Duty calls: why Insurers need to start preparing now for the new Consumer Duty

Despite the volume of regulatory change in the insurance market over the past decade, the Financial Conduct Authority (FCA) continues to report concerns related to customer harm. In their opinion, many firms have adopted a reactive stance in identifying and resolving poor customer outcomes.

The new Consumer Duty emphasises the expectation that harm will need to be prevented, through robust end-to-end enhanced design and testing. From our interactions across the market, many are still struggling to understand the significance and breadth of change required, due to the lack of final rules. In this post, I’ll outline the key impacts of the new principle on insurers, the pressure points clients have experienced so far and the steps firms can start taking now.

The FCA has specified that it won’t be acceptable to measure customer outcomes based solely on regulatory requirements. Instead, firms will be required to define measures that demonstrate what the achievement of ‘good outcomes’ looks like for them. These will then need to be tested, likely on an annual basis. Any failings to reach these targets will need immediate action to rectify.

This is a transformative change and time is of the essence. There’s still a window of opportunity to embrace the shift in regulatory focus, and make sure that the customer is at the heart of every decision. However, that window is getting narrower with the new rules coming into force on 31 July 2022 and implementation expected by 30 April 2023. This short timeframe means the new duty requires an urgent and strategic step change for most firms.

To start with, I want to highlight three key impacts on firms:

A shift in mindset

The changes need to go beyond policies, procedures and traditional affirmations of treating customers fairly, and instead pave the way towards an entirely customer centric market founded on transparency, value and personal responsibility. The regulator is expecting firms to put the customer at the heart of their business, and the same applies for end customers who may be buying products through a third party.

In my view, this can only be achieved through designing ‘in’ test parameters and testing ‘out’ product values. This includes the target market, cost of sale, product performance, cost of borrowing, cost of service and claims performance, across all impacted distribution channels. The regulator is expecting the consumer principle to be embedded throughout the product lifecycle, including pre-inception testing. Whilst not retrospective, firms will intuitively need to consider how they approach closed and niche back book customers going forwards, particularly where needs may change over the lifespan of a product.

Increased evidential burden

The duty increases the evidential burden, which will require firms to prove they are delivering ‘good outcomes’ for customers. The product governance rules go beyond individual products and services in isolation, requiring firms to consider the whole proposition regardless of role - as manufacturer, co-manufacturer or distributor. This will have a significant impact on insurers, given market practices over the last few decades have led to complex and lengthy distribution chains, increased proposition build costs and extensive leverage of outsourced capability.

Board visibility and outcome reporting

Firms need to be ready to inform the board that they are compliant with the four Consumer Duty outcomes:

1.      Products and services

2.      Price and value

3.      Consumer understanding

4.      Consumer support

It’s highly likely that some form of board attestation will be required by the FCA in the long-term, as the market has witnessed in recent regulatory policy changes. Firms will be expected to advance towards a qualitative and quantitative assessment of outcomes, whereby the customer journey is tested throughout the lifecycle and evaluated against board agreed tolerance levels. For any operations or products outside of appetite, board oversight will be critical to ensuring remedial action and that root cause insight is considered in the approach taken, to return outcomes to an acceptable level of risk.

Feedback from insurers shows a stop-start, but the journey has just begun

From what we’re hearing in the market, the industry unanimously agrees that the last two years have been exceptionally busy with the pace and complexity of regulatory change. Many firms are acknowledging that the Consumer Duty is a market changing initiative, but the overall feedback is that progress to date, has been high-level in nature.

In our view, given the breadth and depth of this regulation, delaying or underestimating the effort required could have significant negative consequences - leaving firms under prepared and exposed.

Firms are currently telling us that they share several common challenges:

1.      The understanding and expectation of the duty is at best a challenge and at worst misunderstood: Having tackled multiple regulatory change initiatives over the last three years, the assumption maybe that there is little left to do. Yet the duty carries a much wider scope than more recent policy changes.

2.      The lack of firm guidance has paused action or risks setting firms off down the wrong path: Without the final rules, some firms are either delaying changes or making initial changes without clear regulatory direction, such as when deciding retail versus commercial customer segments and the definition of ‘good’ versus ‘fair’ outcomes, including foreseeable harm.

3.      Being behind the curve means some insurers are having to move at pace without real strategic thinking and transformational design: Limited visibility and understanding of each customer journey and the supplier business model, means potentially poor customer practices are unknown or unidentified.

4.      Regulation and change fatigue has set in in some areas: Relentless pressure for change weighs heavily on a small, but growing number of individuals within a firm. Also, distribution of responsibilities takes time and cultural adjustment.

A roadmap for successful implementation

There are several steps that firms can take to ensure they build solid foundations, for when the policy statement is published in July 2022. This will provide a roadmap for a well-defined and considered programme of change, that’s designed around the firm and relative to its culture, market position, portfolio profile and risk appetite. These include:

1.      An open discussion and agreement around the requirements of Consumer Duty and gravity of change required: Ensuring the board, and those operating under the Senior Managers and Certification Regime (SM&CR) are aligned in their understanding of the requirements and the gravity of change required.

2.      Defining and agreeing terms internally that may appear ambiguous within the consultation: Including a firm wide definition of non-retail customers, sense checking downstream impacts where customers straddle retail and non-retail categories, considering target market statements and readily available data points to help define customer status.

3.      Performing an initial impact assessment to understand the likely effort required to reach a compliant state: This will be unique for each firm, depending on the strategy, size and complexity of the business. Subsequentially, to identify and ring-fence resource and investment based on priorities.

4.      Performing a risk assessment of the products and distribution channels with highest risk of foreseeable harm: This will allow firms to prioritise programme workstream activity and consider various dependencies that could impact successful and timebound delivery. From our experience, this includes complexity, IT dependencies, internal and external change scheduled, contractual obligations, negotiations, resource implications and peak demand periods.

Transformative change is still possible

Without doubt, there’s a significant amount of work for firms to prepare and implement the changed required by the new duty. While the final rules are yet to be published, this cannot be a reason for delay, as time will simply run out for implementation.

The concept behind the new duty requires firms to put themselves in their customer’s shoes, which will be a test to the industry’s commitment to being authentically customer-centric. Those insurers who fall short of the new duty, may face serious reputational damage and regulatory sanctions.

With only 13 months until implementation, insurers need to rise to the challenge now, as the regulator seeks a transformative change in approach. The risks of failing are high, but I’m optimistic, given that our industry has spent the last few years reinforcing its commitment to customers. While the implementation of the new rules clearly brings challenges, the duty provides an opportunity for insurers to demonstrate how customer centric they truly are.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.