The growth of UK insurance
It’s a pleasure to be here today and I’m grateful for the opportunity to thank BIBA for its positive engagement with the FCA over the last few months. I know our team has enormously appreciated the contribution of Steve and his team, as well as Eric before him, on some of the big issues we’ve been tackling in areas like client assets, IMD2 and conflicts of interest.
I am also personally grateful to BIBA and its members for attaching such prominence in your 2013 manifesto to the experience of customers.
This focus on policy holders, this focus on client interests and delivery, is a point I particularly want to look at today because it’s a strength of UK insurance that goes back a long way. A strength that helps us understand how and why the market has achieved such dominance over the years.
It is important to recognise that there was never anything inevitable or predestined about the rise of our insurance market. It was not a given that ship-owners striking deals in London’s 17th century coffee houses would pave the way to an industry now worth more than £187bn a year.
That success had to be earned. It had to be cultivated by delivering for clients. It was not self-executing. The unbroken – unrivalled – tradition of honouring payment obligations in global markets. The UK’s exceptional ability to price and write almost any risk: from annual travel insurance policies to the construction of the new World Trade Centre.
The fact that the UK insurance industry has performed to these high standards, and performed to them so consistently, tells us all we need to know about why it is now the largest general insurance market in Europe and third largest in the world. It also helps us explain why our brokers are chosen to act as intermediaries on more than half of all insurance deals struck in the domestic market.
My own ambition is simple. I want regulation to support this success. I want the FCA to act not just in the interests of your clients – the man in the street or the FTSE 100 firm – but in the interests of BIBA and its members.
I want to ensure the UK insurance market works well. That you can make profits – and that you can make those profits in the right way. That is, by delivering valued services to customers.
This is our growth challenge and it is one of the reasons why the FCA has been given the explicit objective by Government of making markets work well. Not just for general insurance, not just for those buying your services, but for firms and consumers across the wider financial sector as well. For all the markets in this country that create jobs and wealth.
Smarter regulation
But this challenge requires us to change. It requires a new approach to regulation.
Too much regulatory activity in the past – not just here, not just in the UK, but around the world – has been steeped in the economics of the 18th century. That competition will always deliver good outcomes. That prices respond efficiently, or at least respond, to new information. That customers make rational decisions – particularly the most financially-savvy customers or clients.
Where markets and consumers didn’t neatly fall into these economic models, the stock response was always to provide more information.
So if someone didn’t appreciate the risk of a product, we extended the description and asked them to tick a box to say that: ‘Yes – I do understand this product. I understand this is my decision and my decision alone. I understand this was a non-advised sale.’
We now know this approach was flawed. It was limited. Overly reliant on the mechanics of compliance – areas like disclosure – without really considering whether this achieved a good outcome for consumers.
The fact is most of us don’t read the terms and conditions. We’re not painstakingly careful assessors of products. We can be quoted a low insurance premium and pay for it, without thinking too hard about the relative merits of choosing between cheap policy A and more expensive policy B, or the charges we might incur further down the line.
Equally, we can follow poor advice for the most human of reasons. Perhaps because we think a broker looks well dressed. Perhaps because we see a certificate on the office wall behind our financial adviser – it might only be a scuba diving certificate but it looks official so we’re comforted.
These are the kind of issues we’re dealing with. Broad-brush issues over trust; poor quality of advice; information asymmetries and misaligned incentives.
Regulation supporting consumers and firms
So as we step forward, the FCA will look to have a foot in both camps. It will work on behalf of both your consumers and your market. It will be more forward looking. It will be at least as focused on culture as controls. And it will be more willing to take early action to prevent loss.
That doesn’t mean the new system will always succeed in identifying every risk. It’s important to be honest about that. No regulatory regime can prevent and predict the detail of every financial crisis. It would be wrong to pretend otherwise.
But we can, and we should, look to step in earlier where risk is crystallised to help us fend off costly and damaging scandal further downstream. And that means the FCA will be more interested in general areas like behavioural economics, product design and industry trends. It will be more market and consumer-focused. Acting on behalf of both your industry and your clients.
In other words, this is not a question of ‘either – or’. Regulation is not ‘either’ in the interests of consumers – ‘or’ in the interests of business. Good regulation is in all our interests.
It should support all participants. It should support all market players. Promoting competition. Reducing the risk of systemic failure. Reducing costly litigation. Reducing consumer loss.
At its best, at its most effective, regulation should be win-win.
So, yes, we will look more closely at how your firms interact with their customers. We may step in – not always but it is there as a possibility – to ban or amend products if they present a risk to retail and wholesale markets.
