Identifying General insurance products in the Duty spotlight

Who is this blog for?
 

Board members, senior executives, Consumer Duty champions, and those leading the implementation, monitoring, and reporting on the Duty for general insurers and general insurance intermediaries.
 

At a glance:
 

• The Duty has been in effect for nearly a year, during which the FCA has taken a very active approach to its supervision, scrutinising certain products and services (for eg. GAP insurance, premium finance, and ongoing service charges by fund managers).
• We have analysed FCA and FOS complaints data, General Insurance Value (GI) Measures reports, and recent FCA and FOS publications and announcements about future areas of focus to develop a Risk Identification Framework. This identifies products that have the potential to deliver poor outcomes under the Duty within GI.
• The analysis in this article is based solely on publicly available data and represents a simplified view of product value and potential sources of harm. Individual firms should have private data at their disposal to allow them to interpret our conclusions in the context of their own circumstances.
• Our analysis indicates that products such as warranty, pet insurance, and certain add-ons including motor excess protection and home emergency could soon be on the FCA’s radar. Other areas of focus include prompt and fair claims processing and valuation, the need to ensure customers understand the cover they are purchasing and the fairness and clarity of exclusions set out in terms and conditions.
• If not doing so already, firms should interrogate their own complaints, quality assurance and customer feedback data to identify where they stand in comparison with market averages (as illustrated in publicly available data)  and FCA expectations. Such an exercise could act as an early warning indicator of areas where customer outcomes are deteriorating and the risk of harm is likely to crystallise. Now would be a good time to carry out this analysis to identify emerging risks and remediate issues to avoid foreseeable harm¹.
   

1. Overview
 

The Consumer Duty has been in effect for nearly a year, during which time the FCA has taken a very active approach to its supervision. Examples include the pause in sales of GAP insurance earlier in 2024 (recently lifted for a number of firms following a review), and announcements of reviews of premium finance products, pricing practices rules, total loss vehicle valuations and vulnerable customers (cross-sector review). Other sectors, such as asset managers and advice firms, are also under heavy scrutiny with much debate regarding ongoing service charges and value considerations. More insight into these actions can be found here.

In this article we ask how firms can use publicly available data to help them identify the products and services that will attract significant FCA scrutiny or lead to potential customer harm in the coming months and years.

The analysis in this article is based solely on publicly available data and as a result represents a simplified view of product value and potential sources of harm. Individual firms should have private data at their disposal to allow them to interpret our conclusions in the context of their own circumstances. The FCA has repeatedly stated its intentions to become a more data-led regulator. In our view, this means that publicly available data and its analysis and interpretation should be a priority for firms if they want to anticipate what the regulator might focus on next.

For our analysis, we used publicly available complaints and value measures data (from FCA and FOS) to develop a framework to identify products with a higher risk of resulting in poor customer outcomes. We filtered the complaints data taking account of the volume of complaints (see Annex for details on the methodology) which led us to focus our analysis on five product categories: Warranty, Pet, Travel, Motor & Transport and Property. Each category includes several individual products. There is material variation in loss ratio and FOS upheld rates by individual product within each category. In the table below we include the loss ratio and FOS upheld rate risk ratings associated with the individual product most representative of each product category. Our detailed analysis in the following sections of this article separates the information relating to individual products to provide some insights into the sources of risk of poor customer outcomes within each product category.

Figure 1: Risk Identification Framework by GI product categories

Finally, for some products we analysed a sample of FOS upheld decision cases to identify common root causes of complaints. Putting the data together allowed us to connect the different metrics and identify products that present higher risk of customer harm. The Annex describes how we risk assessed the products and product categories for each data source.
 

1.1 Motor & Transport

Figure 2: Risk identification framework (Motor & Transport)

Motor & Transport GI products are the most complained about amongst the five GI product categories since 2019. In 2023 H2, 281,082 complaints were opened for Motor & Transport, at least three times more than the next GI category (Property).

‘Car or Motorcycle Insurance’, with an upheld rate of 39%, ranks as the sixth highest upheld rate among the 25 insurance products listed in the FOS complaints data.

