Life insurance portfolio letter: insurance market priorities 2023-2025

20 September 2023

Dear CEO,

Insurance market priorities 2023-2025

We want to update you on the FCA’s priorities for the life insurance market and broader

insurance market 2023-2025, the specific risks of harm we are most concerned about,

what we want firms to do about them and where we intend to focus the majority of our

work in this area.

The broader insurance market is essential to the UK economy providing a vital service

for millions of UK consumers and businesses. The market has 3 key sectors: personal

and commercial lines insurance, wholesale insurance and life insurance. The wide variety

of products and services within it includes personal and commercial lines products such

as home and motor insurance that provide financial protection, wholesale products and

services that price and underwrite risks from around the world, and life insurance

products that provide income to millions of customers before and at retirement, as well

as long-term protection products.

Life insurers manage c.£2.35trn of customer assets across c.90m policies (at end 2022),

helping customers manage their risks and to save for their retirement as well as other

long-term savings needs. In personal and commercial lines markets, our 2022 FCA

Financial Lives survey, shows 84% of adults surveyed hold an insurance product with

over two-thirds (68%) of them reporting they always or usually shop around for these

products. Further, the wholesale insurance market is a fundamental enabler to the

economy allowing risks to be pooled and covered with around £55bn of Gross Written

Premiums (GWP) written in 2021 alone. The health of the UK insurance market remains

significantly important to the UK economy.

As with all financial services, the insurance market has faced, and continues to face,

significant challenges such as the aftereffects of COVID-19, supporting customers with

cost of living pressures and adjusting to higher inflation and interest rates. Additionally,

climate change, artificial intelligence, resourcing challenges and strains on profitability

have the potential to materially increase the existing risks of harm about which we are

concerned. Ensuring we have the right data to assess both current and emerging risks of

harm is a key priority for us.

Our strategic objective under the Financial Services and Markets Act (FSMA) is to make

financial services markets function well. A key aim for the UK insurance market is that it

continues to be a successful industry that helps customers achieve their long-term

financial goals and is there for consumers and companies when the worst happens.

Where insurance works well, we see customers invested in good value pensions products

with good quality and timely support when they need it, and claims being met quickly

and fairly at the time of customers' greatest need.

However, when we take a closer look at specific areas, too often we find significant

failings. For example, in the last year we have taken supervisory action against firms

where we have seen:

• instances of very long waiting times/settlement delays

• weak identification of vulnerable customers

• the continued sale of products not providing fair value

• paying away substantial amounts of commission to third parties where it was not

clear how those commission levels had been assessed as being fair value

• failure to implement general insurance pricing practices rules

• discriminatory pricing practices

• undervaluation of motor claims, and

• poor business interruption claims handling.

As a regulator, we are required to comply with our statutory obligations, we do this by

focusing our resources on ensuring firms achieve good outcomes for consumers to meet

their needs and to ensure the market is functioning well. We expect Boards to do the

same and oversee firms and ensure their objectives are in line with our priorities. While

we generally see good intent from Boards, we are concerned that not enough action is

being taken to ensure good outcomes for customers. We therefore expect firms’ Boards

to ensure concrete, proactive action is taken throughout the firm in line with our rules

and expectations and not to treat them as a compliance exercise or wait for us to force

action.

Market-wide priorities

While the UK insurance market covers a broad and diverse range of firms, our focus is

on 4 market-wide priorities alongside sector-specific priorities. These are consistent with

our strategic outcomes and commitments:

Setting & Testing Higher Standards

Putting consumers' needs first: Embedding the Consumer Duty

We have a strong focus on Consumer Duty implementation, especially in the current

tough macro-economic environment – for both consumers and firms. We expect firms to

assess and address issues with Products & Services, Price & Value, Consumer

Understanding and Consumer Support. We also expect firms to put the consumer at the

centre of their business to ensure they are delivering good consumer outcomes. This is

both for open products and services now and in readiness for the Duty applying to closed

products and services from 31 July 2024. We set out our expectations on implementing

the Consumer Duty for Life Insurance and Personal & Commercial Lines Insurance earlier

this year. We will consider using our range of regulatory tools to assess the effectiveness

of this implementation, which may include mystery shopping exercises across different

sectors.

