Who does the Guidance apply to?
The guidance applies to all firms carrying on regulated activities in relation to all non-investment insurance products and, in particular, to firms who have manufactured these products. The guidance is relevant to all insurance products, irrespective of customer type, but does not apply to reinsurance.
What must firms do?
The FCA expects firms to consider whether and how coronavirus may have materially affected the value of their insurance products. The FCA uses the term ‘product value’ to mean what the customer is paying for and the quality of the product or service it is intended they receive. The effects of coronavirus may mean that:
- Firms are no longer able to provide expected contractual benefits, either in the expected form, timeframe, or at all. For example, where fulfilling claims would involve service providers whose movements are restricted due to lockdown, or some medical covers where customers cannot access certain benefits.
- There has been a reduction in the chance of underlying insured events happening for any holders of the policy e.g. due to Government lockdown or other circumstances connected with coronavirus, resulting in a fundamental change in risk for the firm and the product provides little or no utility to customers. For example, public liability insurances for businesses that are unable to operate, such as hairdressers, bars and restaurants.
Changes such as these could affect the intended value being delivered to customers holding certain insurance products.
The FCA expects a firm to prioritise a product level assessment where (a) firms or the product itself cannot deliver a benefit, or (b) there has been a reduction in the risk of an underlying insured event happening so the product now provides little or no utility for customers. Sub paragraph (b) is one of only a few areas where the finalised guidance is different to the draft guidance: the finalised guidance is broader than originally proposed.
The guidance is not intended to create an expectation that firms should reassess the value of policies where claims are still generally possible but the likelihood of a customer making a claim may have changed (e.g. motor insurance where there has been a reduction in car usage).
The general proposition is that a review should be carried out at product level and not by reference to the particular circumstances of any customer. However, there may be occasions where the factors above have led to a material change in the value of a product for customers in temporary financial difficulties as a result of coronavirus. The FCA expects firms to consider the value of the product where customers contact them, or where a firm contacts the customer, regarding missed payments.
Where firms identify something that could materially affect the value of a product they should consider the appropriate action to take. This could include delivering benefits in a different way, the provision of alternative, comparable benefits, reducing premiums for the duration of the change in value, or partial refunds of premiums already paid. The FCA is not mandating specific actions. It expects firms to be able to demonstrate to the FCA how they have met their obligations at a product level and treated their customers fairly. As part of this, firms will need to consider whether the impact is different for customers at different stages of the policy life cycle. For example, where it has not been possible to deliver contractually due benefits (such as a boiler service) to customers by the time of expiry or renewal of a policy.
Firms need to have completed this assessment for all of their products and decided on resulting actions by 3 December 2020.