UK: Fairness reaches insurance - Insurance Market Update – June 2005

Last Updated: 21 June 2005
Article by Rebecca Thorpe and Jackie Wells

Most Read Contributor in UK, August 2017

General insurers and distributors have faced considerable regulatory change over the past year. In common with all other regulated firms, they now have to get to grips with how the principles of Treating Customers Fairly (TCF) will affect their businesses. Companies need to start to draw up their TCF strategies now, and understand that TCF applies to all parts of their businesses.

TCF is a major priority for the FSA, and the industry as a whole is responding to the drive from the regulator as well as from customer groups and the political community.

The principle that firms must treat their customers fairly isn’t new, and to most seems like an obvious course of action that makes good business sense. However, there are much quoted examples of poor treatment and as the regulatory theme has developed, there are some serious issues that the industry as a whole has been tasked to address.

How will TCF affect general insurers?

The FSA suggests approaching TCF by considering the "product lifecycle":

All of these stages are applicable to general insurance products, especially those firms operating in the retail market. Firms working through the product lifecycle stages should consider the customer ‘touch points’ and begin to work through the issues of fairness that arise. In order to satisfy the FSA, firms will have to show that:

  • they have reviewed their corporate and business strategy to ensure that it reflects TCF principles;
  • that these principles are reflected in processes that could have a bearing on the customer relationship;
  • that the practices that the firm adopts are TCF compliant; and
  • that the culture of the business and the people in it are customer facing.

At a strategic level, general insurers will have to consider how in the future they will survive in a much more transparent market. A particular recognition is a need for transparency and openness in broker remuneration. If the same principles are applied to pricing, TCF could also have a number of knock-on effects:

  • is it fair to price products differently for new customers compared to existing customers?
  • are prices calculated on the basis of fair criteria?

The insurance market is experiencing regulatory change, and the TCF emphasis suggests that this tide of change is far from over. The recent implementation of Insurance: Conduct of Business (ICOB) has been a challenge for many firms, and TCF will mean further challenges ahead. Firms will need to consider the TCF implications when adhering to the ICOB rules, for example if a client approaches a company advisor with a portfolio of covers for which they appear to be overpaying, it may not be possible to offer advice if the cover was sold by a different intermediary. This might seem unfair to the customer, and firms may want to consider their own interpretation of the ICOB rules. In this instance it would be suitable to alert the customer to the issues, but without giving advice.

When will it happen?

Speakers from the FSA have indicated that general insurers, along with mortgage intermediaries, will be given more time than the rest of the industry to get to grips with the TCF regulatory theme. However, some general insurers and mortgage firms will already be implementing TCF as part of group-wide initiatives. As this beds in, FSA expectations for the sector will change and a greater focus may be placed on general insurers and distributors over time.

The FSA are currently issuing results of the investigative work with large and smaller firms on TCF. The FSA "are encouraged by the early signs we see of TCF progress at firms; but there is still a long way to go before we reach our goal" (Oliver Page, Director, Major Retail Groups Division 16 February 2005). Firms are expected to take action on TCF issues now, and the requirement for general insurers to take action is not far behind.

The FSA have published interim results of their work to date on their web site, and are due to publish a full report on the past year’s work in June 2005, which will include the results of market research on consumers’ views of fairness.

The slight lag in the requirement to adhere to TCF in the general insurance market does potentially provide an advantage in that it will be possible to learn the types of issues that the rest of the market is identifying, and how they are being tackled. However, as Oliver Page noted in his recent speech to the industry, "whatever changes you make, you do not need to wait for the FSA to tell you what they are."

What do firms have to do?

As a minimum, firms should be:

  • defining what TCF means for the business;
  • conducting a gap analysis of capabilities;
  • developing an action plan;
  • defining accountabilities;
  • setting appropriate measures;
  • implementing the plan; and
  • monitoring and acting on delivery against it.

What are the problems?

Some of the key issues that firms outside of general insurance are currently facing, but which are likely to impact this market too, include:

  • product development – and in particular the need to test customers understanding and understand risks to the customer during this process;
  • producer/distributor relationship – what are the respective responsibilities along the distribution chain?
  • management information – there is a need to measure success and monitor TCF implementation and embedding within the business, but what sorts of key performance indicators are needed?
  • remuneration – current remuneration structures are primarily sales volume driven, which can lead to the encouragement of behaviours that do not support TCF principles.