Strategy for positive change - our ESG priorities: Governance and Culture

Poor governance and culture in the insurance market leads directly to poor outcomes for

consumers, market participants and employees and these have been key root causes of

recent major conduct failings.

Firms should be able to show how they are actively working towards having a diverse

workforce at all levels in their organisation. This will help firms understand customers’

diverse needs and make the market an attractive career proposition for future talent.

These positive outcomes can be advanced through firms assessing and improving the

drivers of culture in your firm, considering leadership, purpose, governance, and your

approach to recruiting, managing and rewarding employees. We have seen encouraging

market commitments in this area but remain disappointed on the general lack of

progress within the market overall, especially in the wholesale market.

Minimising the impact of operational disruption: Operational resilience and the

increasing reliance on third parties

Operational resilience is the ability of firms, financial market infrastructures and the

financial sector as a whole to prevent, adapt and respond to, recover and learn from

operational disruption. We have recently seen incidences of a lack of operational

resilience within firms to the detriment of customers and the wider market. We are

particularly concerned with the level of governance, oversight and contingency planning

on outsourced services where, if a problem occurs, customers suffer harm because

adequate controls and contingency plans are not in place.

Our Operational Resilience Policy (PS21/3) accompanied rules and guidance. Firm had a

year implementation period until the rules came into force on 31 March 2022. After that

firms needed to as soon as reasonably practicable and no later than 3 years, show that

they are which comes into effect in March 2025, requires in-scope firms to be able to

remain within Impact Tolerance (ITol) in severe but plausible scenarios for their

Important Business Services (IBSs). To meet this requirement firms must have scenario

tested their IBSs to identify any vulnerability in their operational resilience and acted on

any findings before March 2025, when the 3-year transitional period ends.

It is good practice for firms to have credible plans in place to manage and recover from

operational problems, take remedial action where necessary and notify the regulators

promptly as appropriate. In particular, we draw attention to the risks of cyber-attacks

and the need to ensure you have adequate controls in place where information is held by

third parties.

Improving oversight of Appointed Representatives

Many firms in the insurance market operate as principals with Appointed Representatives

(ARs) to bring benefits such as supporting innovation as some firms use the model to

trial new services and propositions, providing increased customer choice and driving

competition by providing market access for smaller firms. However, we have seen a wide

range of harms where firms operate with the AR model, as set out in our policy

statement last year. Our strengthened rules, which came into force on 8 December

2022, give principals more responsibility for ensuring your ARs are fit and proper. We

are using data and analytics to help us identify higher risk principals and taking

appropriate action on outlier firms. We will be testing that firms are properly embedding

the new rules across the AR regime and increasing and improving our engagement with

principal firms and other stakeholders. We expect principal firms to ensure high

standards both within their firm, and at their ARs. Principals need to take steps to ensure

their ARs operate within those high standards and to take assertive action with those

ARs that fall below the principal firm’s standards.

In addition to the Market-wide priorities, we will also be focused on wider regulatory

priorities over the next 2 years. These include the Future Regulatory Framework and its

impact on the Insurance market, our new secondary competitiveness objective – with a

focus on the wholesale market, and climate change risks. On climate change risk, we

encourage firms to be systematically informed about the climate change risk impact

across their organisation and continually challenge inputs and outputs of the climate

change models they use.

Life insurance specific priorities

In August 2021, we wrote to firms within the life insurance sector to set out our view of

the key risks of harm and our supervisory strategy. Our life insurance portfolio takes

account of the risks within all life insurance firms, including mutuals. Within this portfolio

we also include the main regulated Third-Party Administrators (TPAs) which perform

various services on an outsourced basis for life insurers.

As well as the market-wide priorities, we will also be focusing on the following areas in

your sector.

Setting & Testing Higher Standards

Putting consumers' needs first: Price and value

The Consumer Duty strengthens the need to deliver fair price and value for all retail

products. This includes pensions and other long-term savings products, annuities and

long-term protection.

Pensions and long-term savings products can have complex value chains. We expect

there to be transparency in the charging process, including for closed book products

invested in unit-linked or with-profits funds. We expect firms to ensure that consumers

are not paying excessive fees and charges, that the overall value is fair, and that they

are provided with the necessary information and support to understand the end-to-end

fees breakdown to make informed choices and decisions.

