Understandably there has been significant focus on how this will affect the underwriting and distribution processes but much less focus on what are the implications for insurers and distributors when considering how they deal with customer claims- which is of course in reality where it really matters for policyholders.
The Consumer Duty- an overview
The summary below sets-out where the insurance industry should be in implementing the new Duty rules:
- By the end of October 2022 firms’ boards or management bodies should have agreed their plans for implementing the Duty
- By the end of April 2023, manufacturers should have completed all reviews necessary to meet the outcome rules and shared necessary information with their distributors
- The Duty comes into force on 31 July 2023 for new and existing products or services that are open to sale or renewal
- On 31 July 2024 the Duty comes into force for closed products or services
The FCA has also stressed that whilst their work pre-dated the cost-of-living crisis it is has become even more important given the pressure on household finances.
One important point to remember is the wide scope of the requirements. The Duty applies to products and services offered to retail customers, and to all firms who determine or have a material influence over customer outcomes - not just those with a direct customer relationship.
For the purposes of the Duty, retail customers include some commercial customers. This means that, for firms subject to the Insurance Conduct of Business Sourcebook (ICOBS), the scope of the Duty follows the position in this sourcebook. The Duty does not apply to reinsurance, contracts of large risk sold to commercial customers or other contracts of large risk where the risk is located outside the UK. Nor does it apply to activities connected to the distribution of group insurance policies or the extension of these policies to new members.
So what does this new Duty require of firms in the insurance sector? The key element is that the Duty requires firms to act to deliver good outcomes for retail customers. Firms must act in good faith towards customers, avoid causing them foreseeable harm, and enable and support them to pursue their financial objectives. Firms should consider the diverse needs of their customers – including those with characteristics of vulnerability.
It also introduces new rules and guidance which include the following to ensure that:
- Products and services are designed to meet the needs, characteristics and objectives of a specified target market
- Consumer understanding: Firms communicate in a way that supports consumer understanding and equips consumers to make effective, timely and properly informed decisions
- Consumer support: Firms provide support that meets consumers’ needs throughout the life of the product or service
What the Duty means for the handling of claims
Firms must provide support that meets the needs of consumers, throughout the life of the product or service. The FCA has stressed that it should be at least as easy to make a claim as it is to buy the product or service in the first place.
The consumer support outcome requires firms to ensure their customers are adequately supported – at every stage of the lifecycle of the product or service – whether the customer makes an enquiry, claim or complaint. Firms should also ensure they have processes in place to avoid causing foreseeable harm.
During the claims life-cycle the following are areas where insurers and/or distributors may cause harm to policyholders:
- consistently poor or excessively slow service
- under-resourced customer helplines, for example where firms disproportionately focus on pre-sales, over after-sales, claims support
- phone systems, menus or webchats that are difficult to navigate
- badly designed websites that make it difficult for customers to find key claims-related information online
- uncertainty around how or where to access support, or poor hand-off processes, including where third parties are involved in its provision.
Given that distribution and claims handling processes very often involve customers dealing with multiple parties in a chain there is clear scope for things to go awry.
And the FCA has given some specific examples of what it considers to be poor claims handling practice- for example it identified a particular insurance firm with a complex claims process which deterred many customers from pursuing claims. This process included a requirement for customers to provide hard copies of all evidence.
A firm may have legitimate claims handling requirements, such as a need to give notice when the loss event occurs, or to provide adequate evidence of the loss. But the FCA considered that the means of making a claim should be easy to find and the firm should not impose unreasonably restrictive, rigid or arbitrary administrative requirements on customers that create barriers to them making a claim.
If you have any questions of how the duty to notify affects your business, or any other Consumer Duty query, please contact the author.