Tapping into the opportunities presented by Consumer Duty

It’s almost a year since Consumer Duty was introduced to the UK insurance market and it’s back in the headlines again with closed-book products or those no longer on sale set to be held to the new standards as of July 31 of this year.

The anniversary offers the chance to examine the impact of the framework and its instruction for firms to ensure their products provide fair value, cater to customer needs and offer satisfactory customer service. It’s an assessment which prompts the question – is there too much consideration of Consumer Duty as a regulatory intervention into pricing? And is there enough discussion around the opportunity it presents for firms to take a closer look at what customers need from insurance and to ensure that’s being delivered?

What is consumer duty and how does it impact brokers?

Under the Consumer Duty rules, insurance firms are required to ‘regularly assess, test, understand and evidence’ the outcomes their customers are receiving. The final rules for the new standard were published in July 2022 with firms given 12 months to implement them for all new and existing products and services currently on sale.

For brokers, Consumer Duty affirmed their responsibility to act in the best interests of clients through enhanced product governance, transparency in communication and a review of their remuneration structures to ensure these are not incentivising behaviours which could lead to poor customer outcomes. From this, the broad remit of these new rules is made clear and it’s important to emphasise consumer value as an element of consumer duty – and premium pricing as a further subset of this.

Moving away from Consumer Duty as just a regulatory intervention

On the nature of Consumer Duty, Gareth Birch (pictured left), MD of SME and personal lines at Gallagher, said he welcomes it less as a conduct or operational intervention and more as an invitation for insurance to change its internal mindset regarding consumers. Corroborating this, the CEO of the underwriting and distribution giant Pen Underwriting, Tom Downey (pictured centre), said his take on the new rules is that, “it is regulators just asking us to do what we should do every day anyway”.

Birch also noted that it’s in rethinking how you think about Consumer Duty that brokers can achieve the organic growth that is the key metric of success of any large, quoted organisation. “One of my more worrying observations of fair value is that whenever it gets mentioned, it’s as though the only solution is to reduce the price,” he said. “And there are occasions where Gallagher has looked at its processes and questioned whether it might have followed the market rather than looking at what we’re delivering. [For instance], in areas like premium finance, we’ve put caps on the levels of APR that we think are appropriate today as opposed to what might have been appropriate 12 or 18 months ago.

“We’re rigorous in the way we scrutinise our admin fee structures and the commission structures we’ve agreed with our insurer partners. That doesn’t mean they always have to reduce but what it does clarify is that we’ve got clearly defined services for which we receive commission – and we’re confident that this commission is right. We know we provide a specific range of services and we’re always looking to make sure that stands up to scrutiny – as it should.”

Implemented effectively, it’s clear that Consumer Duty has the potential to create real opportunities for insurance businesses to showcase the value they present to customers, and also to analyse and re-assess their processes and operations to underscore their value proposition. This is particularly relevant given the renewal pressures facing large tracts of the market today with Birch underscoring the need to recognise that renewal pressures and new business opportunities go hand-in-hand.

How is Consumer Duty changing the broader insurance proposition?

Seizing the opportunity to use Consumer Duty as the basis for a broader change in how to support clients is not limited to the broking market and one area ripe for evolution is the claims sector. Recognised by many as a proof of concept of the insurance premise, claims is mentioned 24 times in the FCA’s ‘Final non-Handbook Guidance for firms on the Consumer Duty’ – with examples of good and poor practices outlined clearly.

Reading through the guide further spotlights the need to move away from simply considering the pricing implications of the rules as they approach their first anniversary. At its core Consumer Duty is all about taking care of the customer, noted Nicola Dryden (pictured right), and while many claims businesses have instilled the importance of ethical behaviour at the heart of their values, the guidance offers an opportunity to re-affirm and communicate that message. 

“It’s about accountability, collaboration and listening,” she said. “It’s so important when you go out there that you’re listening to what customers are saying. Because you might have seen hundreds of these claims but it will likely be their first time… So, training around developing empathy is so important because that’s how you are able to pick up on the vulnerabilities highlighted by Consumer Duty.”

The capacity for Consumer Duty to act as a guiding hand for best practices in insurance was emphasised by Downey who noted that, two years ago, Pen took the decision to reduce its commissions for property owners leaseholders business. At the time, Pen lost some business, he said, but he recognised that it was the right thing to do and that, in time, the market would catch up.

“If you take the core principles of Consumer Duty and put them into your thinking then you’re in a position to put the customer at the heart of your decision making,” he said. “By asking, what will the customer think of this, you’re able to shape your business a different way… It comes down to embedding and embodying Consumer Duty on a day-to-day basis – and that’s what we’re trying to do.”