Improving claims processes should be a priority: the FOS has highlighted a material uptick in motor claims in 2023, with delays in resolving claims and issues related to claims valuation being key root causes of many complaints. The FCA has taken steps to address motor claims valuation issues, publishing findings of its multi-firm review in March 2024 on insurers’ valuation of vehicles. Before coming into power, the government has expressed their intent to ask the FCA to investigate increasing car insurance premiums. The FCA indicated in its 2024/25 business plan that it will focus on prompt and fair claims processes. Earlier in 2024, Rachel Lam, Director of Insurance at FOS, stressed the importance of firms communicating with customers where a claim is delayed and how they should sometimes step out of the standard claims process in particular where there is customer vulnerability to ensure better outcomes.

Value in excess protection products: ‘Excess Protection for motor insurance (Add-on)’ ranks third at 15%, only surpassed by GAP insurance products (stand-alone and add-on). Insurers may want to revisit their value assessments including challenging themselves on the evidence behind the rationale for these products being good value. Firms need to consider a wide range of value measures and how they holistically demonstrate fair value. This may include commissions and fees through the distribution chain, cost of service for each distributor in the chain, detailed data around claims payouts vs premium paid and value data at customer cohort level to identify potential pockets of harm for specific groups of customers.
 

1.2 Warranty

Figure 3: Risk identification framework (Warranty)

Over the last five years, warranty insurance products had the highest increase in the number of complaints opened, doubling from 21,832 to 43,698. Household Warranties also have upheld rates of 39%, above the FOS average of 35%.

Value and understanding of warranty products: we analysed 10% (24) of the FOS’s household warranties decision cases in the last quarter of 2023. Significant causes of the complaints included lack of customer understanding of the product coverage and servicing and support issues when processing claims, where in some cases replacement products did not meet customers’ needs.

Given the very material rise in Warranty complaints, insurers underwriting warranties and firms distributing them should identify the root cause of complaints and whether there are patterns that indicate issues with product design, value, target market definition or poor customer communication. In particular, insurers may wish to review their communication strategies and test the level of customer understanding for these products.
 

1.3 Travel

Figure 4: Risk Identification Framework (Travel)

The number of open complaints relating to travel insurance products has increased by 7,000 in the last 5 years (24% increase). However, the number of complaints per 1000 policies is at the lower end of the range at 0.9. Travel can be a relatively complex product and the FCA has introduced specific rules in this market over the past few years. Below we note some considerations for firm.

Value through the chain and commission caps consideration: claims payouts for travel insurance represent 31-33% of premiums paid and commissions, admin and medical screening costs continue to be very high (between 25% and 45% of total premium)². The FCA stresses that the lack of absolute commission caps for some of these products (in particular, travel insurance for customers with pre-existing medical conditions) could well result in poor value to customers. Finally, FOS data reveals that travel insurance has the second highest upheld rate at 44%. In summary, travel insurance products need to be carefully managed and monitored by firms as a range of indicators continue to flag them as higher risk.

Continued focus on provision for customers with pre-existing medical conditions: in addition, on April this year the FCA published a review of the signposting rules for consumers with medical conditions. The rules resulted in an additional 21,000 travel policies (in the year ended 30 June 2023) issued through specialist firms to consumers with previous medical conditions who would previously have struggled to find cover. However, this is a much lower number than the 32,000 policies expected in the FCA’s original cost benefit analysis. The FCA plans to consult on updating the £100 medical condition premium trigger point for signposting and will follow up with firms where it deems that the customer is not receiving fair value and other issues of non-compliance (such as low effectiveness of sign-posting).
 

1.4 Pet

Figure 5: Risk Identification Framework (Pet)

There has been a 66% increase since 2019 in the number of Pet insurance complaints. This has led to Pet insurance having the highest number of complaints opened, among the five product categories, per 1,000 policies in force (contextualised) in 2023 H2, at 4.7.

How to deliver good outcomes when increasing the use of exclusions: Rachel Lam, Director of Insurance at FOS, remarked that pet insurance has seen an increase in the number of complaints, in particular in relation to the use of exclusions. The FOS is aware that exclusions have been applied quite broadly and has stressed the need for firms to consider how exclusions are communicated and understood by customers. The FOS also argues that firms should be more ‘interrogative’ when it comes to claimants to avoid rejecting claims with little evidence on file about why they are being rejected.

Insurers should review the exclusions in their pet insurance products, with a focus on the terms relating to pre-existing health conditions (which is a common issue of contention in the FOS case studies). Critically, insurers should review how the exclusions are being interpreted by claims teams, how they are communicated during the sale and renewal of the product, and, if an issue is identified, how the firm has addressed it.
 

