FCA expectations of general insurance (‘GI’) firms

The FCA has published its Thematic Review into GI insurance distribution chains. The FCAs findings have highlighted and identified areas where there is potential of harm and poor outcomes for customers arising from the product development, sales and distribution approaches in some sectors of the GI market.

The FCA’s Thematic Review highlights the importance of GI products to the wider economy, explaining: “GI products are key to giving UK consumers and businesses the security and stability to go about their daily activities with confidence. It is therefore essential that they can access high quality, good value insurance products.”

The report highlights that GI distribution chains can vary from only one or two parties (e.g. a direct insurer or an insurer and an insurance broker) but others can include multiple parties. The report highlights how the remuneration of all the parties in the distribution chain can result in customers paying significantly higher prices than the production and delivery costs of the products they are buying. In some distribution chains there can also be a high risk of unsuitable sales (e.g. where an insurance product is sold alongside a non-financial product, such as a car).


The General Insurance (‘GI’) products serve an important social need and are key financial products underpinning a well-functioning economy. The GI market includes all types of non-life insurance policies, such as motor, home and travel cover. This sector is made up of more than 300 insurers and 5,000 intermediaries who currently operate in Britain’s GI marketplace. These firms operate using a wide range of business models, allowing UK customers to access GI products via a variety of different distribution channels and purchase methods.

This is not the FCA’s first foray into the GI sector, in recent years the FCA has published two reports which highlighted failings in the governance and control of GI distribution chains, including over outsourced arrangements (in 2015 on Delegated Authority and in 2016 on Appointed Representatives). The FCA has confirmed some progress has been made, today’s report outlines that significant potential for customer harm remains. The issues identified in the report indicate many firms lack sufficient focus upon customer outcomes and need to address this urgently to mitigate the potential harm to customers.

Findings of the GI distribution chain Thematic Review

  • The FCA reviewed three specific GI products (travel, tradesman and GAP/motor ancillary insurance) – selected to give a representative sample of the wide and varied GI market – the FCA has found that:
    There is a potential for harm to customers arising from the product development and distribution approaches used in some sectors of the GI market.
  • Many customers paid prices, which appeared significantly higher than the production and delivery costs of the products. This was due to very high levels of commission within the distribution chain.
  • Many firms did not adequately consider risks of harm to customers when developing products and their related distribution arrangements.
    Some product manufacturers were giving control of the product design (including pricing) to other parties in the distribution chain without proper oversight and without considering the impact on the value of the product and outcomes for customers.
  • Some firms had a lack of appropriate due diligence and oversight of distribution partners. This meant they were failing to consider the suitability and ability of parties to whom authority, control or responsibility is being delegated or passed.

The FCA identified significant potential for harm to customers arising from the product development and distribution approaches currently employed in some sectors of the GI market and by some GI firms. The risks of harm identified included examples relating to both features of the distribution chain and of the particular product involved. The FCA reported that they saw many cases where it was not clear that firms (both insurers and intermediaries, acting as manufacturers or distributors) had considered the impact of their actions (and inactions) on the value of the products provided and customer outcomes.

Specific examples of the potential harms identified include the following:

  • Customers buying GI products paying high prices, which appear significantly higher than the production and delivery cost of the products due to high levels of commission within the distribution chain. One example where the FCA found potential harm occurring was for Guaranteed Asset Protection (‘GAP’) insurance (and other motor ancillary insurance products) purchased alongside a motor vehicle, where the average level of commission taken by some distributors was over 60%. These distributors were often directly regulated intermediaries or appointed representatives (‘ARs’) forming part of an otherwise unregulated group, like a motor manufacturer or dealership network, and they appeared to be able to extract these levels of commission due to the control they could exert over both the distribution chains and the customers.
  • Firms failing to fulfil obligations to customers, including where the services provided to customers are not delivered appropriately. The FCA found examples of this where there were shortcomings in the processes and practices surrounding claims handling, including in cases where the responsibility for handling claims had been delegated, creating the risk that legitimate claims could be rejected”.

In his comments on the Thematic Review, Jonathan Davidson – executive director of Supervision – Retail and Authorisations at the FCA said: “The widespread extent of these issues demonstrates a culture which pays insufficient regard to customer outcomes in some parts of the general insurance sector”

In its report, the FCA also highlighted the requirements of the Insurance Distribution Directive that came into force on 1 October 2018 and:

  • Requires firms to act honestly, fairly and professionally in line with the best interests of the customer; and
  • Prohibits remuneration for insurance distributors and their employees that conflicts with their duty to comply with the customer’s best interests.

The Senior Manager and Certification Regime (SM&CR) is designed to make Senior Managers accountable for the actions of their firms. It has applied to insurers since 10 December 2018 and will be applied to GI intermediaries in December 2019.

The FCA has issued a warning to firms that: “it will not hesitate to intervene with both firms and their senior managers…where it sees a failure to have appropriate regard to the value their ultimate customers receive“.

Next steps for GI firms?

The FCA has warned the sector to closely review its practices in light of the recent findings and make immediate improvements or face further regulatory intervention. The FCA has issued a “Dear CEO” letter to share its findings and make clear that the FCA expects firms to act immediately to identify and address any shortcomings and to ensure they meet the FCA’s expectations.

GI manufacturers should consider the value provided by their products through their product approval processes and their oversight of distribution arrangements. GI distributors should consider the impact their distribution processes have on the value the customer receives from the product and ensure they are not remunerated in a way that conflict with customer’s best interests.

The FCA has also published draft non-Handbook guidance giving further clarity on the FCA’s expectations of firms in the GI sector. The key points are:

  • All GI firms must act fairly, honestly and professionally in accordance with the best interests of their customers.
  • All GI firms should consider the value their customers ultimately receive from their products and services.
  • All GI firms should maintain appropriate systems and controls over the remuneration they receive.
  • All GI manufacturers should have sufficient knowledge of the roles and remuneration of all entities in the distribution chains they use to be able to assess the impact they have on the value customers receive.
  • All GI firms must maintain appropriate systems and controls (including the production and use of appropriate management information) over their GI products and services. This includes when delegating authority to another business.
  • All GI distributors should consider the impact of their distribution strategy (including the distribution method and the level of remuneration they receive) on the overall value of the product for their customers.
  • With the introduction of the Senior Managers & Certification Regime, the FCA also expect there to be clear lines of individual accountability within all firms for each of the expectations and related activities detailed in the guidance.

The guidance is open for consultation until 9 July 2019.

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