Following a short consultation period, FCA has now published (with a few clarifications following responses to the consultation) its finalised rules and guidance for insurers and insurance intermediaries to consider the value of their products in light of Covid-19. The guidance apples to all firms that carry on regulated activities in relation to general insurance and protection policies, but particularly to product manufacturers.
FCA says the guidance is intended to highlight what it considers firms should be doing now to identify any material issues from Covid-19 that affect the value of their products, and their ability to deliver good customer outcomes, during the current crisis – although all the basic principles apply at all times. When considering product issues, FCA reminds firms of their obligations under:
- PROD and
- ICOBS, in particular ICOBS 2.5.-1R.
FCA also reminds all insurance and premium finance firms to also consider its related guidance on dealing with consumers with temporary financial difficulties resulting from Covid-19.
The guidance is relevant to all insurance products for both retail and commercial customers, but does not cover re-insurance products.
What is product value?
Product value refers to what the customer is paying for and the quality of the product or service it is intended they receive. Customers should expect value from the products they buy, and FCA is pleased to note many manufacturers have already taken action where they have noted, for example, that they have not been able to deliver benefits due because of the effects of Covid-19.
What does FCA exepct?
FCA expects firms which are manufacturers and/or product providers to consider whether and how Covid-19 may have materially affected the value being delivered to customers of their insurance products.
Its expectation that firms should prioritise a product level assessment is restricted to cases where:
- firms or the product itself cannot deliver a benefit. For example, where fulfilling claims involves service providers whose movements are restricted because of lockdown (e.g. boiler servicing), or some medical covers where customers cannot access certain benefits.
- there has been a reduction in the risk of an underlying insured event happening so that the product now provides little or no utility to consumers.
FCA welcomes firms going further than this, although this is not required.
The regulator is clear that firms should already, in meeting their existing obligations, regularly review the insurance products they offer, taking into account any event that could materially affect the potential risk to the identified target market. Product manufacturers should be considering whether a product remains compatible with the needs, objectives, interests and characteristics of the target market.
That said, the guidance does not create an expectation that firms should reassess the value of policies at a policy level because of Covid-19 where claims are still generally possible but the likelihood of a claim may have changed, such as reduced car usage. But where there are circumstances where the factors above may have led to a material change in the value of a product for customers in temporary financial difficulties related to Covid-19, FCA expects firms to consider the value of the product where customers contact them, or where firms contact customers, regarding missed payments.
Where firms identify something that could materially affect the value of the product they should consider the appropriate action to take. This could include delivering benefits in a different way, the provision of alternative, comparable benefits, reducing premiums for the duration of the change in value, or partial refunds of premiums already paid.
FCA expects firms to consider how they can best address any changes in circumstances. It considers that firms themselves are best placed to identify what precise steps to take and is not mandating specific actions. FCA does however expect firms to be able to show how they have met their obligations at a product level and treated their customers fairly.
As part of this, FCA says firms may need to consider what the appropriate action will be where Covid-19 may have different impacts on segments of their customers at different stages of the product life cycle. However, the guidance is not intended to oblige firms to assess the value of their products at an individual customer level. For example, firms may wish to consider all customers who have not had a boiler service due under an insurance policy and are near to renewal, but FCA does not expect this review to take into account the individual circumstance of each customer.
FCA says that where firms are providing refunds or partial refunds to customers at a product level as a result of the impact of Covid-19 which do not involve changes to the actual policy, it is unlikely that they would need to treat this as a mid-term adjustment for the purposes of its renewal disclosure rules under ICOBS 6.5 or any other ICOBS rules around mid-term adjustments.
In line with their existing obligations in FCA’s Handbook, FCA also expects firms to communicate clearly with customers where they have identified an issue that may adversely affect the customer, and any actions they are taking to address this.
What are the next steps?
The guidance takes effect from 3 June 2020. FCA proposes that firms should complete their review of product lines and decide on any resulting action(s) by no later than 3 December 2020. FCA feels this should give firms the time they need to assess the overall impact of the virus.
Firms can also assess the longer term impacts of Covid-19 on their insurance products on an ongoing basis beyond this 6-month period.
FCA says it will review the guidance in the next 6 months in the light of developments regarding the pandemic and may revise the guidance if appropriate.