Guidance on Insurance Distribution
The FCA is taking further steps in its work stream on general insurance distribution with the publication of its Finalised Guidance (FG19/5) “The GI Distribution Chain: Guidance for insurance product manufacturers and distributors” . This builds on the Thematic Review on the General Insurance Distribution Chain published in the spring of this year (Thematic Review 19/2). Both these papers contribute to the development of a theme, which is the FCA’s concerns over product value in the general insurance market. In this context of these papers, the FCA places greater scrutiny on how distribution arrangements affect product value.
The FCA notes that the conclusions of the Thematic Review were that:-
- There is potential for harm for consumers arising from product development and distribution channels;
- Pricing was often higher than it should be- with a particular focus on high commissions sometimes charged;
- Product manufacturers were allowing the distributor to control product design without proper oversight;
- Insufficient consideration was being given to harm to the consumer.
The Guidance is intended to provide further clarity on the expectations for firms in general insurance distribution and hopefully address some of the weaknesses outlined in the Thematic Review.
Guidance on Insurance Distribution
The FCA focuses separately on the two main participants in the sector, namely manufacturers and distributors. The first comments concern the responsibilities of insurance product manufacturers.
The FCA’s expects manufacturers to consider the following factors when designing an insurance product, namely:-
- That they have put in place a robust product approval process;
- The value a product presents to its intended customers;
- Whether the product is compatible with the objectives, interests and characteristics of customers in the target market;
- Whether they have established a distribution strategy that meets the needs of the target market.
When considering the value to the consumer, the product manufacturers should reflect on the difference between risk price and the premium paid by consumer. The risk price is effectively the underwriting cost of the risk.This difference often represents the commission paid to the distributor. If there is evidence of poor value through the commission arrangements or other costs in the distribution chain, the manufacturer should be taking appropriate action.
The manufacturer should be proactive in addressing value in the distribution chain. This means that it should obtain access to the management information which allows it to assess the issue. If the manufacturer delegates responsibilities further down within the distribution chain, the manufacturer should establish the systems and controls to ensure that the manufacturer’s obligations continue to be met.
Product Distributors- Remuneration
The same themes flow through to insurance distributors. Firms should consider the impact that their distribution strategy and remuneration has on the overall value to the consumer. Remuneration paid to the distributor should not conflict with the duty to comply with the customers’ best interests. The possibility of customer harm should be monitored through:-
- Direct interactions with customers;
- Assessments of customers’ demands and needs;
- Analysis of customer complaints.
Distributors should co-operate with product manufacturers to allow the manufacturer to assess the impact of a product.
Distributors need to take particular care with regard to the remuneration that they take. As the FCA notes “while the product may provide benefits to the customer, the level of distributors’ remuneration may mean the product fails to provide the intended value identified in the product approval process.”
The FCA highlights various examples which may indicate that there is a clear imbalance between the interests of the customer and the distributor. Each of these may indicate that the distributor’s remuneration is unrepresentative of value inputted to the process. If distributors assess the remuneration taken as inappropriate, then the FCA expects them to make changes to the remuneration arrangements.
Product Distributors- Process
Again distributors should ensure that the distribution process is having the desired positive impact on customers. As with manufacturers, they should ensure that they have the information to make this assessment.