The new Consumer Duty - impact on your claims department

Overview

The FCA’s Principles for Business currently sets out eleven fundamental  “principles”, the objective of which was to set out high level standards that regulated firms must meet. Following two consultations in 2021, the FCA announced a twelfth principle, the new Consumer Duty (the Duty), with a view to setting a higher standard for firms in dealing with their consumer (and small business) customers.

The Duty represents, in the FCA’s own words, a “paradigm shift”, requiring firms to go beyond simply acting in a client’s interests, instead delivering a higher standard of customer care, and proactively taking steps to deliver good outcomes for retail customers (see FCA Policy Statement PS22/9 (the Policy Statement)).  

The majority of insurers are likely to already conduct business largely in line with the Duty. However the FCA is still expecting firms to review their current approach in line with the Duty, even if it is to maintain standards and reinforce well-established processes, rather than needing to make wholesale changes.  With that written we examine below some areas that those running an insurer’s claims function will want to bear in mind.

Cross-Cutting Rules

The FCA has introduced a set of cross-cutting rules designed to enhance the standards of conduct and assist with achieving four required outcomes. These cross-cutting rules consist of three expectations for behaviour, to assist firms in understanding and implementing the Duty, namely:

1. Act in good faith
   • Firms must have honest, fair and open dealings with consumers. This rule does not prevent firms from advancing their own commercial interests, provided their conduct accords with the provisions of the Duty.
2. Avoid causing foreseeable harm (whether by act or omission)
   • This extends to indirect relationships in a distribution chain. However, the FCA states that if a firm reasonably believes a customer to have understood and accepted a risk, failure to prevent that client from proceeding will not breach the Duty.
3. Enable and support consumers to achieve their financial objectives
   • The actions required by a firm will depend upon the nature of its products/services, and by what is within the firm’s control, based on its knowledge of the customer. It requires firms to establish an environment in which consumers can obtain relevant advice/materials to empower them to make decisions.

Outcomes

Firms must demonstrate that, by adherence to the cross-cutting rules, they have been able to achieve the following four outcomes:

1. Products and Services 
• Products and services must meet the consumers’ needs and objectives and be fit for purpose.
2. Price and Value
• The products should offer fair value, meaning that there should be a relationship between the cost of a product and the overall benefit the consumer receives from it.
3. Consumer Understanding
• Firms should provide relevant material, in a way that is easy to understand, to ensure that consumers are equipped to make good decisions.
4. Consumer Support
• Obtaining ongoing support should not be an unduly burdensome task for the consumer. Firms should be responsive and helpful at every stage of their relationship with the consumer.

For insurers, the first two outcomes are already covered by recent rules on product governance and fair value, which insurers should already be complying with. The last two outcomes introduce new requirements in relation to how firms communicate with consumers and how they provide effective consumer support. The FCA has avoided reference to the “average consumer” in its Policy Statement. Instead, firms are required to consider a range of needs in their target market, including “vulnerable” consumers. Whilst firms do not require to assess the needs of consumers on  an individual basis, the design and sale of products must factor in the range of consumer characteristics within the target market for the relevant product.

Implementation Deadlines

By 30 April 2023 regulated firms needed to know all outcomes that a product was designed for, and which ones needed improvements. By this date firms were also expected to share relevant information with distributors of their products. The FCA may well ask firms for evidence that all outcomes are known and what improvements are needed.

By the end of July 2023, the Duty must be implemented for new and existing products and services for sale or renewal. Also, any improvements that have already been identified need to be made. There are also ongoing requirements to monitor and make improvements where needed beyond the implementation date.

By the end of July 2024, the Duty will be effective in relation to closed products (those products that are no longer marketed or open to renewal).

Claims

What does this mean for the claims function? How can a claims team act in good faith, do no harm to the consumer, and enable consumers in their objectives?  The following are some of our ideas:

1. The claims team and underwriters need to be joined up and clear on what each product is designed to cover. At a high-level MI should be capable of showing that if a consumer makes a claim against a policy it responds. Have decisions on how a policy will respond been assessed with a panel of consumers and ingrained with the underwriting and claims teams? Has training to the claims team been provided?
2. Simply making a claim can be stressful. Consumers need to be supported in making claims with relevant guidance on how to make a claim. Are there backups or plans in place if a web site goes down? Is there an internal or external surge facility if a FNOL centre starts to breach consumer centric KPIs? Is the process easy to follow? While making a claim on an App may be better for some consumers, are there alternatives for those that do not want to use an App?
3. How can the process from making a claim through to payment be improved? As a minimum, there should not be any unreasonable barriers to making a claim.
4. Is there MI to support the testing and showing results of examining whether a sample of consumers understand all communications?
5. If the policy does not respond then the reason must not only be fair, but the explanation clear. The number of repudiations may be relatively small so that quantitative MI is not required, but that does not remove the need for qualitative MI. Are there internal processes involving senior management approval and advice from external advisors? Has the house style been tested with a sample of consumers? If the repudiation of a claim is challenged, is the internal process expedient? Is there a separate review process for the claims teams to feed back to underwriters the basis of a repudiation in case a review of the product is needed?
6. Does the service delivery from outside providers align with internal processes and procedures?
7. Already mentioned is MI, but its importance cannot be underestimated. Firms are expected to be constantly monitoring their outcomes throughout the customer journey so that they can identify and remedy problems early. Data will therefore be fundamental to monitor outcomes. There should be MI for every step of the consumer’s journey from completing the proposal form, receiving (and understanding the policy), to making a claim, the resolution of that claim, the speed of the payment, the repudiation level, FoS decisions etc. Is the MI provided to the board? The FCA may request the board’s report on whether the firm is complying with the Duty and the regulator expects the board to lead and monitor compliance with the Duty. The FCA consider that in implementing the Duty firm’s will retain and attract new customers. Is this being recorded?

The themes that run through these suggestions – that will already be in place in most claims departments – are testing outcomes with consumers and having MI to show processes are in place, are working and being appraised.