The Financial Conduct Authority (FCA) has published the results of its thematic review of delegated authority arrangements in the general insurance market (click here). Delegated authorities are widely used in the UK insurance market in relation to the outsourcing of functions to third parties and intermediaries. Outsourcing and any accompanying allocation of functions can take various forms and may relate to all stages of an insurance product life-cycle from product development, to underwriting, distribution and sales, and claims handling. In producing the report, the FCA reviewed the outsourced underwriting and claims handling arrangements of 12 insurers, and the associated activities of 19 intermediaries and third party administrators.
The FCA found that only a minority of firms it sampled had treated externally delegated underwriting as a form of outsourcing and had applied a risk-based approach to the selection of third parties. Such firms considered the extent of the outsourcing arrangement and the level of authority being delegated. In contrast, a number of firms had not treated these arrangements as outsourcing and their risk appetite and approach to outsourcing was unclear.
A further area of concern for the FCA was the extent of due diligence performed by insurers in relation to prospective relationships, which stemmed in part from many insurers not treating the delegation of authority to a third party as outsourcing. The FCA found that insurers who did not appropriately assess the ability of selected third parties to provide products and services to customers presented potential risks to customers.
Additional concerns highlighted included that:
- In many cases insurers and intermediaries did not appear to have adequately considered their regulatory obligations in relation to both outsourcing and other functions;
- There is a lack of appropriate oversight and monitoring by many product providers of the delivery and performance of the product, particularly in relation to meeting customers’ needs; and
- Insufficient consideration is given to the risks of the distribution model.
These findings have caused the FCA to be concerned about the fair treatment of customers where functions are outsourced and multiple firms are involved in the provision of products and services. In particular it has concerns that the increased risk of poor customer outcomes arising from the division of knowledge and responsibility that occurs in outsourcing underwriting, claims handling authority and other related functions to third parties is not being appropriately managed.
Similar themes were also highlighted in the FCA’s recent thematic review into the handling of insurance claims for Small and Medium-sized Enterprises (“SMEs”) (click here), published in May 2015. In that report, the FCA identified the overall poor perception by SMEs of the claims experience, a lack of clarity and poor communication as to who was responsible for driving the outcome of the claim, and sums insured not being adequate to cover the loss.
The FCA has indicated that improvements are needed in firms’ due diligence and the way they manage outsourced arrangements, particularly in considering and assessing customer outcomes. Linda Woodall, acting director of supervision at the FCA, said: “all firms must ensure they have appropriate oversight of outsourced arrangements and meet their wider responsibilities to deliver fair customer outcomes.
The report is further evidence of regulators’ increasing focus on managing risk and maintaining operational oversight and control of outsourced functions in the insurance sector. In addition to reviewing their existing arrangements in the context of Solvency II (see our earlier article for further information (click here)), the FCA will now expect firms to consider its findings and make any necessary changes to ensure that customers are treated fairly and are not at risk of detriment.