A review of the business to determine whether the strategy is TCF oriented should provide either a confirmation that the vision and strategy are clearly TCF oriented or that a re-articulation or revisions are required. Furthermore, a set of principles should emerge that can guide the development of processes and practices across the business.

What are the solutions and benefits?

The issues listed above are just a small selection of those being discussed across the industry, but some guidance is emerging on these and in other areas. The FSA themselves have begun to publish results, including specific examples of behaviours that they consider show significant progress as well as examples of serious gaps. Working through the problems also can highlight some of the benefits of TCF, which firms are beginning to harness as competitive advantage.

Product development

New products are continually being developed that may offer better terms or cheaper prices than the existing product range. Is it a requirement under TCF that you have to tell all your existing customers that there is a better deal on offer? Is it acceptable to offer new customers better terms than existing customers? The regulator is expected to develop their thinking in this area further as they consider the issue of equity between different groups of customers.

This is perhaps a distributor issue, in terms of making sure individual customers get the best deal but manufacturers also can take actions such as a review of pricing across their existing range of contracts to make them more competitive.

Many firms test products from an economic or "risk to the firm" perspective during the product development process, but fewer undertake testing with customers or assess in full the risks to the client through the lifetime of the product, perhaps particularly true of products which provide cover for several years (eg single premium creditor products).

Firms need to ensure that they consider the customer view during the design process, and in particular assessing whether customers understand the products and risks, and any extra features that it provides. Firms should also be conducting testing of product literature with customers, again to ensure they understand the features and risks. Better customer understanding must lead to improved sales.

Producer/distributor relationships

A few "pure" producer firms have taken the view that TCF is not their responsibility because they are not customer facing. Similarly, some distributors are of the opinion that they cannot be held accountable for the products they sell, as they rely on the producer to supply good products and customer information about those products. It is easy to see that two of these extremes in the same distribution chain could lead to TCF issues.

TCF is bringing changes in these areas, as both producers and distributors are beginning to realise that they need to take more of a responsibility about thinking about the end customer than they do already. Examples include producers providing a comprehensive information pack for distributors, setting out the key risks and target market for their products and distributors conducting customer testing of products with their client base.

Management information

Management Information (MI) is an important factor in monitoring successful implementation of TCF projects, but firms have been struggling with determining what measures are required. The audience, regularity, and how the data is used are important considerations when reviewing or designing any MI suite. It is important to understand what TCF means to the firm before commencing on designing the MI, as the information collated must support this overall plan. Some of the measures may already be collected, but not necessarily reported to the correct group. There may also be some gaps, for example in testing during the product development process or root cause analysis in the complaints area.


Remuneration for sales forces and non-sales staff have traditionally concentrated on volume, which emphasises quantity not quality, for example volume of products sold or volume of complaints handled. Such measures can lead to a compromise on quality and potentially be detrimental to the customer.

Firms are beginning to build in quality measures to remuneration structures and also begin target setting for non-sales staff and for senior executives. Consideration has been given in other areas to bringing in equalised commission for product families to prevent bias, or awarding bonuses for non-sales issues such as low cancellation or complaint rate.


2005 is likely to see many general insurers begin to focus their attention on TCF. In doing so it is important to remember what TCF is and is not. TCF is not:

  • just an issue for compliance – it needs to be embraced across the organisation and in particular by senior management and embedded in the culture, values and strategy of the business;
  • something that the marketing department does – customer fairness should be considered in all parts of the business;
  • just about running focus groups or customer satisfaction surveys– understanding customers will be important and customer research and interaction will form a part of the TCF jigsaw but on its own will not convince the FSA of a firm’s intent;
  • simply a box ticking exercise – whilst firms should introduce a structured approach to reviewing their firm’s TCF strengths and weaknesses, a true TCF policy will be felt in the culture of the business;
  • something to be done half-heartedly – ultimately the FSA and more importantly customers will come to recognise where such an approach has been adopted.

TCF needs to be at the heart of the business and to be truly successful needs to move beyond the FSA’s immediate requirements. TCF presents the industry with an opportunity to regain the trust of consumers, the regulator and the government, to achieve real growth for the industry and, as markets become more efficient, to create shareholder value.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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