The Financial Conduct Authority (“FCA”) has issued a discussion paper DP24/1 (“DP”) initiating a comprehensive review of the regulation of commercial and bespoke insurance businesses.
The primary objective of this DP is to solicit feedback to determine whether the FCA’s current rules appropriately balance between safeguarding customers who may require regulatory protection and the competitiveness in the commercial non-investment general insurance market. The FCA acknowledges the potential for changes that could better align these priorities, changes that have been much anticipated by industry. Responses to the DP have been requested by 16th September, so time is tight for firms to submit the requested input.
The options set out in the DP are intended to consider and identify areas where it may be appropriate to reduce regulatory requirements, and consequent costs for firms, while maintaining appropriate levels of protection for Small and Medium-sized Enterprises (“SMEs”). These are:
1. Application of Rules to the Commercial Insurance Market
Concerns
Industry has highlighted that inconsistencies across definitions, namely for ‘contracts of large risk’, result in time-consuming and disproportionate effort to categorise each customer for onboarding or renewal. The definition also leads to variances where customers who may not necessarily need protections are nonetheless in scope of the rules. Further, certain product categories are included or excluded from the large risk definition on a blanket basis. The FCA illustrates this with the example that policies concerning sickness and accident are never classed as large risks regardless of who is purchasing them. This means that large corporations arranging private medical insurance for their employees will, nonetheless, receive the same regulatory protections as consumers.
DP approach
In Chapter 2, the FCA examines how the Insurance Conduct of Business Sourcebook (“ICOBS”) distinguishes between requirements for consumers and commercial customers. A significant area of exploration is how the definition of SMEs might be amended or replaced. The FCA to date has consistently recognised the differing needs of SMEs compared to larger commercial customers and believes that SMEs generally require the same level of protection as consumers. In the insurance industry, regulatory protections often depend on whether a contract is classified as a ‘large risks contract’ and the FCA is now questioning whether this is still the most suitable criterion for determining protections. The options presented include:
- replacing the contract of large risks definition with the Dispute Resolution (“DISP”) eligible complainant definition;
- removing product-specific criteria within the contract of large risks definition; or
- developing a new definition based on the unique features of the insurance market.
None of these approaches will affect consumers but would amend the criteria for distinguishing between SME customers and larger commercial customers who are less in need of regulatory protections.
2. Co-Manufacturers of Insurance Products
Concerns
As the current rules apply to all co-manufacturers individually, each must have a product approval process that identifies whether the product provides fair value. As a result, there is duplication across firms and a risk of conflicting assessments. Further, some distributors are being approached by each co-manufacturer separately to provide them with information and in some cases the data they are being asked to provide is different.
DP approach
Chapter 3 considers the regulatory framework where multiple firms are involved in manufacturing insurance products. Although the focus is on commercial non-investment insurance, the FCA is also seeking input on whether similar considerations should extend to the retail market and pure-protection products. The FCA has asked whether it should:
- designate responsibility to the lead insurer;
- allow co-manufacturers to determine responsibility for compliance; or
- provide clarificatory guidance on what the current rules require.
3. Bespoke Insurance Products
Concerns
Currently, under the Product Intervention and Product Governance Sourcebook (“PROD”), there is an exclusion for intermediaries who design custom contracts at the request of a single customer. In these cases, the intermediary is not considered a manufacturer, but the insurer remains classified as such under PROD. While this aligns with the PROD rules, which apply to products in general rather than individual contracts, industry stakeholders have indicated that most do not utilise this exclusion. Consequently, firms may incur costs without gaining significant benefits if they apply PROD to custom-made contracts.
DP approach
In Chapter 4, the FCA is particularly interested in the design of tailor-made contracts requested by individual customers. Notably, the Handbook currently lacks definitions for ‘tailor-made’ or ‘bespoke’ contracts, and the FCA is open to suggestions on whether defining these terms would be beneficial. The FCA has asked for responses on whether it should:
- broaden the scope of the bespoke contract exclusion; or
- provide clarification on what bespoke contract means.
Commentary
For any firms that are involved in writing and distributing commercial and bespoke insurance business, this will be a welcome first step. The difficulties in seeking to apply rules that were predominantly designed for mass market consumer and SME business to the more commercial end of the market are well-known to firms operating in the sector, who have long lobbied the FCA to reconsider the broad application of ICOBS, PROD and the Consumer Duty in particular. An approach that gives due consideration to the manner in which the commercial insurance market actually operates (particularly where business is written on a subscription or line slip basis) and recognises that there are many companies that fall short of the contracts of large risk thresholds but are by no means SMEs, should provide much needed clarity. Hopes will be high that this discussion paper leads to the introduction of a more proportionate application of these rules.
The FCA invites comments on the DP, with any relevant evidence, by 16 September 2024. Any subsequent changes proposed by the FCA will undergo further consultation to ensure they effectively address the issues identified.
For further information on the Discussion Paper or the process for submitting comments, please visit this link.
Social Media cookies collect information about you sharing information from our website via social media tools, or analytics to understand your browsing between social media tools or our Social Media campaigns and our own websites. We do this to optimise the mix of channels to provide you with our content. Details concerning the tools in use are in our Privacy Notice.