Integrating Consumer Duty into BAU: Is the insurance industry ready?

By: Karen Scott

15/08/2024

As we now await the FCA’s review to streamline their rules, in order to reduce the burden on businesses; as well as further understanding from the FCA’s latest customer vulnerability survey exploring how prepared Insurance firms are integrating Consumer Duty principles into BAU; we reflect on two of the four outcomes: consumer understanding and consumer support.

Why are insurance firms disappointing the FCA?

It is clear the principles behind Consumer Duty are deep reaching, setting the scene for a cultural shift in many business behaviours.

As such, Consumer Duty goes much further than to simply demonstrate whether the insurer or broker believes their customer communications are clear. It requires businesses to actively engage with customers in order to better understand their characteristics and provide evidence on how understand them.

So how ready is the insurance industry?

‘A lot of the policy documentation is the same or at least similar across different lines of business.’ SJS Insight Broker Interview May

So, it seems that for some firms a change in mindsets is still required when being asked to actively engage with consumers to support organisational business processes. This is particularly important when creating customer appropriate communications and content: Insurance policy cover and claims documentation; pricing and T&Cs; Marketing etc.

Putting the customer at the centre of the process

In the general insurance sector, the FCA expects firms to ensure that customers are at the centre of the claims process, so that unreasonable delays to claims processing are avoided and fair claims settlements are made.

However, a recent study by Which? found that 48% of all people making a claim about home, travel, motor and pet insurance experienced at least one problem with their claim. It looks as though there is still work to be done and it becomes an ever more complex issue when you start to identify ‘fluid’ characteristics associated with vulnerability.

Monitoring life changing events

For consumers, contacting an insurance company can follow a negative life event: a relationship breakdown, bereavement, accident, home damage, theft, flooding or cyber-attack etc. All are within the broad FCA defined characteristics associated with being a driver of vulnerability.

Table 1: FCA defined characteristics associated with the 4 drivers of vulnerability

It is also fair to say that the current and future drivers of consumer vulnerability can be exacerbated when looked at alongside current additional cost of living challenges.  Therefore clearly increases in insurance premiums or going through a claims process can add an unwanted and unreasonable burden on many.

Firms may have appropriate customer service, call centre, documentation development processes in place. However, as highlighted, vulnerable characteristics are far reaching, complex and ever changing. They are extremely difficult to monitor and benchmark, and consequently tricky to then successfully and ensure a fit for all situations.

A recent Which? survey states that those claimants who had been severely effected by a life event were far more likely to report problems in the claims process than those who had not: 63% vs 33%.

So, how prepared is the Insurance sector in terms of integrating Consumer Duty into BAU? Are there learnings to be made from outside of the sector?

For the sake of this article, we should not identify like for like outcomes. By their nature they will be unique to each customer type. That said, if we focus on one area where the FCA would like to see improvements; it is in sharing relevant data across the same distribution chain.

Firstly, when looking within two sectors: Comparing wealth managers and insurance brokers, we can see there are differences in understanding and preparedness of what is required of them.

• 51% of UK investors display vulnerable characteristics

• On average wealth managers consider 14% of their clients to be vulnerable

Source: Research in Finance’s Retail Consumer Interests Study

• 47% of 19,000+ UK adults surveyed displayed one of more vulnerable characteristics

• 1 in 10 wealth managers found it difficult to even identify vulnerable customers

Source: FCA bi-annual financial lives survey

‘…when we see the regulator we get a sense they seem to feel that somewhere between eight and nine out of ten people are vulnerable at any particular point, when we’ve looked at all the characteristics of vulnerability, we’re expecting that if we’ve not got at least half of our clients being listed as vulnerable for one reason or another, we’re probably not asking the right questions.’ Wealth Manager

‘The vulnerable client thing? Yeah, it is a minefield, isn’t it? It’s a nightmare… I suppose mine (proportion of vulnerable clients) was perhaps somewhere between a quarter and a third of clients, and they (other members of network) were kind of saying it should be much higher.’ Wealth Manager

Amongst insurance brokers there are also concerns when it comes to FCA expectations over their approach in the management of claims.

Insurance Industry’s view of handling claims

• 51% of insurance brokers claim to be “well informed” about Consumer Duty

• 54% agree that the number of add-ons to our policies are appropriate/reasonable

• 48% of claims brokers state the claims process is fair and transparent for their end clients

• 42% of brokers agree customers who make claims receive fair settlement

Source: Research in Finance Consumer Duty research amongst insurance intermediaries 2024

‘Compliance teams sit and talk to compliance teams. Small business retail, we don’t really have things in place to assess it. I am more interested in the impact of our admin fees. First time we have had to introduce these. Our margins are so low. Out of 20,000 customers only about 100 are vulnerable. How do we prioritise these?’ Broker – part of network SJS Insight Broker Interview May 2024

Conclusion

While we wait to see how prepared firms are at applying Consumer Duty Principles into BAU. There is a realisation that unfortunately, that even while firms get better at identifying, responding and successfully handling interactions with customers showing any signs of vulnerability, some vulnerable customers will, at least for the foreseeable future potentially continue to ‘slip through the net.’

That said, there continues to be further points of clarification from the FCA; including the need for businesses to be more actively engaged with customers to better shape their understanding of consumer support needed in understanding policy and claims communications. Meaning consumer and customer involvement should be at each stage of the new product, service, documentation and content development, not just as an output of monitoring service performance or satisfaction.

And finally, specifically for the insurance industry there remains a cross-industry need to be better at collaborating and sharing relevant internal and external data across providers and brokers, in order to support the monitoring of new content and communication improvements.

Setting the scene for monitoring consumer understanding and consumer support outcomes

We employ a cross-industry approach supporting senior leaders in the development and governance of a business-wide vulnerability strategy. Our approach:

• Supports their understanding of the needs of their target market / customer base
• Ensure their staff have the right skills and capability to recognise and respond to the needs of vulnerable customers.
• Respond to customer needs throughout product design, flexible customer service provision and communications.
• Monitors and assesses whether they are meeting and responding to the needs of customers with characteristics of vulnerability, and make improvements where this is not happening.

Our Communications Compass is a community testing solution designed to ensure that your marketing communication materials are meeting the regulatory requirements. The FCA has indicated that all client communications will need to be continually monitored post-implementation of the duty. Communications Compass allows for both testing and re-testing of specific materials by our proprietary panel of a cross-section of consumers, including vulnerable clients, resulting in a templated report card that reveals a variety of overall indicators, anonymised competitor positioning, suggested improvements, and more.

For more information on how your firm could benefit from joining Communications Compass, please get in touch with Mick Hrabe. You can also call us on +44 (20) 7104 2235.