James Daley: Industry must increase consumer trust to avoid political intervention

The insurance industry needs to brace itself for the threat of renewed political scrutiny as it continues to embed the Consumer Duty regulation, according to James Daley, managing director of research foundation Fairer Finance.

Daley tells Insurance Times that the insurance market was still battling with its image in the eyes of clients and the regulators, but as Parliament this month (23 May 2024) confirmed a new general election for 4 July 2024, political parties are also looking at the industry and its performance.

Assessing the current reputation of the industry from a client perspective, Daley says there is still “an expectation gap which [the market] is struggling to close”.

He continues: “It needs to be recognised that insurance is not a panacea for all risks. However, clients do not read the 20,000-word policy from cover to cover.

“The industry has not quite faced up to the challenge to rebuild trust.”

Client trust in the insurance sector was severely dented following the onset of the Covid-19 pandemic in 2020, where many insurance policy terms and conditions were put to the test – at this time, a large proportion of insurance customers discovered that they did not have the cover in place that they thought they did, leading to a widening expectation gap between insurers and customers.

More honesty and transparency

For Daley, the introduction of the FCA’s Consumer Duty rules last July serve as a catalyst that will force the insurance industry to stay honest.

Consumer Duty requires firms to measure, analyse and benchmark their performance across a number of metrics designed to bolster service.

These metrics include products and services, fair value, consumer understanding and consumer support.

Daley says: “We have seen the FCA react in the past and the issues around guaranteed asset protection (Gap) cover are a case in point.

“I have been saying for 15 years [that] the industry needs to be honest, transparent and set customer expectations and the value of what they do. The regulators are now doing that.”

Daley notes that “the arrival of comparison sites” in the early 2000’s impacted market-wide transparency because “the industry moved from mis-selling to mis-buying”.

He explains: “Comparing complex products is not ideal if you are being asked to do so unaided. It all too often ends up coming down to price, not suitability.”

Daley adds that as risks change, so do policies and their cover. However, the public is all too often unaware of these changes or the fact that their own risks have also shifted.

“People will often do their learning when they buy their first product and then if they have claims which [are] subsequently turned down.

“At present, insurance is viewed as a grudge purchase. Customers expect they will face a fight with their insurer if a claim occurs.”

Daley says there has always been a tension between the needs of the customers and the need of shareholders.

“As customers become less able to make decisions, shareholders will push insurers to do things they have not done before,” he adds.

A ‘heavy handed’ regulatory approach

Daley believes the FCA’s response to dual pricing was “heavy handed.”

Dual pricing, also known as the loyalty penalty, refers to when new customers are offered more competitive premiums then renewing customers, based on like-for-like risks. To mitigate this, the FCA introduced its fair value reform in 2021.

“It would have been better to communicate with the industry rather than just outlaw dual pricing,” Daley explains.

“Consumer Duty is the next phase in the process and it is likely that commission levels and claims ratios will be the next areas of focus for the regulator.

“We have seen some businesses move profits to areas which have come under less scrutiny, but the regulator is starting to look there and work around the edges.”

Daley says there is a need for government and regulators to take a wider look at the insurance industry, to create a sustainable market where insurers remain profitable but consumers are better protected.

“The market needs to price for the delivery of value and good outcomes,” he continues.

“Take the Gap market. We saw a warning at [a] firm and when – after six months – the required changes had not been made, [the FCA] simply tear the market up.”

Daley believes regulators will continue to look at crisis areas such as motor, where pricing has made cover unaffordable for some.

He says: “In the next five years, we are likely to see political and regulatory attention. It is not over.

“We have seen members of the Labour party front bench discussing car insurance and the ABI knows [it needs] to create a response to the current high prices.

“In the past, [tackling industry-wide issues] has always been left to the regulators, but we do not want to come to the point where politicians become involved.”

Premium finance

One area where Daley believes there is likely to be more attention is the premium credit market.

“The industry will need to provide hard evidence as to why they demand the premium up front and then charge 14% to fund it on a monthly repayment basis,” he says.

“At present, insurance is viewed as a grudge purchase. Customers expect they will face a fight with their insurer if a claim occurs.”

However, Daley is optimistic that the insurance market will come through the regulatory challenges it faces.