The recent FCA thematic review 15/7 focused on general insurance firms’ oversight of outsourcing and other delegated authority arrangements.
It focussed on the potential impact any shortcomings could have upon the delivery of products and related services to customers.
The FCA found numerous shortcomings, including insufficient oversight, a lack of understanding of the responsibility of product providers and insufficient focus on product performance
The FCA set out its expectations for general insurance firms, including the requirements to mitigate conduct risk, ensure proper surveillance, delineate “product provider” responsibilities and assess the appropriateness of distribution arrangements.
This briefing sets out a number of questions which general insurance firms should be asking where they put in place outsourcing or other arrangements.
To fulfil their regulatory obligations, insurers and intermediaries need to have robust systems and controls in place to ensure they have adequate oversight of delegated authority and outsourcing arrangements with a clear focus on ensuring good customer outcomes.
The Financial Conduct Authority (FCA) thematic review 15/7 focused on general insurance (GI) firms’ oversight of outsourced arrangements and the potential impact any shortcomings could have upon the delivery of products and related services to customers. The FCA raised concerns that profitability pressures, together with an increased risk appetite is driving GI firms to venture into new arrangements, could lead to poor customer outcomes.
What is meant by 'delegated authority'?
Delegated authority is widely used in the UK GI market. This includes the outsourcing of underwriting and claims handling to third parties and the allocation of other functions such as product design.
The FCA’s findings
The FCA reviewed the outsourcing arrangements of 12 insurers representing a broad range of firms operating in the UK GI market and activities of 19 firms that held underwriting and/or claims handling authority from those insurers.
The FCA’s findings included the following:
- Insurers do not always treat delegated arrangements as outsourcing and improvements are needed to due diligence and the way they manage such arrangements.
- In many cases, insufficient focus and consideration has been given to how the interests of customers might be impacted by outsourcing.
- Some intermediaries undertaking product design activities do not recognise the extent of their responsibilities as product providers.
- In many cases, there is insufficient oversight of the performance of products and delivery of services.
The FCA’s expectations
The FCA indicated that it would expect GI firms to be able to demonstrate that:
- in outsourcing to third parties, GI firms have effective and risk-based controls in place that appropriately mitigate any associated conduct risks.
- there is appropriate monitoring and management information is provided to identify instances where customers may not be treated fairly (most notably in claims outcomes), and that this information is reviewed appropriately, shared as necessary and acted upon.
- where they act as 'product providers', they appropriately identify this and, where circumstances and responsibilities allow, allocate responsibilities for: (a) product design and (b) the ongoing monitoring of the performance of the product for customers.
- where they act as 'product providers', they assess the appropriateness of the distribution channel and sales activities, and to exercise appropriate ongoing oversight.
The FCA have noted that a significant number of firms are unable to demonstrate how they made the above judgements and this is particularly concerning due to the potential impact of such failings.
Responding to the FCA’s concerns
How would your firm respond to the following questions?
- Why have you chosen the outsourced service provider?
- Does the outsourced service provider have the necessary capabilities to deliver the level of service that your customers would reasonably expect?
- Do your delegation and/or outsourcing arrangements make clear who is responsible for designing a product?
- Do your delegation and/or outsourcing arrangements make the product design responsibilities clear?
- Do the lie as a result, and have they adequately considered how the product performs for customers and how it delivers fair customer outcomes?
- Are there robust monitoring arrangements in pace, including arrangements for providing sufficiently detailed management information, to assess the effective delivery of fair customer outcomes?
- Is it clear that the results of any monitoring undertaken under the arrangements above are reviewed, understood, shared with all relevant stakeholders and acted upon?
- Do you know who is selling/distributing your product?
- What measures do you have in place for the effective oversight of product distribution?
- Are the measures sufficiently effective to identify promptly any issues which are likely to be detrimental to customers?