But we will also work much more closely with you. And, I hope, positively and transparently with BIBA on big ticket issues like conflicts of interest, client assets, regulatory fees – which Steve is right to raise – as well as key areas like disclosure and cost.
How, for example, do we make sure all customers are treated fairly at the point of sale on insurance products? How do we help them make sense of the terms and conditions on a policy that might cover shark diving as standard but won’t provide cover for a game of cricket? All within a document that could, at its longest, take more time to read than a Shakespeare play.
And how do we encourage customers to think not just about the upfront price of policy, but about the differences between policies and charges after sale? Particularly when we know some firms – not all but some – are increasingly reliant on low-cost, high-margin add-on or optional insurance products to generate income and differentiate policies.
These are questions we all – and I do mean all – need to confront. And I am grateful to Andy, to Steve, to BIBA and its members for the work they’re already doing on areas like fair disclosure, as well as its work on the cost of motor insurance, flood and regulation.
It is important to recognise that the risks posed by general insurance brokers are different to other parts of the financial service sector. Not absent but different. It is also important to recognise that healthy broker markets, at their best, are one of our most important safeguards against consumer detriment and market failure.
We are happy for firms and aggregators to help customers find suitable products. We want intermediaries to give clients those answers to questions they didn’t even know needed answering. We want brokers to provide the means by which we can promote effective competition.
Launch of thematic review on claims
But there is also a specific responsibility here on the shoulders of the FCA. A responsibility to protect your market. To make sure it operates effectively and in the interests of firms and customers alike.
So, we will be that more forward-looking regulator. We will look at issues across the piece and play a more investigative role in the insurance markets.
What, if any, are the smoke signals that need interpreting? Does our analysis, data and evidence hint at a fundamental problem? Or is the market operating efficiently?
One of the areas I’m particularly keen to get right is personal lines claims.
We know complaints about insurance products are on the rise. We know these complaints are more likely to be upheld in favour of the customer than ever before. And, significantly, we know the large majority of these complaints – 64% according to Which? – are directly related to claims.
I think it is right to dig deeper into figures like these. I think it is right to address public concerns that imply policy holders might be facing delays; poor customer service; or having perfectly valid claims unfairly declined.
Very often, we are talking about enormously stressful periods in people’s lives. Touchstone moments. Someone taken seriously ill on a family holiday; a house burgled; a property flooded.
It would be very difficult, if not impossible, to defend any company if it was found to be aggravating these experiences by dragging its heels - or trying to wriggle out of its responsibility to pay legitimate claims. We buy insurance for peace of mind. Not for a painful scrimmage with insurers.
We need to quickly determine – for the sake of both the insurance industry as well as its customers – whether there is case to answer and that’s why we’re today launching a strategic review into the claims process.
The review will look at themes across the general insurance market but with a particular focus on household and travel claims. We will conduct it in partnership with firms, as well as consumers. And I want my team to obtain evidence directly from claimants on how they have been treated.
Does their experience vary according to whether they bought insurance directly, through a broker or through an affinity scheme? How good are insurers in explaining up front what will happen when a customer makes a claim? How well do they then keep them informed of progress?
On top of this, are payments being made in a fair and consistent way when they are due? Are companies acting ethically towards their customers? Is the claims department as well resourced as the sales team?
These are questions that industry and regulators need to confront. If we want to address concerns over the fair treatment of customers, our analysis must be clear-sighted.
In the long run, the review might mean we revisit our rules. But what I’m asking today, and what I’d prefer, is for firms to revisit their culture. Is your claims’ culture fit for purpose in the modern world?
During this process, I will look to BIBA and its members to take a leading role. What are your observations and insights? Is there any concern that your position is being undermined by firms not paying legitimate claims, or not paying them quickly enough? How widespread, if at all, does that concern run?
I want your firms to be ready to answer these questions. And I want us to make 100% sure that our review can, if needed, prevent any future, more costly problems arising.
I will expect my team to deliver its findings, and final recommendations, by the last quarter of the year.
Conclusion
Now, I mentioned at the start of my speech that the general insurance industry has been characterised over the years by its attention to customer service. I want to end by repeating and reinforcing that point.
Very few markets in the financial sector have emerged with their reputation intact following the financial crisis. Firms, governments and regulators around the world have been swept along by conduct crisis after conduct crisis.
Our insurance markets, however, remain strong. It is my job, it is the FCA’s job, to make sure that is the case for many years to come.
That is an enormous responsibility. But it is also a great privilege and I want to ensure that this journey we’re on is a true partnership.
So, my thanks again to BIBA for your support and engagement with the FCA.
My thanks to Steve as well. And my thanks, of course, to everyone here for playing your part in keeping the UK insurance industry ahead of the rest.