In this chapter of our Annual Insurance Review 2020, we look at the main developments in 2019 and expected issues in 2020 for regulatory.

Key developments in 2019

2019 marked a significant year for regulatory developments relevant to the insurance industry. Building on the themes and more prescriptive regulation introduced by the insurance distribution directive in 2018, and alongside work in other key areas such as Brexit, regulators have been focusing on value and governance in the distribution chain.

The Spring publication of the Financial Conduct Authority's (FCA) General Insurance Distribution Chain Thematic Review adopted a critical tone, with the regulator noting that it was "extremely disappointed", given the prior focus on third party governance and oversight, and warning that newly introduced rules, Senior Managers and Certification Regime (SM&CR) and other initiatives will help it take a more interventionist approach .

Evidence of this included the £30 million fines levied against Carphone Warehouse and Standard Life Assurance for the mis-selling of general insurance and for failures related to sales of annuities, respectively.

The FCA emphasised the same themes in its Business Plan 2019/2020 and its General Insurance Values consultation. Lloyd's has also announced a number of initiatives following similar themes including its acquisition costs review and its new approach on third party oversight.

To respond to these developments, firms should focus particularly on product governance and how they are managing their oversight of third parties. Insurers, and brokers acting as manufacturers, should ensure that they have up to date policies and processes to identify vulnerable customers and protect their interests and understand the role of other parties in the distribution chain. Given the FCA's concerns and recent enforcement actions confirming that insurers will be held responsible for outsourced functions, insurers should also ensure that they have effective systems and controls in place.

What to look out for in 2020

Expect continued scrutiny from the regulators on value, governance and remuneration.

The 'value' theme will continue through the FCA's and Prudential Regulation Authority's (PRA) planned review of life insurers' outsourcing arrangements, and the assessment of cloud infrastructure used by PRA regulated firms. The FCA is expected to have a particularly busy year in 2020. It is scheduled to carry out a second review following its 2017 Assessing Suitability Review and expects to publish a report reviewing the impact of its measures in relation to mis-sold payment protection insurance (PPI).

The year should see the culmination the FCA's work on value measures reporting in early 2020. It has, so far, put in place four pilots and is likely to propose additional requirements for firms to use value measures data as part of their monitoring and governance of insurance products. The regulator hopes that, by publishing this data, market transparency and competition will be improved, as well as providing an additional supervision tool. Accordingly, insurers should prepare to submit data on how customers use their products and whether consumers are satisfied with them.

At Lloyd's, its Strategy 2018-2020 articulates that, by the end of 2020, it intends to have explored differing distribution channel options that reduce the market's overall expense ratio. Jon Hancock, Lloyd's Performance Management Director, has said that Lloyd's will demand to see more progress on expense ratio reduction during the 2020 planning process.