Insurers and intermediaries: UK legal and regulatory certainties for 2021
After such a challenging 2020, all businesses are craving more certainty in the new year. Whilst 2021 is already producing its own surprises, there is at least some certainty in the legal and regulatory issues likely to affect insurers and intermediaries in the UK. This article summarises key issues insurers and intermediaries should keep clearly on the radar in 2021.
Pricing and value
Insurers and intermediaries specifically need to consider value to customers of general insurance products they manufacture or distribute (except private medical insurance initially) under new rules from 1 January 2021. Reporting requirements on value measures will apply from 1 July 2021, with the first reports due to the Financial Conduct Authority (FCA) in February 2022. Firms can expect intervention from the FCA where it has concerns over data provided or harm to customers.
The FCA, despite trying not to be a price regulator, continues its work on controls over pricing in home and motor insurance. New rules on renewal pricing, product governance and auto-renewals and related reporting are due mid-2021 and firms can still respond to the consultation on these until 25 January (CP20/19).
The last-gasp deal between the UK and the European Union (EU) was light on financial services. As a result, firms with cross-border business into the EU from the UK - or vice versa - will need to implement their plans to continue that business in the absence of passporting. “Equivalence” decisions between the UK and EU only help in specific areas (e.g. group solvency reporting) and the UK’s recent decisions have not yet even been reciprocated by the EU. In any case, these decisions cannot themselves permit carrying out insurance or distribution between the UK and EU states. With only limited transitional powers, UK regulators will expect firms to be operating compliantly post-Brexit, as the outcome was ultimately no surprise.
European Economic Area (EEA) firms continuing regulated activity in the UK through the Temporary Permissions Regime (TPR) need to decide next steps, principally whether to set up a UK-authorised branch or subsidiary, or to wind down under the run-off regime. Even existing branches need revisiting to set up as third country branches, with sufficient governance, substance and regulatory capital.
There is no consistent regime for operating in EEA states, so UK firms operating cross-border need to be clear on applicable local rules and obtain authorisation, if not already, where needed. It seems likely there will be an increased focus on UK firms’ activities in EEA states.
FCA portfolio letters
The FCA’s 2020 letters to insurers and intermediaries identified supervisory priorities for the subsequent 12 months. The regulator will review progress from January 2021 and so firms may want to re-check the letters they received.
In addition to sections on Brexit and operational resilience (covered below), the FCA reminded firms to ensure proper implementation of the requirements under the Insurance Distribution Directive and highlighted robust governance, controls and healthy cultures and behaviours to ensure good customer outcomes. The letters emphasised issues such as incentives (particularly financial), renewals and conflicts of interest and the FCA warned it would use the Senior Managers & Certification Regime (SMCR) to hold senior managers accountable.
COVID-19 and vulnerable customers
In addition to the pandemic’s effects on underwriting, claims and indeed everyday working for firms, insurance policies may need adapting, either to cover the virus in novel ways or to exclude cover. Either way, updated policy wording needs to be considered against applicable legal and regulatory criteria, including fairness, the value of the policy to customers and in some cases the final decisions in the FCA test case. The FCA’s focus on vulnerable customers goes well beyond coronavirus and needs to be taken into account for all products and their implementation.
Operational resilience and increased digitisation
The operational resilience regime will cover many firms including insurers and any intermediaries that are enhanced scope firms for SMCR. Despite delays to the FCA and PRA final rules, affected firms can start considering how the likely requirements will apply, focusing on what are “important business services” and maximum tolerable levels of disruption to them. These will soon enough need to be documented and the actions necessary to keep within tolerances in “severe but plausible” disruption scenarios considered.
Challenges such as cyber risks and business transformation are exacerbated by people working from home. Under existing systems and controls rules, as well as SMCR, the FCA already expects a level of resilience and planning for these types of risks.
Updates to distribution and customer journeys through increased digitisation need to be appealing but also compliant, allowing for vulnerable customers, data security and regulations that are not particularly designed for the digital era. Effective integration between insurers’ and brokers’ systems and clear allocation of liability for different stages of the process will also be critical to the effectiveness of these updates.
Despite the already challenging environment, firms still need to check regularly that they are taking these legal and regulatory developments into account to avoid additional unwelcome issues as 2021 progresses.