Board Members and Senior Executives of insurers, brokers and MGAs who are manufacturing, co-manufacturing or distributing general insurance (GI), pure protection products and premium finance.
The FCA published its policy statement PS21/5 in May 2021 which set out its final Product Governance rules that came into effect on 1 October 2021. The Product Governance rules extend existing requirements, as well as introducing new rules such as requiring firms to complete detailed reviews by 30 September 2022 to make sure that products provide fair value to customers. The rules apply to non-investment insurance contracts, including general insurance (GI) and pure protection insurance, not just to home and motor insurance like some of the other aspects of the FCA’s pricing remedies. These rules support other work being undertaken by the FCA to enhance fair value to customers, including its more recent consultation on a new Consumer Duty and guidance for firms on the fair treatment of vulnerable customers.
The rules have been in force now for a little while (and regulatory expectation was confirmed in May 2021), however, in our experience, there are insurers and brokers that are still grappling with fundamental challenges. This regulation requires extensive interaction, data sharing and agreement between insurers and brokers/MGAs across each of their products. While many firms have a tactical solution they are confident meets the rules, not all have a sustainable and scalable solution that will, for example, efficiently and effectively complete all required reviews by the 2022 deadline. And given these framework and operational challenges, it can be easy to forget that evidencing how value and outcomes have been enhanced for customers will be a key test.
How comfortable are you that you have a sustainable and scalable solution to these Product Governance requirements? We set out below examples of challenges being faced across the insurance value chain, from insurers to brokers and MGAs:
- What is a product? This is important, as activity is often at a product level. So, more products typically equals more reviews. Firms are compiling a list of their products, but what is the right level of detail? Every wording being a different product feels too low level, but what is the right level? What is the right number of products? Insurers, brokers and MGAs are now discussing each of these products to agree on the definitions of the products they underwrite and distribute.
- Grouping of these products can then increase effectiveness and efficiency of reviews but there is guidance from the FCA around what products should and shouldn’t be grouped. Again, fewer groups will mean fewer reviews, but grouping at too high a level can mean missing important differences within the grouped products and not effectively reviewing products to improve value and outcomes for customers.
- Some firms remain uncertain as to whether they are a co-manufacturer and what this means in terms of their role in assessing fair value. Discussions are ongoing between insurers, brokers and MGAs to agree on this including whether one co-manufacturer may be taking a leading role in the review. We are seeing examples where brokers are the co-manufacturer taking the leading role in value reviews and brokers also have their own reviews to do where they are a distributor.
- We have also seen firms struggle to determine what fair value means and therefore face challenges over what data they expect to receive or provide, as well as how to review it to determine that the product delivers fair value. It is important to show how value has been enhanced for customers.
- Firms are expecting a vast amount of data to be shared between insurers, brokers and MGAs. We have seen firms assessing how they will manage this data in the most efficient and automated way.
- How many people do you need to do these reviews? And how does technology impact the number of people you may need? Firms are looking at their operating model and whether they have the right people and technology to actively engage with the market and do the required work.
- Some firms that offer premium finance as an add-on to a core product where they are not the manufacturer are struggling to work out how best to consider premium finance in conjunction with the fair value assessment completed by the core product manufacturer.
- Firms are attempting to work out the most efficient way to integrate their Product Governance work with their Delegated Authority frameworks, so that product oversight and distributor oversight work together, rather than duplicating work.
Sustainable and scalable solutions
We set out three examples of important considerations:
- Product simplification
Firms often believe they have too many products and as a result, have found it challenging to control what is in their wordings. Product simplification is often working hand in hand with this Product Governance work and from our work on the Future of Insurance, we believe this is what customers want too.
- Setting an appetite for fair value
Defining what fair value means to the firm by using clearly defined metrics and thresholds that allow for a consistent, and potentially automated, approach to the fair value assessment process.
- Adoption of technology
It is widely recognised that spreadsheet and manual solutions are not sustainable. Technology solutions are being used to automate these Product Governance frameworks including Deloitte’s OneView: Product Governance solution. OneView is being used by firms to catalogue their products including the complex hierarchies between products; triage and automate the risk-based oversight of products based on risk profile and product role; schedule, workflow and automate reviews; transfer data between insurers and brokers; and produce meaningful MI.
There remains a lot of work to do for firms, especially with the 1/1 renewals to navigate within the first few months of this regulation. However, there are risk-based, practical and technology-enabled approaches that can help firms, and support enhancing outcomes for customers. In the meantime, there is going to be a lot of communication and data being shared up and down the insurance value chain over the coming months and years. And firms must remember, the outcome of this topic is to enhance value and outcomes for customers, which is an outcome that can be forgotten given the significant operational challenges involved in this topic.