The FCA released its report on the results of its thematic review of the before-the-event Motor Legal Expenses Insurance (MLEI) market on 7 June 2013.1 The general conclusion of the report, that MLEI is a product which “can be useful for consumers”, will come as a relief to insurers. Nonetheless, firms selling MLEI need to review their websites and product literature by the end of the year as the report indicates that the FCA will conduct a further review of the sector in 2014.
The report is also important for all general insurers. Firstly, the FCA is explicit in stating that this review and report show how the FCA will supervise general insurers. Secondly, the FCA’s concerns about MLEI and the action it requires from insurers to remedy these are applicable to other markets, particularly given the FCA’s current focus on add-on products.
The future of insurance supervision
It is clear that the FCA’s review of MLEI is intended to send a message to the wider insurance market. The foreword to the report states explicitly that it “shows what you can expect from the FCA’s approach to general insurance supervision.” In light of this statement, there are several striking aspects to the report and the accompanying review.
- the origins of the report are novel in that the legacy FSA was recommended to carry out a review of the MLEI market by the OFT following its December 2011 report into the Private Motor Insurance market. Given the FCA’s recent focus on building up its competencies around ‘behavioural economics’, Insurers should expect a greater focus from the FCA on how certain markets function for consumers.
- the FCA states explicitly that the starting point for testing whether MLEI delivers value for consumers was to assess the product’s profitability because low loss ratios could indicate that consumers have encountered difficulties in claiming successfully. Motor insurance lines suffer from notoriously high loss ratios, so firms will be concerned that the FCA seems to have concluded that profitability indicates that an insurance product does not provide value to consumers
- while the FCA’s research did not generally uncover problematic remuneration structures for the sale of MLEI, it did uncover specific incidents, one of which led to regulatory action. Firms which are contacted by the FCA about general market reviews – including the claims handling review announced by Martin Wheatley in May2 – should now be very wary given that such reviews may lead to disciplinary action.
Further review in 2014
The FCA will revisit the work in 2014 and insurers selling MLEI should expect ARROWS II visits that year. Firms should start to take action based on the report at the earliest opportunity because those firms involved in the review, i.e. competitors, have already committed to taking action and may launch compliant MLEI products before 2014. In addition, the FCA has made it loud and clear in the report that there will be significant regulatory risks from inaction.
It is not just those firms selling MLEI who should consider taking action. The FCA wants all motor insurance providers to reflect on the review’s findings. The report asks firms to “pay particular attention to what customers are saying about their understanding of MLEI and motor insurance in general.”
Read on for more detail from the report and the FCA’s checklist for motor insurers.