1.5 Property

Figure 6: Risk Identification Framework (Property)

Do customers understand Home emergency cover? ‘Buildings and Home Emergency’ Insurance products have a FOS upheld rate of 43% (third worst across GI products). In addition, Home Emergency insurance is the poorest performing Property Insurance product within the Value Measures data, ranking seventh (for Add-ons) and 14th (for Stand-alone) among the 29 insurance products. Firms might want to review their value assessments and customer communications in relation to these products, as the data suggests that there is much room for improvement.

As of 31 December 2023, new rules relating to multi-occupancy buildings insurance came into force. As the rules are new, the data has yet to reflect this effect on the market. Nevertheless, we anticipate that this will be a particular area of focus for the FCA in the next few months. As a signal, the FCA published a letter to the Secretary of State in February 2024, stating it will continue to focus on how firms deliver fair value for customers and leaseholders paying for buildings insurance. The FCA will take the necessary action if they discover firms fail to meet the required standards under the new regulations. Insurers should be acutely aware of their buildings insurance products where group policies create policy stakeholders to whom consumer protection needs to be extended.

2. Actions for firms
 

• Assess product portfolio to identify areas of weakness: determine the firm’s own performance in relation to the products highlighted in this analysis and closely related products likely to be subject to similar challenges. Leverage internal complaints’ root cause analysis data to provide a more tailored picture of potential problem products in the portfolio.
• Complaints analysis is necessary but not sufficient: monitoring complaints numbers, trends and root causes is necessary to assess outcomes under the Duty but by no means sufficient. The FCA believes some firms are ‘placing [sic] undue reliance on complaints data.’ ³ The FCA’s insurance review on outcomes monitoring lists the range of metrics the FCA expects firms to use to assess for each of the four Duty outcomes.
• Review insurance claims processes and outcomes: the FCA is increasingly concerned with firms’ responsiveness to insurance claims, and the treatment of vulnerable customers. Firms should analyse the time they take to process insurance claims and the fairness of outcomes, especially in motor insurance products. Firms should also analyse outcomes between different customer groups (with a focus on vulnerable customers) and identify differences in outcomes among these groups.
• Develop customer engagement strategies: a recurring theme in many complaints is the lack of awareness or adequate information for customers regarding the terms of their insurance products and what qualifies as a valid claim. It is crucial for firms to establish a transparent and achievable engagement strategy to improve customer understanding of their products. This strategy could include providing clear examples of valid and invalid claims scenarios, as well as clear information on potential adjustments that can better align the product with customers’ needs (types of coverage, exclusions, excess terms, etc).
   

3. Conclusion

GI firms have invested significant time, energy, and money over the past three years to implement conduct regulatory changes, from pricing practices and product oversight and governance rules to value assessments and more. However, there continue to be some flashing lights in the dashboard with data that seems to point out to potential risks of poor outcomes in products across the GI market. This paper analyses publicly available data through a simple risk framework and highlights the risks behind products such as home warranties, pet, and some motor and property add-ons. Firms should dig deep into their own complaints, quality assurance and customer feedback data to paint a fuller picture of where they are in comparison with the market and FCA expectations. Such an exercise could provide a good early warning indicator of potential issues ahead. Now would be a good time to carry out this analysis to be ahead of the curve and avoid foreseeable harm to customers.

Annex – Methodology
 

Risk Identification Framework

We selected three data sources to develop a risk framework to identify products that might lead to poor customer outcomes and regulatory attention:

1. FCA aggregate complaints data⁴ - percentage increase in number of complaints opened since 2019 and number of complaints opened in H2 2023 (Contextualised⁵).

2. General Insurance Value Measures Data⁶ - loss ratios

3. Complaints upheld rate - FOS complaints data.⁷

The FCA's aggregate complaints data provides information on the number of complaints opened, categorised by firm type, product group, and product category from H1 2019 to H2 2023. We chose to assess the change in complaints numbers since 2019 to eliminate fluctuations due to the pandemic. We analysed complaints data by product category, which we then mapped against FOS complaints data and GI value measures data.
 

