Director-general of the Association of British Insurers, Otto Thoresen, warned today of the need to avoid a “predator-prey” relationship between the insurance industry and the incoming Financial Conduct Authority (FCA).

Speaking at an ABI conference on regulation, Thoresen called on government to mandate that the work of the incoming FCA is aligned to the wider needs of society, such as getting an ageing population saving for their retirement.

“The way ahead for regulation has to be one where the industry and regulator work in partnership to focus on what needs to be done for consumers,” said Thoresen.

“The insurance industry has been resilient through the crisis and continues to pay out over £190m a day to millions of customers. We have already worked hard to make improvements for customers. And we fully support the creation of the new FCA with a clear focus on consumers, giving the industry and regulator an opportunity to take stock on what can be done better and build on initiatives like Treating Customers Fairly.

“We face a new normal, with the challenges of an ageing population, a squeeze on household and public budgets, low interest rates and low growth. Insurance has always been about developing solutions for these challenges and the work of the new regulator must support us to continue to do this.”

The ABI has set out six key themes for the industry and the FCA to take forward in a partnership relationship, as well as making six commitments on behalf of the industry. Those themes are:
- Making markets and regulation work to deliver public policy goals
- A regulator that is in touch with the consumer experience
- Regulation focused on markets delivering products that meet consumer needs
- Facilitating effective competition and innovation in financial services
- Actively shaping the FCA’s wider regulatory programme with the EU and the UK
- Building mutual confidence and respect between the FCA and the industry.

Commenting on the ABI's declarations, Jeremy Irving, insurance partner at international law firm Eversheds says, “There are fundamental economic changes in play, caused by the regulatory changes entailed by the FSA’s Retail Distribution Review (RDR).

“For over a century, insurers have been able to reduce the cost of distributing their products by paying commission to an intermediary in return for the intermediary’s recommendation of certain insurance contracts to the intermediary’s customers, who then become the insurer’s customers. Needless to say, the intermediary’s economic interests are in recommending the products which pay the highest, most frequent or most reliable commission.

“Regulatory rules were designed to control the operation of this model. However, RDR forbids commission, so the model has changed. This is reflected in the number of independent financial advisers (IFAs) which are now ceasing to operate, or being consolidated into much larger intermediaries, with a particular emphasis on web-based communication.

“The questions then are whether insurers are prepared to develop their own distribution systems or will be forced to distribute through the more successfully evolved IFAs, and who may be in a position to control the economics of product design and distribution. A further question is whether the new generation IFAs will seek to obtain collateral income from life insurers in the way that non-life or general insurance brokers have done via agreements for services undertaken for non-life insurers, in order to supplement the commission (brokerage) paid in the non-life market. The risk here is that brokers select the products of insurers with which they have the most remunerative service arrangements.

Irving feels that if the ‘service agreement’ model becomes a dominant feature of the life market, there is a risk that much of the current good regulatory intention will prove to be insufficiently effective in protecting consumer interests.

Share Story: