An outsource of concern
The industry is on notice to improve its oversight of delegated authorities, after a stinging critique by the UK regulator.
The Financial Conduct Authority (FCA) says insurers and intermediaries need much better processes for selecting third parties and managing and monitoring outsourced arrangements.
The fallout will almost certainly flow to Australia because of its links with the UK market.
The review is also likely to capture the attention of regulators here, who may decide to investigate local arrangements.
The FCA report – called Delegated Authority: Outsourcing in the General Insurance Market – says insurers need to select third parties with more care and both they and intermediaries need to put more effort into considering whether their products treat customers fairly.
The regulator reviewed 12 insurers, including Lloyd’s participants, that underwrite products for retail and SME customers. It defines outsourcing as functions including product development, underwriting, distribution and sales, and claims and complaint handling.
It says outsourcing can increase complexity and raise the risk of shortcomings in service delivery, and many insurers and intermediaries have not adequately considered or recognised their regulatory obligations.
Insurers do not exercise enough control over outsourced claims and have not performed adequate due diligence when selecting third parties.
The FCA interviewed insurers, brokers, managing general agents and 19 other intermediaries.
It finds insurers and intermediaries alike sometimes have no clear division of responsibilities in their partnerships.
Intermediaries designing products may not recognise their responsibilities as retail manufacturers.
The lack of oversight flows through to shortcomings in complaint handling and outcomes.
“Product providers did not always appreciate that as the complexity of the distribution chain increases, so do the potential challenges in overseeing it and the potential for consumer detriment,” the review says.
When companies have considered the risks, they are able to explain why the third party has been chosen and its capacity to deliver on reasonable customer expectations, say who designed the product and where responsibilities lie, and show how claims processes have been designed.
Companies should be able to detail monitoring and management information processes to assess customer outcomes, show how this monitoring is reviewed, understood, shared and acted upon, and say whether any significant conduct issues can be promptly identified and acted upon.
They should know who is selling their products, and how oversight is conducted.
“In a significant number of cases firms were not able to evidence how they had made these judgements,” the report says.
In about 15% of examples, providers could not provide basic details about how a product was sold, such as whether it was advised or non-advised and whether it could be sold online, by telephone or face to face.
“This raises the question as to how product providers with limited understanding of, and influence over, the sales processes and selected distribution channel are able to assess whether customers are treated fairly.”
The FCA now plans to follow up on specific issues it has identified, “to determine whether this may have resulted in customer detriment”.
It will focus on these issues in its supervisory work and talk to industry trade bodies about its concerns.
It will also consider how the Solvency II regulatory regime in Europe may affect outsourcing.
Lloyd’s Australia General Representative Chris Mackinnon believes the Australian market has little to fear from the FCA research, given Lloyd’s has a long-standing operating model here with a fair degree of oversight.
Many of the FCA’s comments provide greater clarity on the UK regulator’s expectations, he told insuranceNEWS.com.au.
“The message is very consistent with Lloyd’s objective of protecting our customers interests.”
Calls for tighter oversight often lead to concerns that innovation will be stifled, but Mr Mackinnon does not see this happening.
“Innovation will come where there is opportunity,” he said. “A well-run coverholder will innovate product and that is something that has always been done in Australia.”