Our analysis started by using the FCA aggregate complaints data as follows:
 

1. FCA Complaints data filtering

Figure 7: Filtering methodology

Although the different data sources have different product category groupings, we carried out a filtering process to narrow down the field of analysis and allow us to compare results between data sources. For our analysis we selected only GI product categories with greater than 4,000 complaints opened as of H2 2023 and removed default categories . As a result, we identified five GI product categories from the FCA complaints data for analysis: Warranty, Pet, Travel, Motor & Transport and Property.

2. FCA Complaints data key metrics and ranking

From FCA complaints data, we selected ‘percentage number of increase in complaints opened (H1 2019 versus H2 2023)’ and ‘number of complaints opened in H2 2023 (Contextualised)⁹’ as the key risk metrics.

We ranked the risk in these metrics as follows:

• Percentage number of increase in complaints opened: Lower risk: 0 – 20% increase, Medium risk: 20 – 50% increase, Higher risk: >50% increase. 
• Number of complaints opened in H2 2023 (Contextualised): Lower risk: 0 – 1.5, Medium risk: 1.5 – 3.0, Higher risk: >3.0.
  

3. Mapping the five product categories into FOS and Value measures data sources

Using the five product categories identified in 1., we then mapped against relevant product types within the GI value measures and FOS complaints data. For example, ‘Contents insurance’ (present in both GI value measures and FOS complaints data) is mapped to the FCA’s product category ‘Property’. We identified 29 GI product categories in value measures reports, and 25 GI product categories¹⁰ in FOS complaints data. The table in Figure 1 reflects the performance of the most material product (by policy volumes) within each category. For example, within the Motor & Transport category, FOS includes upheld rates on Car or Motorcycle insurance, Caravan insurance, and Roadside Assistance insurance. Figure 1 reflects Car or Motorcycle insurance upheld rates only.

4. Using FOS complaints data – key metrics and ranking

From the most recent FOS complaints data (Q3 2023/24), we chose ‘upheld rates’ as the key risk indicator for our analysis. In the case of products with significant upheld rates, we analysed a sample¹¹ of upheld decision cases from September to December 2023 to identify complaints’ root causes. There are 25 individual GI products in FOS complaints data – we ranked them based on the distribution of upheld rates from lowest to highest as follows:

• Upheld rates: Lower risk: Lowest third of the product population (rates below 30%), Medium risk: middle third of the product population (rates between 30% and 35%), Higher risk: highest third of the product population (rates over 35%).

5. GI value measures reports – key metrics and ranking

GI value measures data includes loss ratios, average number of policies in force, claims frequency, and claims acceptance rate across a range of GI product categories. We selected ‘loss ratio’ as the key metric to assess the risk of harm in each product. There are 29 individual GI products in GI value measures data – we ranked them based on the distribution of loss ratios from highest to lowest as follows:

Loss ratios: Lower risk: Highest third of the product population (rates above 42%), Medium risk: middle third of the product population (rates between 30% and 42%), Higher risk: lowest third of the product population (rates below 30%).

¹The concept of harm prevention and anticipation is enshrined in one of the Duty cross-cutting rules: “firms must avoid causing foreseeable harm to retail customers” (PRIN 2A2.8). Foreseeable harm may be caused by both acts and omissions and firms are required to anticipate where harm could arise in future, respond to emerging trends to identify new sources of harm and take appropriate and prompt action to mitigate risk.
²Source: Post implementation review of the travel insurance signposting rules for consumers with medical conditions (fca.org.uk)
³FCA’s Insurance multi-firm review of outcomes monitoring under the Consumer Duty – 26 June 2024
⁴Data covers H1 2019 to H2 2023: Aggregate complaints data: 2023 H2 | FCA
⁵Number of complaints opened per 1,000 policies in force.
⁶Latest iteration being year 2022: General insurance value measures data 2022 | FCA 
⁷Latest iteration being Oct 2023 to Dec 2023: Quarterly complaints data: Q3 2023/24 (financial-ombudsman.org.uk)
⁸These categories are not sufficiently granular to aid our analysis and include GI packaged multi products, protection packaged multi products, other GI, and other pure protection.
⁹This metric provides the number of complaints opened per 1000 policies underwritten and as a result removes fluctuations due to changes in new business/renewal rates.
¹⁰In our analysis, we only included GI product categories that had values in the data (a number of categories had missing values).
¹¹The sample included the higher of 10% of cases or 10 cases over the quarter in scope.