Product value and coronavirus: draft guidance for insurance firms

This guidance is intended to highlight what we consider firms should be doing to identify any material issues that affect the value of their products, and their ability to deliver good customer outcomes, during this unprecedented time. When considering product issues, firms are reminded of their obligations under:

• the FCA Principles for Business (PRIN)
• the systems and controls sourcebook (SYSC)
• the product intervention and governance sourcebook (PROD)
• the insurance conduct of business rules (ICOBS), in particular ICOBS 2.5.-1R

This statement sets out our expectations for firms when considering the fair treatment of all customers for an insurance product as defined below, not just those in financial difficulties as a result of Covid-19.

All insurance and premium finance firms should also consider our related guidance on dealing with consumers with temporary financial difficulties resulting from coronavirus[2]. 

Application

This guidance applies to all firms carrying on regulated activities relating to all non-investment insurance products, i.e. general insurance and protection policies, and in particular firms who have manufactured these products.

This will be relevant to all insurance products, no matter the type of customer (ie, retail or commercial). This includes natural persons and business customers. This guidance does not set out expectations for the review of re-insurance products.

Where firms should act

Product value (ie, what the customer is paying for and the quality of the product or service it is intended they receive) is an essential part of firms’ obligations when manufacturing products. Customers should expect value from the products they buy, and this is particularly important in the current period of economic uncertainty. 

Many insurance providers are already considering how their products have been affected by coronavirus and taking action, for example where they have been experiencing difficulties in delivering benefits due under the insurance contract. We welcome these steps.

Proposed guidance

We expect firms which are manufacturers and/or product providers to consider whether and how coronavirus may have materially affected the value of their insurance products. The effects of coronavirus may mean that:

• Firms are no longer able to provide expected contractual benefits, either in the expected form, to the expected timeframe, or at all. For example, where fulfilling claims involves service providers whose movements are restricted because of lockdown (e.g. boiler servicing), or some medical covers where customers cannot access certain benefits.
• Underlying insured events can no longer happen for any holders of the policy eg, due to Government lockdown or other circumstances connected with coronavirus, resulting in a fundamental change in risk for the firm.  For example, public liability insurances for businesses that are unable to open, such as hairdressers, bars and restaurants.

These changes could affect the intended value being delivered to customers holding certain insurance products. Our expectation of a product level assessment is restricted to cases where the firms or the product itself cannot deliver a benefit, or where the customer cannot make a claim as the underlying event is no longer relevant. Some firms may choose to go further than this, which we would welcome, but do not require.  

Firms should already, in meeting their obligations under existing rules, review regularly the insurance products they offer, taking into account any event that could materially affect the potential risk to the identified target market.  Product manufacturers should be considering whether a product, including its costs and charges, remain compatible with the needs, objectives, interests and characteristics of the target market.

This guidance is not intended to create an expectation that firms should reassess the value of policies at a product level as a result of coronavirus where claims are still possible but the likelihood of a customer making a claim may have changed e.g. a reduction in car usage.

There may be some circumstances in which the factors above may have led to a material change in the value of a product for customers in temporary financial difficulties related to coronavirus. In these circumstances, we expect 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 the 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. Again, some firms are already doing this, which we welcome.

We expect that firms should be considering how best they can address any changes in circumstances, and we consider that they are best placed to identify what precise steps to take where they identify the product is not delivering the value intended for their customers. We are not mandating specific actions. We expect firms to be able to demonstrate to us how they have met their obligations at a product level and treated their customers fairly.

Where firms are providing refunds or partial refunds to customers at a product level as a result of the impact of coronavirus which do not involve changes to the product itself, it is unlikely that firms would need to treat this as a mid-term adjustment for the purposes of our renewal disclosure rules under ICOBS 6.5 or any other ICOBS rules around mid-term adjustments. We are open to engagement with firms that have concerns on this point.

It is important that firms have sufficient opportunity to assess the overall impact of Covid-19, which may not yet be clear. We propose that firms need to have completed this review of their product lines and decided on any resulting action(s) by no later than 6 months from the finalisation of this Guidance.

In line with their existing obligations in our Handbook, including Principle 7, we expect firms to communicate clearly with customers where they have identified an issue that may adversely affect the customer, and any actions they are taking to address this.

Process and next steps

We want to act quickly to protect consumers in these difficult times. We consider that the delay involved in publishing a formal consultation accompanied by a cost benefit analysis would be prejudicial to the interests of consumers. We are therefore not doing so. There is no statutory requirement to prepare a cost benefit analysis in relation to guidance.

However, we do want to understand how insurers will implement this in practice, and whether this guidance is sufficiently clear. Therefore please respond with any comments to [email protected] by 5pm on Friday 15th May.

Timing

If confirmed, the measures would come into force by the end of May. We would also review this guidance in the following 3 months, and may revise it if appropriate.

The FCA’s objectives and regulatory principles

The proposals in this consultation support our consumer protection objective and are designed to protect consumers by providing them with support in the light of the current exceptional circumstances arising out of coronavirus.

Equality and diversity

We are required under the Equality Act 2010 to ‘have due regard’ to the need to eliminate discrimination, harassment, victimisation and any other conduct prohibited by or under the Act, advance equality of opportunity between persons who share a relevant protected characteristic and those who do not, and to foster good relations between people who share a protected characteristic and those who do not.

As part of this, we ensure the equality and diversity implications of any new policy proposals are considered. We do not consider this guidance will adversely affect consumers with protected characteristics.