The Changing Focus of Regulation

In 2005 the FSA took on the regulation of “non-investment insurance” – in anybody else’s money that is broadly “general insurance”. Twenty years later it is the FCA which carries the torch for regulating that market.

It is both interesting, and informative, to look at how the focus of that regulation has changed over those twenty years.

When the FSA opened for general insurance regulatory business on 14th January 2005 it announced that there would be a:-

“better deal for consumers. The new regime means that consumers will get clear pre-sale information in a policy summary bearing a keyfacts logo”.

That was the expectation. Provided customers were given clear (and prescribed) pre-sale information, then customers would be able to judge, for themselves, whether the “product was right for them”.

For all intents and purposes, the only change made, in 2005, to the already existing FISMA regulatory regime, to cover mass marketed general insurance, was the introduction of the Insurance: Conduct of Business Sourcebook (ICOBS). ICOBS was to meet the expectation that regulating firms’ conduct, at the point of sale, would deliver the regulatory bacon.

That expectation was based on a massive assumption – that customers would even look at, still less mark, learn and inwardly digest written information handed to them about insurance at the point of sale.

In 2005 firms were not going to worry about that. If meeting the new regulatory regime was to be based on meeting rules and guidance requiring prescribed sales processes and information, then compliant sales processes and information would be generated – in spades; and doubled.

I recall the massive relief within the motor market when they realised that, what they feared be a “city regulator” descending upon them, turned out to be simply a “process regulator”. The motor market already “did” process – that was how car sales and arranging associated finance were done; so adding some (well tons of) insurance sales process on top, was no problem. Still less because everyone knew that the customer would pay precisely no attention to it!

We all know how that ended up – a “payment protection scandal” based upon the view that customers “did not understand what they were buying”. Of course they didn’t (hardly any consumer understands any insurance) but it is vital to understand that this lack of understanding was not as a result of a “mis-selling scandal” (as lazy journalists and now lazy regulators would have you believe).

The vast majority of general insurance was (and still is) sold precisely in line with the requirements of ICOBS. There was little mis-selling, if that term is to imply poor compliance by firms.

What there was instead, was the demonstration that a regulatory regime based solely upon compliance at the point of sale does not work.

Customers (of mass marketed insurance) are not interested in insurance, in terms of the content of the contract, the very information which compliance with ICOBS tries to deliver to them. Indeed, customers are not interested in insurance at all. The old adage “insurance is never bought – only sold” is frightening true.

So, we have customers who, unless somebody explains, in pretty graphic terms, the potential consequence of not having insurance, would never bother with it. It is only fear that sells insurance.

That is a pretty unhealthy truth.

If insurance is to be offered to people who:- 

• don’t want to engage with it, and
• are brought to engagement only via emphasis on the negative outcomes if they do not purchase, and
• where details of the insurance they are to purchase are explained in material they will not read

there is the recipe for trouble.

Sprinkle in some incentives for firms to underline the negative outcomes of not having cover – and we get the:-

• “I didn’t realise”,
• “it wasn’t worth it” and
• “there were things I didn’t need”

claims of “mis-selling”.

The regulator has spent the past fifteen years wrestling with what to do about these unhealthy truths?

It would be very glib for me to fast forward you the Consumer Duty as the “solution” (which it isn’t) – but that would be to miss an important step on the way.

If all you have to do solve the problem would be to deliver four simple outcomes for customers, you would have insurance which:-

• was designed to meet the needs, characteristics and objectives of a target group of customers;
• would have a reasonable relationship between the price paid and the overall benefit a customer receives from it;
• enables customers to make informed decisions about the insurance via information consumers need, at the right time, and presented in a way they can understand; and
• meets consumers’ needs throughout their relationship with a firm.

But those outcomes do not take much account of the fact that any likely target group of customers for mass marketed insurance will be:-

• massively dis-interested in the objectives;
• want the cheapest possible price with no interest in the details of cover;
• unwilling to engage properly with information provided to them; and
• expectant of outcome which delivers a material benefit to them.

These truths are why the step between dealing with the failure of point of sale regulation and delivering on the Consumer Duty outcomes is so crucial.

That step is offering products to customers which are designed to cope with realities which I have just listed above. If a firm’s business model is focused on overcoming disinterest via incentives to engage with customers (and most are) then that engagement must be about something which is incredibly simple, with benefits and value which will immediately resonate with the customer.

Which brings me to the vital step on the way to firms meeting the Consumer Duty.

Since 2021, firms have been required to assess the value of their insurance products via meeting the (extensive) obligations in PROD 4. Led by the requirements of PROD 4, firms have assessed value by focusing on the relationship between the total price a customer pays for their product and the quality of the product and services they receive. Most firms have approached that equation by seeking to drive the price down, often by decreasing sales incentives.

That seems to me to open up a bigger problem than it solves. If my above analysis is correct, then firms need to be engaging more, not less, with customers.

Customers need to understand and value insurance. So, what is missing from many product reviews, is focus on the second part of the fair value assessment – the quality of the product and services which customers will receive.

An insurance product needs to sell itself – it has to be so simple, so demonstrably aimed at a specific concern of the target group of customers, at a particular point in time, and so integrated into their own assessment of the value of the transaction which they contemplate, that such value would be incomplete without the insurance.

Insurance has to be an obvious answer to a genuine and common concern – “I would proceed – but I am a bit worried about if X happened”. If a product clearly addresses that concern, then the customer will engage with the product, and they will value it – because it recognises them, and how they feel.

Rigid focus on compliance with ICOBS has much damaged general insurance.

The proposition I leave you with is that intelligent focus on product design can save general insurance.