On 1 May 2020, the Financial Conduct Authority (FCA) published guidance setting out their expectations for insurers and insurance intermediaries to consider the value of their products in light of the exceptional circumstances arising out of coronavirus (Covid-19).
The guidance applies to all firms carrying on regulated activities relating to all non-investment insurance products, i.e. general insurance and business customers. This guidance does not set out expectations for the review of re-insurance products.
Many insurance providers are already considering how their products have been affected by Covid-19 and are taking action, for example where they have been experiencing difficulties in delivering benefits due under the insurance contract.
The FCA expects firms which are manufacturers and/or product providers to consider whether and how Covid-19 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 or some medical covers where customers cannot access certain benefits.
- Underlying insured events can no longer happen for any holders of the policy e.g. due to Government lockdown or other circumstances connected with coronavirus, resulting in a fundamental change in risk for the firm. For example, public liability insurance for businesses that are unable to open, such as hairdressers, bars and restaurants.
The FCA’s 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 the FCA would welcome but does not require.
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.
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 the coronavirus. In these circumstances, the FCA expects firms to consider the value of the product where customers contact them, or where a firm contacts the customer regarding missed payments.
Where a firm identifies something that could materially affect the value of the product they should consider the appropriate action to take. This could include:
- delivering the benefits in a different way;
- the provision of alternative, comparable benefits;
- reducing premiums for the duration of the change in value; and/or
- partial refunds of premiums already paid.
The FCA expects that firms should be considering how best they can address any changes in circumstances, and considers 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. Specific actions will not be mandated but the FCA expects firms to be able to demonstrate to it how they have met their obligations at a product level and treated their customers fairly.
It is important that firms have sufficient opportunity to assess the overall impact of Covid-19, which may not yet be clear. The FCA proposes 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 the FCA Handbook, including Principle 7, firms should 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.
The FCA would like to understand how insurers will implement this in practice, and whether the guidance is sufficiently clear. The FCA welcome any comments prior to the Friday 15 May 2020 closing date.
If confirmed, the measures would come into force by the end of May. The guidance would be reviewed in the following three months, and may be revised if necessary.