As part of Consumer Duty requirements, we expect firms to make assessments of the

fair value of open and closed book business to the customers that have them. We will be

conducting work to fully understand the transparency of charges across the value chain

and how firms assess overall product value. We will focus particularly on unit-linked

investments which have not been subject to the same requirements as Authorised Fund

Managers managing authorised investment funds. As part of this work, we want to

understand what actions firms have taken where they have identified instances of unfair

value and how they will be measuring this on an ongoing basis. We will use this data to

evaluate whether remedies are needed.

Recently, annuity sales have increased significantly in response to increases in annuity

rates. While consumers’ response to improved annuity rates may be positive, the gap

between the worst and best rates offered on standard (non-underwritten) annuities has

widened. As we noted in our letter to life insurers in December 2022, given that

consumers will be locking into an annuity rate for life, we expect firms to ensure that the

prices offered are fair value to consumers. We also expect, in accordance with our rules

on pension annuity comparison information (COBS 19.9), firms make it clear that

consumers may achieve a higher rate by shopping around on the open market, including

for impaired / enhanced annuities. This should be shown prominently, clearly and in an

engaging way in the documentation a customer receives.

While the market for retail annuities might be price-competitive, pricing may be used as

a way to manage a firm’s capital budget. For example, firms may reduce annuity rates

so they are less attractive, to avoid selling too many relative to the available capital

budget or operational capacity. Insurers should ensure that, relative to market

conditions / the yields on assets being used to back annuities, they are still providing fair

value for customers buying their annuities.

Providing fair value includes individually underwritten annuities, where customers

disclose particular health and lifestyle circumstances (enhanced annuities). There is a

well-established, and rational, expectation across customers and financial advisers that

where particular health and lifestyle factors are disclosed this should provide a higher (or

at least the same) income, compared to an annuity without making disclosures. Given

this, customers who qualify for these products may not seek quotes for annuities that do

not allow for any health and lifestyle circumstances. Insurers (and intermediaries where

appropriate) should ensure that customers who disclose information about their health

and lifestyle circumstances when buying an annuity are not left worse off - due to any

targeted pricing management, or disproportionately high distribution costs - than if they

bought an annuity without these additional disclosures.

We will continue to monitor activity in the annuity market and will take action if we

consider the actions of firms across the value chain, including the level and transparency

of commission on non-advised annuities, could harm the delivery of good outcomes to

annuity customers.

For the life protection market, through our thematic review of PROD 4 rules, we are

testing whether protection products are delivering fair value to customers. We continue

to engage with insurers to identify where there may be evidence of poor outcomes. We

are also concerned that levels of commission may not always be consistent with fair

value and may incentivise unnecessary product churn.

Putting consumers' needs first / Dealing with problem firms: Consumer support

& service quality

We have seen plenty of evidence in recent years of poor service being delivered to life

insurance customers. This includes slow transfer and claim settlement times, as well as

lengthy response times, and we expect firms to address this as a matter of urgency. We

are also concerned about potentially poor service standard targets life insurers set

themselves. Additionally, much of the poor service we have seen seems to be linked to

migrations or transformation activity on legacy business. We expect to see firms raising

the overall standard of their service to ensure good outcomes for their customers.

Transformation activities are a known risk to firms. This is both because of the technical

elements involved and of the potential impact that key actions such as migrations can

have on wider customer services. Insurers should have strong governance of

transformation activities to ensure they are progressing in a way and on a timescale to-

achieve the best overall outcomes and support for their customers.

There are also other developments which could continue to affect insurers’ service levels

unless firms actively manage these risks. For example, the economic environment

continues to affect firms’ ability to recruit staff. Firms should take a holistic view of their

service levels to identify risks of potential service downturns and manage these before

problems occur.

The Consumer Duty has further raised the standards expected of firms for the quality of

service being delivered and how they factor this into assessing the fair value of what

they deliver to customers. We expect firms to have a clear view of the standards they

are trying to achieve, why these meet the needs of their customers in different product

lines and plans for how they will achieve and maintain these standards. Given the wide

range of products and older systems often involved, we expect closed book products to

present different challenges to open book products in delivering the expected service

standards. It is imperative that firms have a clear roadmap to comply with the Duty by

the deadline for closed books.

