or there is any other issue which could give rise to customer harm in relation to each individual product.
7. Next steps
7.1. Actions for us
We are aware that some firms whose products lost material utility or value as a result of the Covid-19 pandemic have already made commitments to refund customers or are still actively considering making refunds. We will continue to monitor their actions and the resulting outcomes for consumers and will intervene if we see harm arising from firms’ decisions.
We are likely to do further work on fair value to assess the extent to which firms are complying with relevant rules, including product governance rules, and meeting our expectations, as set out in PS21/5. We have already intervened in some cases to ensure firms take action to amend products and improve the value they deliver to customers, including through reductions in remuneration and the provision of additional cover or benefits.
The applicable product governance regime under PROD 4 including the new rules arising from PS21/5, and the SM&CR, will help us to take a more interventionist approach in future. Where we see firms and individuals failing to meet their regulatory obligations, we will act using the full range of regulatory tools available to us. These actions can include requiring firms to remove products from sale while they work to amend them to ensure they provide suitable quality at a fair price.
As well as publishing this review, we will be communicating our findings and expectations directly to firms using a letter addressed to firms. We will also feed back our findings to individual firms included within the review as appropriate and will consider the need for additional interventions.
7.2. Actions for firms
- Firms who are still considering whether and how to return value to customers following their Covid-19 product value reviews should conclude this process and take appropriate action as soon as possible. As set out above we will continue to monitor their actions in this regard.
- All general insurance and pure protection firms, both insurers and intermediaries, must implement the new product governance rules contained in PS21/5 by 1 October 2021.
- We expect all insurance firms to act immediately to ensure they address any remaining gaps or shortcomings in their product governance frameworks and can meet all obligations under the enhanced rules from 1 October 2021.
The new rules contained in PS21/5 build on and enhance product governance obligations for both product manufacturers and distributors including expectations in our previous guidance. So, we believe firms that have effectively implemented our rules and guidance in PROD 4 and FG19/5 and considered our distribution chains thematic review, will be better placed to implement our new product governance rules.
Firms who had yet to implement FG19/5 fully may be subject to regulatory action where breaches or harm have arisen and are likely to find it more challenging to effectively implement our new product governance rules by the required deadline.
Firms must meet this deadline so they can consistently deliver fair value by providing products and services of suitable quality and price, as set out in our 2021/22 Business Plan. We will intervene using the full range of our regulatory tools, including requiring firms to remove products from sale where necessary, if firms do not fully meet our enhanced product governance rules.