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FCA criticises London market over contract certainty, price increases and claims

The UK regulator has told Lloyd’s and London company market insurers it is concerned they aren’t delivering contract certainty or treating commercial customers fairly, adding that risk transfer products do not provide buyers with “fair value” or meet policyholders’ needs.

In a letter to CEOs, the Financial Conduct Authority (FCA) said “most” London market insurers pose six main risks to buyers that it will closely monitor during the next two years.

The regulator said wholesale (re)insurers in the London market should “put the end customer at the heart of their business model”, after the fallout from Covid-19 business interruption claims exposed issues with policy wordings. The FCA said it is concerned that contract uncertainty “may be more widespread”.

“We want firms to learn from their mistakes, such as the market’s initial handling of business interruption insurance claims, and find a market solution to market issues,” said Charlotte Cross, head of department, wholesale general insurance at the FCA.

Contract wording is often “ambiguous” and alongside “misaligned” customer expectations can create coverage uncertainty, she added.

The FCA said commercial insurance products do not always offer fair value and this is often exacerbated by “long distribution chains” that add to costs.

Recent rate hardening for certain business lines, such as employers liability and professional indemnity, have landed buyers with heavy premium costs, the FCA said. The market should provide “affordable insurance products that meet customers’ needs” and better communicate premium rises.

The FCA identified “a number of issues” in claims handling that suggest firms “do not always deliver claims outcomes that are fair and timely”. Cross said some insurers have “created undue barriers” for customers of third-party claimants in historic claims, including those involving child sexual abuse.

The regulator has also raised red flags over the market’s operational resilience as it increases digitalisation and third-party outsourcing. It said technology service failures or weak technology could impact policyholders. Meanwhile, reliance on third parties could create the potential for systemic risk if a large number of carriers rely on the same provider, added the FCA.

It went on to criticise the culture of the London market and the underlying conflict between commercial performance and meeting customers’ needs. “There remains a significant risk that poor underlying cultures may lead to poor customer outcomes and impact the integrity of the market,” Cross said in the letter. She added that lack of diversity and inclusion and “non-financial misconduct” risk creating environments where it is not safe to speak up or where the best talent is lost.

“Whilst firms talk about the importance of attracting diverse talent, we hear less on the work being done to build an inclusive environment. It is encouraging to see that the market has been engaging with the issue and D&I is increasingly on firms’ agendas. But most efforts to date have focused on gender diversity and there is still a long way to go before the London market becomes a truly diverse and inclusive sector,” the FCA said.

It added that London’s insurers now have an opportunity to reset the button as more staff return to the office.

The FCA said it expects firms to address all these risks head-on during the next two years.

“Firms in the portfolio have not embraced some of our key messages (for example around firm culture and purpose) or kept up with the pace of regulatory change. Although some progress has been made on diversity, the industry still has a long way to go, both as employers and in serving the diverse needs of customers,” the FCA said.

FCA’s six risks posed by Lloyd’s and London market insurers:

  1. Value of products
  2. Claims outcomes
  3. Operational resilience
  4. Uncertainty over insurance cover including due to ambiguous contract terms
  5. Culture
  6. Access to certain business lines.
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