FCA warns of potential Gap action repeat in other markets after fair value review

The FCA has warned that it could repeat the action it took with the guaranteed asset protection (Gap) market in other sectors should products not meet Consumer Duty standards.

Back in February 2024, the regulator said that 80% of the Gap market would be suspending sales after feeling that it was failing to provide fair value to some consumers.

It later confirmed that it had sent further requests to the remaining firms to pause sales of Gap insurance, in a second tranche of engagement.

Several firms have now been allowed to recommence their sales of Gap products.

The FCA’s latest market-wide warning comes after shortcomings and inconsistencies were discovered in firms’ approach to meeting its product governance obligations for general insurance (GI) and pure protection (PP) products, as set out under its Product Governance Sourcebook (PROD).

According to the regulator’s latest Product Oversight and Governance Thematic Review for General Insurance and Pure Protection, published yesterday (21 August 2024), “many manufacturers are not adequately assessing and evidencing that their products deliver fair value and good outcomes”.

And while “some distributors have strengthened their governance and oversight of their product distribution arrangements”, others have made “much more limited progress in understanding and meeting their responsibilities under PROD 4.3”.

In turn, it said that if insurers ”cannot demonstrate that their products meet FCA rules and provide fair value, it will take appropriate regulatory action”.

The FCA requested and analysed information from 28 manufacturers and 39 distributors covering 10 different GI and PP products for the review.

“Insurers need to make sure their customers are getting fair value,” the FCA’s director of insurance Matt Brewis said.

“Progress is being made, but we are still seeing too many examples of insurers and brokers lacking the right information, governance, or oversight to ensure their customers get consistently good outcomes.”

Data insight

Within the Gap market, the FCA revealed that claims costs as a proportion of premium range stood at 10%.

Meanwhile, for motor insurance the proportion was 56% and 45% for home insurance. That demonstrated a drop compared to 2022, when the figures stood at 64% and 50% respectively.

The FCA said it would continue to monitor motor insurance, as the data may have been impacted by the underwriting loss made by the market throughout 2023 and not yet reflect claims that may be settled during 2024 or later years.

“All insurance firms should take note of our findings and make improvements where appropriate,” Brewis said.

“We’ll continue to take action where we see poor value so consumers can have confidence when buying insurance products.”

‘No magic bullet’

Considering the findings, CMS partner Pippa Tasker said that it was “not surprising the FCA is disappointed with the industry, given the regulator raised concerns about fair value in the insurance market and introduced rules to address it more than two years before the implementation of the Consumer Duty.”

“This review is a clear indication that non-compliant firms should expect action from the FCA,” she added.

Meanwhile, NTT Data UK&I head of general insurance and broking Deborah Bale said “there’s no magic bullet” to fix customers outcomes, but artificial intelligence (AI) can help address firms most pressing concerns.

She highlighted NTT Data’s Benchmarking Consumer Duty in Insurance report, published in July 2024, which showed that 82% of consumers noticed no change in how their insurers interacted with them since Consumer Duty came into force and only 28% of customers took out new policies in the previous six months.

Neurodivergent individuals were also disproportionately impacted, with 29% struggling to understand their policies, compared to 18% of their neurotypical counterparts.

Bale said that “lukewarm sentiment should set off some alarm bells, but it’s no cause for panic”.

“To rebuild trust, personalisation through AI is going to be key, such as using AI-driven chatbots for real-time policy guidance or predictive analytics to tailor coverage options based on individual customer behaviour,” she added.

“The future belongs to firms who can deliver personalised, authentic interactions that resonate with today’s digital-savvy, and increasingly sceptical, customer base.”