We aim to understand the drivers of inadequate service where it arises. Where we

identify firms that are not acting to deliver good customer outcomes or have inadequate

processes in place to avoid causing foreseeable harms, we will intervene using our

regulatory tools. More broadly, we will collect data in targeted areas to understand how

life insurers’ actual service standards compare with intended standards and how

customer experience differs across a range of factors and between firms.

Putting consumers’ needs first: Effective customer journeys

Providing adequate support to customers involves more than providing baseline service

levels. We expect firms to demonstrate that they provide effective support to customers

throughout their journey and can evidence they have this support in place. The overall

customer journeys around retirement will continue to be a key focus of our attention

given that these can be highly complex, with customers taking significant life decisions

at various stages. It is essential that firms understand their customer journeys, how

current economic conditions may influence customer behaviour and needs, where poor

support is likely to cause the most harm and, where weaknesses are identified, how best

to improve customer outcomes.

A key way to support customers to make informed decisions may involve providing

regulated advice or guidance. It remains important that, where regulated advice is not

provided, firms consider the guidance they can provide to deliver good outcomes for

their customers. We continue to work with the Treasury to review the Advice Guidance

Boundary and have set out guidance for firms on how best to provide support within the

current rules.

Putting consumers’ needs first: Supporting customers in financial difficulty

The behaviours and needs of customers are likely to continue changing and it is essential

that firms appropriately understand these changes and mitigate any foreseeable risks of

harm to customers arising from them. For example, the increasing cost of living may

mean customers engage more frequently with their products than previously. We also

expect that more customers will become financially vulnerable and will require those

people they engage with at life insurers to be informed, well-trained and empowered to

provide support. Such changes present a foreseeable risk of harm to customers, and we

expect insurers to be taking proactive steps to understand what their changing customer

needs are, or are likely to be, to avoid foreseeable customer harm. In December 2022,

we set out our expectations of how life insurers should support their customers given the

rising cost of living.

Minimising the impact of operational disruptions: Effectiveness of outsourcing

oversight

The extent of outsourcing of servicing, administration and systems functions to regulated

Third-Party Administrators (TPAs) within the life insurance sector has continued to

increase over recent years. This reliance on TPAs, and concentration within a small

number of TPAs, presents risks to life insurers which we expect to form a key part of

firms’ risk assessments.

In our February 2023 Consumer Duty letter to life insurers we highlighted that, where

activities are dealt with by TPAs, the ultimate responsibility for customer outcomes lie

with the insurer. While insurers have assured us they remain responsible, we have been

disappointed by how some have responded to operational events. This suggests a

disconnect of understanding and oversight of outsourced processes may have emerged.

We will look for evidence that both insurers and TPAs understand and have implemented

their respective responsibilities under the Duty into their three lines of defence model.

We may intervene to restrict or delay additional outsourcing arrangements if firms

cannot satisfactorily demonstrate they are meeting these responsibilities.

Cyber security and data loss risks are concerns across all sectors. We believe there to be

particular concerns at life insurers given the high volume of sensitive personal

information held and the interdependencies between TPAs and life insurers. Our

expectation is that firms assess the risk of consumer harm which may arise from cyber-

attacks and develop adequate responses to minimise potential impact. We will review

whether firm-specific action is required to address resilience, particularly in relation to

TPAs.

Putting consumers’ needs first: Suitability and value of life protection products

We continue to see evidence of poor selling practices of protection products. While our

data provided evidence of insurers taking appropriate actions in response to intelligence

about poor broker conduct and remediating customers, we consider that insurers could

often have acted sooner. We also want to see firms improve their due diligence on new

brokers to avoid their products being sold to customers for whom they will not pay out

as expected, and to avoid the unnecessary re-broking of policies. Where insurers identify

the potential for customer loss in the policies they hold, we expect them to remediate

customers appropriately and promptly. A potential driver of poor outcomes is the

commission structures between insurers and brokers. We expect firms to perform

thorough assessments of their products and distribution models to ensure they offer fair

value, in line with PROD 4 and Consumer Duty expectations. Insurers should monitor

brokers in their distribution channels to identify instances where either unsuitable

products may be sold, or products do not offer fair value.

