Covid-19: insurance product governance and value for money

The FCA’s top priority for insurers is to safeguard customer’s cover. The regulator does not want people to be penalised and lose their insurance cover for making reasonable changes to their circumstances as a consequence of Covid-19. 

However, the FCA have not provided prescriptive guidance on the extent of changes that insurers can consider, or how insurers should respond if products no longer represent value for money for customers. 

This is putting current product governance processes under pressure. Firms must be able to react quickly to protect the commercial sustainability of their organisation, yet act in the customer’s best interests at all times.  

The following passages demonstrate some of the insights and best practice our team has developed to help insurers successfully navigate the changing environment during Covid-19. 

Continuation of cover 

Baringa has analysed the new business sales journeys of several UK Tier 1 insurers. We combined our analysis with the FCA’s guidance to develop scenarios for consideration. The following circumstances represent areas where insurers must consider their response in the event of a claim: 

Home:

• Individuals staying at alternative addresses for the duration of the pandemic 

• Number of people and / or pets living in the home and material increase in contents value as a result  

• Individuals continuously away from home for more than their policy permits and / or individuals making their secondary home their primary home for the period 

• Future adjustments to voluntary excess as a result of reduced disposable income for those whose employment / income status has changed 

Motor:

• Cover for vehicles being held at alternative locations for the duration of the pandemic – day and night 

• Change in purpose of use of vehicle (e.g. adding commuting to a social, domestic and pleasure policy)  

• Change in mileage – material reduction or increase 

• Number of cars kept at the household, and use of any other vehicle 

• Changes to policyholder employment status 

Travel & events:

• Customers who had booked future travel or events before the pandemic 

• Customers who had booked future travel or events after the pandemic – this would include deciding on a date from which the pandemic “began” 

• Customers who are relying on the renewal of their policy to cover cancellation of future travel or events 

Insurance providers should reflect on their own product suite and associated product terms and conditions. Organisations must ensure that FAQs make clear, internally and externally, what their approach is to claims during the pandemic. This will both reduce in-bound contact and ease the operational burden at the point of a claim. 

Setting up governance for success:

Insurers must not fall into the trap of making changes to products on the fly without appropriate consideration of the potential impacts. Over the last month we have observed a number of insurers adjusting cover, withdrawing products, and imposing changes at the point of renewal which are in direct contravention of FCA guidance.  

All firms have to respond to the challenge of balancing suitably compliant and robust product changes with the need to be more agile and operate at pace.  

Many firms are relying on their BAU product governance processes, others are standing up new, more agile forums. Regardless of the approach taken, all insurers must consider the following questions:  

• Are product governance forums meeting regularly enough in the current environment?  

• Do processes require approval to product changes from accountable Senior Managers (SMFs) or delegates in the organisation?  

• Are product governance forums empowered to make decisions? 

• Is there a broad attendance at governance forums to ensure the impact of changes is assessed across the product lifecycle? 

When making product-related changes, insurers should ensure that: 

• There are effective methodologies and tools implemented in the business to assess the risk of customer harm when making a product change.  

• There are clear standards for record-keeping to evidence decisions made whilst considering customer needs.  

• Methodologies and tools consider the potential long-term implications of short-term risk mitigations, from a customer-harm and a commercial perspective. 

Ongoing value for money assessment:

Many insurers have developed approaches to quantify and qualify a product’s value for money. Changing customer behaviours in response to Covid-19 may result in some of the assumptions and parameters utilised in these assessments becoming invalid in the short-term. Motorists who are not driving; businesses that are not operating; individuals no longer leaving their houses; and hundreds of other scenarios may result in the underlying value of an insurance policy being significantly reduced.  

For insurers that are making value for money assessments, it will be difficult to determine the impact that coronavirus will have on a product’s value over a lifetime until the length of the lockdown is confirmed. 

Insurers will have to evaluate the cost versus benefits of acting now, proactively, to minimise a potential future operational burden. To manage a possible increase in the volume of cancellations at a time when the claims liability is rising, insurance providers may want to initiate a simple online process for cancellations and refunds. Insurers may also want to consider asking customers to wait for a back-dated refund. 

Perhaps as a sign of things to come, the Californian Insurance Commissioner has instructed insurers in six lines of business to issue refunds. Reimbursements have been ordered where the risk of loss has been substantially reduced due to lockdown or stay-at-home-policies during the pandemic. 

Product governance processes across insurers are under strain for the first time at this scale since the Insurance Distribution Directive (IDD) and Senior Managers and Certification Regime (SMCR) were implemented. SMFs with responsibility for products will need to ensure that product decisions are being taken carefully and thoughtfully, considering the full breadth of issues.

Baringa has significant experience supporting insurers with their product governance arrangements and is on hand to support SMFs in this difficult time. If you’d like to discuss any of this content further, please contact Daniel Golding, Sam Casey or Stephen Humphreys.