August 13, 2024

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by: kiran

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Tags: "Regulation"

Regulation of Commercial and Bespoke Insurance Business

In line with the recent call for input on broader rule changes following the Consumer Duty implementation, the FCA has published Discussion Paper (DP) 24/1. This paper seeks feedback on whether the current rules effectively balance the need to protect customers requiring regulatory safeguards with maintaining competitiveness in the commercial insurance market.

The FCA’s existing rules extend consumer protections to certain commercial customers. This DP aims to address the unique challenges posed by different types of commercial customers, ensuring appropriate protection while avoiding unnecessary regulatory burdens or stifling innovation. The paper also proposes changes for co-manufacturers of insurance products in PROD and updates to the rules surrounding bespoke insurance products.

Key Proposals

The DP outlines several potential changes, including:

Redefining ‘Commercial Customer’

Currently, outside of ‘large risk’ contracts, the FCA’s handbook lacks a consistent definition to distinguish between small and medium enterprises (SMEs) and larger commercial customers. For example, sickness and accident insurance is never classified as a large risk, meaning that large corporations purchasing such insurance receive the same protections as individual consumers.

The FCA is considering revising the criteria to better distinguish SMEs from larger commercial customers, presenting three main options:

  • Option 1: Replace the large risk definition with the DISP eligible complainant definition, ensuring customers eligible to take complaints to the FOS receive consumer-level protections under FCA rules.
  • Option 2: Remove product-specific rules for large risk contracts, though this may still lead to inconsistencies.
  • Option 3: Develop a new definition based on different criteria, although this may not align with other relevant definitions.

The FCA also offers supplementary options, such as defining all SMEs with 0-1 employees as consumers or providing additional guidance for policies with multiple policyholders.

Co-Manufacturers of Insurance Products

This section addresses concerns about the current rules where multiple firms are responsible for manufacturing insurance products. The industry has highlighted issues such as duplicated processes and inconsistencies in distributor communications. The FCA is considering:

  • Option 1: Designating the lead insurer (the one assuming the greatest risk or handling claims) as responsible for compliance with PROD 4.2.
  • Option 2: Allowing co-manufacturers to decide who handles compliance responsibilities, providing more flexibility.
  • Option 3: Offering additional guidance to clarify the application of rules in co-manufacturing arrangements.

The FCA is also seeking feedback on challenges related to multiple insurers in distribution arrangements, specifically when separate disclosure documents are sent to customers.

Bespoke Insurance Products

Currently, intermediaries designing bespoke contracts for individual customers are not classified as manufacturers under PROD, though the insurer remains a manufacturer. Concerns have arisen that most firms are not utilizing this exclusion. The FCA is considering expanding the bespoke contract exclusion to include both insurers and intermediary co-manufacturers and providing further guidance on when a product qualifies as bespoke.

What Firms Need to Consider

Firms should review DP 24/1 and provide feedback on the proposed options, including any potential impacts or challenges. Pages 30 to 35 of the DP list specific questions the FCA is particularly interested in, so firms should take this opportunity to get their views across.

This discussion paper, alongside the broader Consumer Duty call for input, represents a significant opportunity for firms to engage with the FCA and influence regulatory developments in the insurance sector.

How We Can Help

If you would like to discuss any aspect of this DP or need assistance in responding to the FCA, Padda Consulting is here to help. Feel free to reach out to us for support.