Introduction
The insurance commercial and regulatory landscape is evolving rapidly, shaped not only by technological advances and shifting customer expectations but also by the regulatory environment. At the heart of this transformation lies the Financial Conduct Authority’s (FCA) Consumer Duty—a set of principles designed to ensure that customers receive fair value, clear communications, and outcomes that genuinely serve their interests. For insurers, brokers, and intermediaries, embracing Consumer Duty isn’t just a matter of compliance; it’s a call to redefine the very ethos of how insurance is designed, marketed, sold, and serviced.
This article explores how Consumer Duty and the fair value requirement are reshaping the insurance sector, delving into the implications, challenges, and opportunities they present for firms.
The Essence of Consumer Duty
The FCA’s Consumer Duty, introduced in 2023, represents a significant shift from a rules-based approach to one that is outcome-focused. The aim is to ensure that firms consistently put customers’ needs at the centre of their business models, operations and decision-making.
Fair value is one of the cornerstones of the Consumer Duty. In the context of the insurance sector, it is not simply about whether a product is cheap or expensive, but rather whether the price paid by the customer genuinely reflects the benefits and quality of service received. This means that firms must assess and demonstrate this fairness not just at the point of sale, but throughout the entire customer journey, considering factors such as product performance, fees, and the impact of distribution chains.
Fair Value: More Than Just Pricing
In September 2024, the FCA published an update on Price and Value. This update provides insights from the first year of implementation and aims to help firms improve their fair value assessments.
The FCA’s key messages to firms include:
- Holistic Consideration: Firms should consider the outcomes of the Consumer Duty holistically, including the price and value outcome alongside other outcomes and cross-cutting obligations.
- Target Markets: Effectively identifying target markets helps in assessing impacts on different customers. Broad target market definitions risk not meeting the FCA’s requirements.
- Cross-Subsidies: Analysis of cross-subsidies can help identify where different consumer groups may be at risk of not receiving fair value.
- Evidence: Evidence is vital in fair value assessments, but firms should adopt a proportionate approach based on their size and the complexity of the factors being considered.
- Charges: When undertaking a fair value assessment, firms should consider the balance between the price and the actual benefits provided. In doing so, firms should take account of any fees, charges, or ancillary costs that may erode value. This includes the impact of distribution chains and third-party commissions on the end customer.
- Prompt Action: Firms should take prompt action if fair value assessments show consumers are at risk of not receiving fair value.
- Governance: Effective governance is crucial in ensuring senior-level challenge on whether fair value is being delivered.
Implications for the Insurance Sector
Consumer Duty and the ongoing emphasis on fair value have far-reaching implications for insurers, MGAs, brokers, and all those involved in the insurance value chain. Based on our engagement across the market, it’s clear there is still some work for firms to do to demonstrate and evidence fair value, especially around:
Product Design and Governance
Insurers need to adopt a far more rigorous approach to product design and governance. This includes a clearer understanding of the target market, more regular product reviews, and better oversight of distribution partners. Firms need to be able to evidence how products deliver value, and actively monitor for signs of poor outcomes.
Pricing Practices and Remuneration
One of the key areas of ongoing focus for the FCA is ensuring that pricing practices are fair, transparent, and aligned with the value delivered. The days of opaque pricing, high add-on charges, and complex commission structures are gone. Insurers are expected to justify their pricing, ensuring that the cost to consumers is proportionate to the cover and service provided.
Distribution Chains
The insurance distribution chain can be complex, with multiple parties each taking a share of the customer’s premium. The FCA expects all parties in the chain to consider their impact on the end customer’s value for money. This means greater transparency, tighter control over fees and commissions, and a shared responsibility for delivering good outcomes.
Customer Understanding and Communication
Clear, timely, and accessible communication is fundamental to Consumer Duty. Firms must ensure that customers fully understand the products they are purchasing, the terms and conditions, and their rights and obligations – and this includes the price they pay relative to the benefits that they receive. This goes beyond compliance with disclosure requirements; it demands a proactive effort to foster genuine customer understanding through plain language, intuitive documentation, and ongoing engagement.
