FCA sends ‘Dear CEO’ letter to Lloyd’s and London Market firms highlighting six potential harms

The Financial Conduct Authority (FCA) has published a ‘Dear CEO’ letter written by Charlotte Cross, Head of Department, Wholesale Insurance, to the Lloyd’s and London Market portfolio of firms.

The portfolio letter sets out six areas of harm that Lloyd’s and London Market (LLM) insurers pose to consumers and to the market in which they operate. These harms fall within the FCA’s supervision strategy for the LLM insurer portfolio of firms. The letter follows a previous letter sent to the portfolio last November.  Although some improvements have been observed by the FCA, the letter makes clear that the market still has work to do to address some specific identified harms.

The six areas of harm identified by the FCA are:

  • The value of products. The FCA remains concerned that customers buy products that provide fair value and meet their needs. The FCA expresses concern that it continues to see evidence of low loss ratios. This appears to be more likely to occur where there are long distribution chains leading customers to pay higher prices to cover intermediary remuneration. The FCA expects LLM insurers to continue to monitor product value and to be able to demonstrate that distribution strategies, including remuneration arrangements, are appropriate.
  • Claims outcomes. The FCA has observed issues with claims handling, suggesting that products do not offer customers fair value. This has been seen specifically in respect of business interruption insurance policies. The FCA is concerned that some firms have created undue barriers to customers and third-party claimants. The FCA reminds firms of the requirement to treat customers fairly and communicate clearly what policies cover.
  • Operational resilience. The adoption of cloud-based technologies and widespread digitisation in the market means that there is a risk of harm to the market and to customers if these technologies fail. Technology or third-party failures can cause widespread operational disruption to firms and their customers. There is the potential for systemic risk where large number of firms rely on the same outsourced or third-party providers. The FCA expects firms to comply with the requirements in policy statement 21/3 ‘Building Operational Resilience’.
  • Coverage uncertainty. The Business Interruption Test-Case has highlighted to the FCA the risk that customers’ expectation of coverage may not align with policy wordings. Customer information should be aligned with policy wordings to avoid situations where customers have taken out insurance that does not meet their expectations. Firms should ensure that their contract terms are not ambiguous.
  • Culture. The FCA believes that a lack of diversity and inclusion as well as non-financial misconduct are creating significant obstacles in terms of retaining talent, whistleblowing and making sound business choices. Following the publication of a joint discussion paper on diversity and inclusion in July, the FCA plans to develop more detailed proposals which will be consulted upon in H1 2022.
  • Access to certain business lines. The FCA reports that the pandemic has created a risk of certain markets hardening such as Employers Liability, Professional Indemnity and building insurance.

Over the next couple of years the FCA plans to prioritise work in relation to the above areas of risk. The FCA will write again to LLM insurers in 2023 to follow up on progress towards mitigating the risks identified in this letter.

Firms within the LLM insurer portfolio should review each of the identified harms in the context of their business model and consider whether they are taking appropriate action to address the risks cited by the FCA. Firms should anticipate conversations with supervisors about the harms identified and should be able to evidence how they propose to address each topic.

View: FCA sends ‘Dear CEO’ letter to Lloyd’s and London Market portfolio highlighting its supervision strategy for identified harms