Abstract
AbstractIn the last three decades the life insurance industry was rocked by a series of mis-selling scandals such as endowment mortgage, personal pension and payment protection insurance mis-selling. Regulators have stepped in to try to address the underlying causes and improve customer protection by introducing more stringent regulation targeted at sales practices and remuneration, product design, disclosure and ongoing monitoring together with significantly larger financial penalties for non-compliance. Against this background, the paper considers whether customers understanding of risks and outcomes associated with life insurance products can be further improved and how poor customer outcomes can be avoided in the future. We acknowledge the complexity of these issues, which involve many stakeholders, covering all stages of the product lifecycle and customer journey and being impacted by a constantly changing regulatory landscape. We first review the current regulatory landscape across both the United Kingdom and other jurisdictions, concluding that whilst regulators have acted to improve customer protection, gaps still remain, particularly around the areas of disclosure and consideration of changing customers’ needs throughout product lifetimes. The paper then considers how the current situation could be improved for customers in a cost effective manner. We focus on improvements in disclosure, needs-based selling, ongoing assessment and communication as a means of ensuring that products continue to meet the customers’ needs and risk profile, and on introducing a duty of care which would force financial services firms to act in the best interests of their customers. In this paper we present our preliminary thoughts and recommendations. Some of the recommendations will cost something to implement, and should therefore be supported by cost-benefit analyses that would weigh these costs against the potentially larger benefits to both customers and the insurance industry.
Highlights
Introduction of theFinancial Conduct Authority (FCA) mission which acknowledges the wide remit of the FCA and the finite nature of its resources
This paper is the culmination of the work of the Risk and Customer outcomes working party, which was set up to consider whether customers adequately understand the risks and outcomes associated with life insurance products, how to avoid poor customer outcomes and to consider ongoing risk management through the product life cycles from
∙ In the early days regulators did not adequately monitor compliance with the rules. ∙ The financial penalties imposed on providers for mis-selling payment protection insurance (PPI) were initially a tiny proportion of the revenue gained from actively selling the products (FSA, 2008)
Summary
This paper is the culmination of the work of the Risk and Customer outcomes working party, which was set up to consider whether customers adequately understand the risks and outcomes associated with life insurance products, how to avoid poor (or maximise good) customer outcomes and to consider ongoing risk management through the product life cycles from. Such events have cost the financial services industry around £40 bn to correct over the last 20 years, driven through a number of factors including heavily sales-based cultures, inappropriate incentives and poor product design as well as regulatory failures along the way. This complexity could explain why gaps still remain in the current regulation and we propose to focus on a few critical aspects which are key to improving customers’ outcomes. This is an incredibly complex arena, with multiple stakeholders and a constantly changing
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