This letter is a response to follow-up questions from the Treasury Committee regarding the FCA's work on various topics, including:
Asset Management:
The FCA is considering how to adapt the EMT (European Mifid Template) data feed to reflect additional cost disclosures required by PRIIPs (Packaged Retail and Insurance-based Investment Product) regulations.
The FCA is working on reforms to investment company cost disclosures, aiming for outcomes-focused information that benefits retail investors.
Insurance:
The FCA notes the success of Flood Re in increasing access to flood insurance and acknowledges the ongoing debate about its future beyond 2039.
The FCA acknowledges concerns about rising insurance renewal costs and is monitoring the situation closely.
They emphasise that they cannot control prices but are reviewing their rules on pricing fairness and transparency.
The FCA believes the securitisation market has potential for growth and is proposing changes to regulations to improve its efficiency and accessibility.
Securitisation:
The FCA is proposing rule changes to make the UK securitisation market more
efficient and potentially reduce borrowing costs for companies.
OPBAS (Office for Professional Body Anti-Money Laundering Supervision)Â Reform:
The FCA believes the current OPBAS framework for AML (Anti-Money Laundering) supervision needs improvement and supports a consolidated supervisor model.
Option 3 (a single professional services supervisor) is preferred by the FCA due to its potential to enhance effectiveness and coordination while minimising complexity.
Option 4, a single AML/compating terrorist financing (CTF) supervisor (SAS) is not considered wise by the FCA as it would men a transfer of expertise, cause friction in the wider economy and would require the removal of AML regulation from the FCA framework of regulations.
Our Focus - Insurance Sections of the FCA Letter
While this is all interesting information, for the purposes of this article we are interested in the insurance section of the letter. These can be summarised here;
Home and Motor Insurance:
The FCA highlights concerns about rising renewal costs for both home and motor insurance, with premiums increasing significantly in recent months. The increases are attributed to losses made by insurers in previous years coupled with increases to factors like rising repair costs, material shortages, and higher energy prices. Claims costs alone have risen 16% between Q2 2019 and Q2 2023 (£2.2bn to £2.5bn).
The FCA are keen to emphasise that they cannot directly control insurance prices but are monitoring the market closely and reviewing their rules on fair pricing fairness and the value delivered. It is evident that the rules introduced in 2021 to tackle loyalty penalties and that business could not be "bought in" at lower premiums has led to premium increases for some people, who thought incorrectly that the lower proces were the correct ones. The FCA says "We plan to carry out a full evaluation of the impact of our pricing rules this year."
Flood Insurance:
Flood insurance is never far from the headlines with a number of named storms hitting UK shores with alarming frequency, the letter addresses the role of Flood Re, a government-backed scheme that helps ensure the availability of flood insurance in high-risk areas.
Insurers providing flood insurance remiain subject to the FCA conduct rules and the Consumer Duty, including the fair value requirement for firms to understand customer outcomes and the value of their products, but in terms of availability the FCA report that
Flood Re’s 2023 annual report sets out that 99% of households in properties at high risk of flooding could find quotes from 15 or more insurers [1]. Whether this is what it feels like for brokers and buyers remains to be seen. The FCA notes the success of Flood Re in increasing access to flood insurance and acknowledges the ongoing debate about its future beyond 2039.
What are the implications?
1. FCA:
The rising cost of insurance and potential future changes to Flood Re present challenges for the FCA in ensuring fair and sustainable markets.
The FCA needs to balance consumer protection with the financial stability of insurance companies.
Reviewing pricing rules and monitoring market trends will be crucial for their response.
2. Insurance Brokers:
Increased competition due to easier price comparison could benefit brokers who offer competitive deals and value-added services.
They may need to adapt their offerings and marketing strategies to cater to cost-conscious consumers.
Clearer and fairer pricing rules could simplify their tasks and improve client trust.
3. Consumers:
Consumers face the brunt of rising insurance costs, potentially impacting their budgets and financial security.
Shopping around and comparing prices carefully becomes even more important.
Understanding and utilising any consumer protection measures introduced by the FCA will be crucial.
Other Points of Interest
The letter also briefly mentions the broader issue of non-financial misconduct within the Lloyd's and London insurance markets, highlighting the FCA's focus on promoting a culture of integrity and inclusion.
While the letter doesn't specifically discuss other insurance lines, the principles and approaches mentioned could be relevant to other areas as well.
What Next?
These are the most liekly next steps for the the FCA and the Treasury Committee;
The Treasury Committee will likely review this response and consider the FCA's proposed reforms.
The FCA will continue monitoring the insurance market and may implement further regulations based on their findings.
The future of OPBAS and AML supervision will depend on the Treasury Committee's decision and potential legislative changes.
How Can I Help You?
If you need help navigating the guidance or any aspect of your regulatory responsibilities please do not hesitate to get in touch.Â
Sources:
[1] - FloodRe Report