Post Blog: Innovate or withdraw

Martin Wheatley

The FCA is likely to take a hard line on products that are not in the best interests of consumers, and insurers could be left with difficult decisions.

In a speech last year, then chief executive of the Financial Services Authority, Hector Sants, outlined the roles and responsibilities of the new regulators coming in to force in 2013 and made it clear that "the Financial Conduct Authority's role should not be one of advocacy or denial of consumer responsibilities but one which emphasises early and proactive intervention".

Billions in compensation has been paid out by financial services companies to compensate consumers following a number of high profile mis-selling scandals, most recently payment protection insurance, so it is interesting to consider how a more interventionist approach by the regulator will affect attitudes of insurers and shape the industry over the longer term.

A key strategic focus for the FCA, and insurers alike, is to rebuild consumer trust. This could be by driving welcome product and distribution innovation.

Alternatively, the increased costs of compliance, uncertainty and fear of reputation risk if they get it wrong may lead insurers to withdraw from markets and lines of business.

So while the newly formed FCA will be tested by a balancing act between its interventionist approach and desire to promote competition, the insurance sector faces a similar balancing act: to innovate or withdraw.

The regulator has made it clear that it will adopt a thematic approach to market practices. If the FCA perceives that a particular product does not have the best interests of consumers at heart, action will follow.

Insurers should also expect to see a widening of the focus to include wholesale operations as well as retail.

Regardless of how far removed the wholesaler is from the product sale, they will potentially carry as much responsibility as the retailer to ensure the product is being sold fairly. The bundling of products and price transparency will also gain increased attention.

Despite the fact that there have been relatively few thematic issues emanating from the general insurance industry, many insurers may feel uncomfortable about their products, pricing and distribution processes being so closely scrutinised.

Thus, in the short term at least, insurers may play it safe and exit from lines of business that no longer prove to be as profitable and which have the potential to become a regulatory target. Such a scenario will be in no one's interests.

The regulator will certainly not want to see a reduction in competition which would be contrary to its desire to ensure that the customer has a varied and competitive market of products to choose from. Insurers in turn could lose out through a shrinking of the overall premium pot.

Looking more to the medium and long term, expect to see a fundamental change to the way in which insurers design their products and services, with the consumer returned to the very heart of the product development cycle.

This can be no bad thing in a market which has often allowed the needs and interests of the consumer to be superseded by the short-term demands of shareholders for profit and top line growth.

If necessity really is the mother of invention, we could be on the verge of the most dynamic period of product development and innovation ever experienced in the industry.

Rather than turning away and retracting from the more difficult areas of the market, insurers looking to profitably grow and survive will have to innovate.

There are already examples of this happening, such as the use of telematics in helping to reduce motor premiums for young drivers, where the industry has proved that it can respond in a customer focused, yet profitable, way.

Who says profit has to be sacrificed in the drive to become more customer-centric? It should be a win-win for insurers, brokers and customers.

To successfully manage this major industry transition, the leaders of this industry will need to step up to the plate and pioneer new ways of managing risk that are acceptable to the regulator while delivering the quality of products and services that customers want and deserve.

If the industry cannot build trust in its institutions, the market will find alternatives. Step forward the mutual?

Linda Read Shepley, principal consultant, Pro

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