The FCA has set out their findings from a review that assessed insurers’ claims-handling processes for valuing vehicles which have been stolen or written-off (‘total-loss’ claims).

This review is very helpful for other sectors to review and reflect on how the regulator has aligned the Duty at a ‘ground zero’ level in just one aspect of the motor insurance claims management process for large multi-product manufacturers (i.e. general insurance firm). This is just a small part of the customer journey from financial promotion to quotation, into the underwriting and policy administration process ahead of renewal, policy variations, customer service, claims handling, policy excess collections, fraud prevention, complaint management and post-termination obligations.

“To support their compliance with the Consumer Duty, firms should ensure they consider the needs of their customers at every stage of the product lifecycle”

Customer Centric Approach 

From the outset, the FCA has reminded firms that they should put consumers at the heart of their business and act to deliver good outcomes for them. They have reminded SMFs under SM&CR to carefully consider the contents of the review and take necessary steps to ensure that the firm’s processes are in line with the FCA expectations.

Example

When valuing vehicles as part of total loss claims, firms must ensure they align their approach with their regulatory obligations. For example, insurance firms must handle claims promptly and fairly (ICOBS 8.1.1(1)R). Further, under the Consumer Duty, one of the ways we expect firms to act to deliver good customer outcomes is by enabling and supporting customers to pursue their financial objectives through the products they offer.

Under the Consumer Duty, firms should support customers in realising the benefits of their policy without unreasonable barriers. An example of a barrier could include a firm making low initial offers in anticipation of negotiation from customers. There is also a risk that vulnerable customers are at greater risk of harm from these practices, as they may have less financial knowledge or experience of dealing with financial firms to challenge their insurer’s initial settlement offer.

Multiple valuation methodologies aligned to better outcomes

Some of the firms the FCA reviewed said they use multiple valuation methodologies to determine claims settlement value. However, the FCA witnessed little evidence that firms monitored the related consumer outcomes to ensure this did not lead to customer harm. Firms need to demonstrate how they meet the requirements under the Consumer Duty to monitor the outcomes retail customers experience from their products.

Under the Duty, the FCA expect firms to use data to proactively identify issues that may be leading to foreseeable customer harm. Accordingly, if a firm changes its valuation methodology over time, it should take active steps to monitor that this does not result in systematically poorer outcomes for customers (e.g. systematically lower settlement payments).

These examples can be aligned to many aspects of the product lifecycle once a customer has been onboarded, including switching support channels to cheaper medium and making other aspects that could be determined as ‘sludge’ practices (e.g. forcing engagement through digital channels, restrictions on payment methods or the costs of paying by instalment where this is an affordability consideration for a legally required product). 

Communications

Communicating the settlement offer in an intelligible manner is a vital step in the claims-handling process. It enables customers to review the offer and decide if they want to accept it or dispute it in a timely manner. So, the customer must understand how the firm reached the valuation, including how it determined the vehicle’s pre-accident market value and any deduction made.

Under the Duty, the regulator expect firms’ communications with customers to help them make effective, timely and informed decisions, and support them in realising the benefits of their policy without unreasonable barriers. Firms also have a responsibility to consider their customers’ information needs, and ensure they communicate in a manner that is clear, fair and not misleading (PRIN 2A.5.3(2)R).

Outsourcing

The FCA has focused on key aspects of the Duty and SYSC around outsourcing of key aspects of the customer journey. Indeed, they have again challenged the senior management of firms to justify their decision to outsource aspects of their service and supply chain. 

“We expect firms to consider the Consumer Duty when deciding to outsource activities and assess if outsourcing claims handling processes could have a negative impact for customers, taking mitigating steps if needed.”

I have made the paragraph below more generic to regulated firms that use outsource providers.

Under FCA rules, firms must take reasonable care to control their affairs effectively and responsibly, with adequate risk management systems (PRIN 3). Although firms can outsource activities, they cannot outsource accountability for ensuring these meet regulatory requirements, including requirements under the Consumer Duty. Firms should ensure they have adequate oversight over third party providers to ensure outsourced activities are handled promptly and fairly. Customer outcomes from third parties must be consistent with those delivered in-house. Firms must also manage conflicts of interest fairly, both between itself and its customers (PRIN 8) and meet the rules under SYSC, that may place specific obligations on providers by sector.

MI – data-driven approach

Under the Consumer Duty, the FCA expect firms to monitor and regularly review the outcomes that customers experience. If firms identify worse outcomes for any group of customers, they must take appropriate action to address this (PRIN 2A.9.12R(2)).

Senior Managers (SMFs) must take reasonable steps to ensure the business of the firm for which they are responsible is controlled effectively, and complies with relevant requirements and standards of the regulatory system (COCON 2.2.1R – 2.2.2R). Ensuring there is timely access to appropriate MI to enable challenge and identify and investigate potential issues is an example of taking reasonable steps to discharge these responsibilities.   

The FCA recommends that regulated firms monitor relevant guidance and decisions issued by the Financial Ombudsman. This will also help them meet their monitoring obligations under the Consumer Duty. It should provide assurance that customers who do not complain to the Ombudsman do not systematically receive worse outcomes (PRIN2A.9.10R(2)).

https://www.fca.org.uk/publications/multi-firm-reviews/findings-multi-firm-review-insurers-valuation-vehicles