The Future of Commercial Insurance Regulation

Recently, the FCA asked for comments on Discussion Paper D24/1[1] on the future regulation of commercial and bespoke insurance business.  Its goals are to i) ensure that commercial customers are appropriately protected in the wake of its updates to PROD and introduction of the Consumer Duty, whilst ii) facilitating the international competitiveness of the UK’s economy as set out in its business plan.  Any changes they decide to make will be subject to consultation.

Redefining Large Risks

Currently, commercial customers attract more than one set of protections.  The FCA recognises gaps exist between its definitions of businesses, chiefly its PROD 4 definition of large risks and the eligibility threshold for Financial Ombudsman (FOS) access under DISP:

To harmonise its treatment of different commercial customers, the FCA is considering three options: 

1.        Replacing definition of large risk with the FOS threshold.  This would both reduce the threshold at which businesses became large risks as opposed to SMEs, and remove product-specific distinctions such as for medical insurance.  In theory, this would enable the insurance industry to simplify its processes whilst affecting just 1% of SMEs who currently have access to the FOS. 

2.         Remove product-related distinctions only.  A more conservative option aimed at the 2.8m policies impacted by the product-specific rules.

3.        Introduce a fresh definition of large risks.  Although possible, the FCA is concerned that any new definition might be inconsistent with other existing definitions.

Co-Manufacturers

The FCA has historically expressed doubt about the efficacy of co-manufacturers co-operation, and the question of who is responsible for what in the co-manufacture of insurance products is one that the industry often struggles to define.  Even when it does so successfully, duplications of effort (particularly in respect to syndicated risks and situations where distributors have a role in product development such as binders/delegated authority arrangements and lineslips) can still result.  The FCA proposes to make things simpler by:

1.        Making the lead insurer responsible for PROD 4.2 compliance.  This carries implications for intermediary-insurer structures. 

2.        Letting Co-Manufacturers determine their own responsibility.  This carries the same implications.  In our opinion, it would also leave the status quo unchanged.

3.        Introducing additional guidance for co-manufacturers.  While the success of any guidance clearly will depend on its quality, the FCA has yet to release details of what guidance it may be considering.

Bespoke Risks

Although PROD 1.4.4 excludes intermediaries’ co-manufacturing activity with respect to bespoke risks[2], many intermediaries fail to utilise the exclusions.  The FCA believes this arises from misunderstanding, and is considering options to expand the exclusion’s effect: 

1.         Extending the exclusion to insurers as well as intermediaries to reduce the burden of compliance.

2.        Defining bespoke contracts more closely.  Insurance contracts created at a single customer’s request, with no target market beyond a single customer, contracts designed to meet the unique needs of a single customer, or which are uniquely priced are more likely to be bespoke.  The FCA considers a definition would make this clearer. 

Conclusion

While DA Strategy welcomes the efforts of the FCA to adapt product governance rules designed for consumer and SME mass markets to commercial customers, we also believe there is a common-sense balance between tailoring existing regulation to firm’s needs and simply adding to what’s already there.  Either way, we are here to help with any questions this discussion paper raises for you or your business. 

The FCA invites firm responses by 16 September here: Qualtrics Survey | Qualtrics Experience Management ( fca.org.uk )

[1] Available here: DP24/1: Regulation of commercial and bespoke insurance business ( fca.org.uk )

[2] PROD 1.4.4R – the tailor-made exclusion