We engaged with product providers earlier this year to understand how effectively their

controls manage the risks of poor selling practices within their distribution channels. We

are also continuing with our thematic review of firms’ implementation of PROD 4 rules

and assessments of fair value, which includes the level of commission structures under

pure protection products. We will share feedback with the market once we have

completed this work and continue to engage with providers.

We have seen evidence of reviewable whole of life policies not delivering good outcomes

for customers. We have also seen premiums increasing substantially at review points,

leaving customers to either pay the increased premium or reduce the level of pay-out

their beneficiaries would receive on their death. Firms should already be able to

demonstrate they are taking active steps to identify and rectify the causes of poor

outcomes for customers. In guidance published in 2016 we set expectations for firms to

periodically review their closed book products, to check they remain fit for purpose and

continue to meet the general needs and reasonable expectations of the customers they

were designed for, taking account of changing economic conditions.

Building on this with the PROD 4 rules and the Consumer Duty, insurers should make

sure that products remain suitable for customers’ needs, offer fair value on an ongoing

basis, and that clear and timely communications to customers detail the nature of the

product and any changes.

Strategy for positive change – our ESG priorities: Sustainability-related

investments and disclosures

We know life insurers can have a role in driving the net-zero transition by aligning their

underwriting and investment activities with net zero. We expect firms to align their

actions with any ESG and sustainability-related public commitments that they may

make. Firms should note that any sustainability-related claims must be communicated in

a way that is clear, fair and not misleading. We have proposed a specific rule that

reinforces this requirement and directly links it to sustainability claims in our consultation

on Sustainability Disclosure Requirements and investment labels. The proposed policy

will not cover unit-linked pension funds and we propose to consult on rules for pension

funds in due course.

Life insurers may be in scope of our Taskforce for Climate Related Financial Disclosures

(TCFD) rules. They may therefore be required to make entity-level disclosures on how

they are managing climate-related risks and opportunities for assets managed or

administered on behalf of clients and consumers. We encourage listed companies to

supplement their existing reporting with reporting aligned with both the International

Sustainability Standards Board (ISSB) standards and Transition Path Taskforce (TPT)

Framework on a voluntary basis, ahead of potential future requirements.

In addition, firms have diverted investments to ‘sustainable’ default funds in recent

months. However, because of the degree of members’ inertia (in pensions in particular),

there is a real risk of consumers landing in funds they may not understand or may not

change if they don’t want to be invested. We expect firms to ensure they have a good

understanding of consumers’ expectations and appetite for sustainable investments and

communicate clearly to keep them appropriately informed about the funds they are

invested in.

Smaller firms

As part of our risk-based approach to supervision, a substantial portion of our

engagement with life insurers is with the largest firms. However, we recognise the

importance of smaller firms, including a large number of small mutuals, to their

policyholders and members. We will be specifically engaging with smaller firms to

understand how they are meeting Consumer Duty requirements and delivering good

customer outcomes in a sustainable way.

Action for firms

You are responsible for ensuring that your firm meets FCA requirements including the

obligations and expectations set out above. You should take all necessary action to

ensure these are met and that you are prepared for the additional requirements that the

Consumer Duty brings to these priority areas. We will use the Senior Managers &

Certification Regime to engage directly with accountable individuals on areas of concern.

A significant part of our activity over the next 2 years will be to test firms against our

priorities and expectations. We will also continue to use data to identify outliers and,

where firms are not meeting our rules and expectations, we will take action.

If you have any questions, please contact your supervisory contact or call us on 0300

500 0597. This is the primary point of contact for your firm’s day-to-day interactions

with the FCA. Our website has further details of how to contact us.

However, we know there may be occasions when your firm faces urgent issues of

strategic importance. In such significant circumstances, please contact the Head of

Department responsible for the life insurance portfolio, Andrew Kay, at

[email protected]rg.uk.

Yours sincerely

Matt Brewis

Director of Insurance

Supervision, Policy & Competition – Consumers & Competition