Insurance Advisory

From Brexit to contingency planning, we offer our international experts’ predictions on the opportunities and challenges that regulatory and advisory teams may face in the coming year and beyond.

Insurance Advisory predictions
#1 Recognition will be key post Brexit

The UK’s departure from the European Union will leave a host of uncertainties hanging over the insurance industry. Many of these will surround the mutual recognition of regulations, especially those governing solvency. The UK Government confirmed in November that it intends to recognise the prudential regimes of EEA states as being ‘equivalent’ for the limited purposes of the UK rules that will apply after the transition period. However, hopes that this will be reciprocated by the European Commission may be disappointed in the short term. The position is complicated by HM Treasury’s call in October 2020 for evidence to review some aspects of the prudential regime for UK insurers, in particular the matching adjustment and solvency capital requirements. The fall-out from Brexit is far from over.

#2 Contingency planning will be a certainty in 2021

Businesses across the globe are shaking up their contingency planning in the wake of the COVID-19 pandemic. As a consequence, many will take a very different approach to insurance as they seek to reconfigure how they assess, mitigate and transfer risk. This will ask hard questions of the role of insurance as firms face up to the threats from critical uncertainties that have the potential to be highly disruptive to their businesses. It will accelerate discussions about the boundaries between private provision and state-backed provision.

#4 FCA to publish guidance for firms on the fair treatment of vulnerable customers

The Financial Conduct Authority (FCA) will continue its work to ensure vulnerable consumers are treated fairly and consistently across financial services sectors.  It will publish guidance for firms that it says is intended to bring about a practical shift in firm behaviour. The FCA’s consultation closed in September 2020 and the finalised guidance is expected in early 2021.  Industry bodies are working on their own initiatives in this area.  In September, the Association of British Insurers launched insurance industry standards to support customers with mental health conditions, with insurers having until 31 December 2021 to implement the standards.

#5 FCA consults on further pricing and governances rules

As part of its continuing steps to ensure ‘fair value’ in the general insurance and protection markets, the Financial Conduct Authority (FCA) is proposing a ban on charging existing customers more than new customers for their home or motor policy. It’s also proposing rules to make it easier to stop auto-renewal. The focus on product governance, including plans to apply its rules to all products, not just those manufactured or significantly adapted after 1 October 2018, applies in both the commercial and retail insurance markets. This is linked to the FCA’s finding that elongated distribution chains are often associated with poor-value products.

#6 A squeeze on capacity will put pressure on MGAs

A hardening insurance market is likely to reduce the flow of capacity to managing general agents (MGAs) and mean insurers look closely at the quality of the underwriting and policy terms. MGAs will need to stay close to their capacity providers and make plans to find alternative capacity should their existing providers indicate they may not renew their binding authority agreement. The Financial Conduct Authority expects firms to plan ahead and ensure they manage their capital and liquidity requirements. They should have a wind-down plan in place, including plans to minimise the potential for customer harm should the business not be able to continue trading.

#7 Increased regulatory focus on insurance policy wording

The coronavirus pandemic highlighted a clear mismatch between the expectations of many insureds and insurers as to how their policies should respond to COVID-related claims. As a result, we expect the Financial Conduct Authority and other regulators to address product design, policy wordings and product governance in future regulatory initiatives. In October, Lloyd’s published ‘Building simpler insurance products to better protect customers’, setting out three areas of focus for the insurance industry: product language and presentation; product design; and greater customer involvement to build simpler, more relevant products. Expect these issues to be high on the agenda for the next few years.

#8 A Scottish perspective: will we see the break up of the UK when Scotland is still using England as a blueprint for reforms?

The pandemic, originally an existential threat bringing the four nations together, has now become a wedge threatening the unity of the Kingdom. Coupled with Westminster’s handling of Brexit (which the majority of Scots voted against), this has increased the likelihood of a second independence referendum. Were this to happen and, based on recent polls, return a vote in favour of independence, this would provide a shock to the Scottish judicial system, already malfunctioning badly due to COVID-19.  Years of pan-UK laws could overnight be disapplied causing chaos. Ironically, the Scottish Government has recently looked to England for a blueprint for procedural change. The introduction of QOCS and allowance of class actions, referral and success fees means defenders are braced for a flood of historic abuse claims, COVID-19 related class actions and speculative and fraudulent cases being advanced.

#9 An Australian perspective: general insurers will feel increasing regulatory pressure in Australia

Following the Hayne Royal Commission, there will be far greater regulation of general insurers in the form of new unfair contract terms legislation, product design obligations, a new executive accountability regime, and claims being regulated as a financial service in 2021. The Australian Securities and Investments Commission and the Australian Prudential Regulation Authority also enjoy new and improved regulatory powers, and an insurer’s obligation under its financial services licence to act “honestly, efficiently and fairly” has now been elevated to a civil penalty provision. This new regime, coupled with a pro-consumer environment, will create challenges for insurers in the way they develop, sell and manage their insurance products.

#10 A German perspective: 2021 will see a need to balance regulatory requirements with technological developments

The regulatory framework for selling insurance products has been strengthened over the last few years. At the same time, selling insurance contracts via cross selling or stand alone online is becoming more and more important. New technologies such as artificial intelligence are big drivers as well. It is a difficult task for insurers and product distributors to combine both a digital sales path and regulatory compliance and we wait to see in the coming year which market participants will be able to compete with big data specialists like Google or Amazon, who are already focused on this market.

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