Customer Support and Vulnerable Customers
Effective customer support is another pillar of Consumer Duty. Insurance firms must provide support that is accessible, responsive, and tailored to the needs of all customers, including those in vulnerable circumstances. This includes clear signposting, multiple contact channels, and a culture of empathy and problem-solving.
Common Challenges
While the principles of Consumer Duty and fair value are clear, embedding this across the insurance sector is not without its challenges.
- Legacy Products and Systems: Many insurers operate with legacy books of business and outdated IT systems, making it difficult to assess and evidence fair value across all products.
- Data and MI: Gathering, analysing, and acting upon management information (MI) that provides real insight into customer outcomes is a significant hurdle for some firms.
- Culture and Accountability: Embedding a customer-centric culture requires ongoing commitment from leadership and buy-in at all levels of the organisation. The FCA expects clear accountability for consumer outcomes, including at the board and senior management level.
- Distribution Complexity: Managing value across complex distribution chains, particularly when dealing with third-party intermediaries, remains a persistent challenge.
Opportunities for Forward-Thinking Firms
While compliance with Consumer Duty is mandatory, firms that embrace its spirit have a unique opportunity to differentiate themselves in a competitive market.
- Trust and Reputation: Firms that consistently deliver fair value and good outcomes are more likely to earn customer trust and loyalty, enhancing their brand and reputation.
- Innovation: The shift towards an outcome-focused approach creates space for innovation, whether through digital transformation, tailored customer journeys, or new product propositions that better meet emerging needs.
- Long-term Profitability: By reducing complaints, regulatory risk, and customer churn, firms can achieve more stable, sustainable growth.
- Market Leadership: Those to embed the spirit of the Duty as well as the letter can position themselves as market leaders, setting the standard for others to follow.
Practical Steps for Insurers
To meet the expectations of Consumer Duty and fair value, insurance firms should consider the following practical actions:
- Conduct comprehensive reviews of all products and customer journeys: Regularly assess the entire lifecycle of products and services to ensure they meet the evolving needs of customers. This includes evaluating product design, performance, and customer feedback to identify areas for improvement.
- Strengthen product governance frameworks and oversight: Implement robust governance structures to oversee product development and management. This involves setting clear accountability, conducting regular audits, and ensuring compliance with regulatory standards.
- Enhance data collection, analysis, and reporting on customer outcomes: Invest in advanced data analytics and AI to gather insights on customer behaviour and outcomes. Use this data to monitor product performance, identify trends, and make informed decisions to enhance customer value.
- Review pricing and remuneration structures for transparency and proportionality: Ensure that pricing strategies are transparent and reflect the true value of the products and services offered. Regularly review remuneration structures to avoid conflicts of interest and ensure they align with customer outcomes.
- Invest in customer communications and ongoing engagement: Develop clear, concise, and accessible communication strategies to keep customers informed throughout their journey. Engage with customers regularly to understand their needs and provide timely support.
- Train staff at all levels on the principles and expectations of Consumer Duty: Provide comprehensive training to employees on the principles of Consumer Duty and fair value. Ensure that staff understand their roles in delivering good customer outcomes and are equipped to handle customer queries effectively.
- Foster a culture of learning, accountability, and continuous improvement: Encourage a culture where learning from customer feedback and regulatory changes is prioritised. Promote accountability at all levels and continuously seek ways to improve products, services, and customer experiences.
Final Thoughts
Consumer Duty and the emphasis on fair value demand much more than box-ticking compliance—they call for a fundamental rethink of how insurers serve their customers, design and price their products, and measure their success.
Ultimately, those firms that embrace the spirit as well as the letter of Consumer Duty will not only satisfy regulatory requirements but also build deeper, more enduring relationships with their customers. By upholding trust, transparency, and fairness, the insurance sector can secure a future that benefits both firms and the consumers they serve.
If you would like to discuss any aspect of Consumer Duty and fair value assessments, or any other conduct-related matter, please contact us at: hello@square4.com.
Senior Advisory Director (Insurance)
