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FCA thematic review of SME claims handling: a stepping stone?

As part of an increasing focus on the insurance sector, the Financial Conduct Authority (FCA) recently published a thematic review of the handling of claims by small and medium-sized enterprises (SMEs).

The FCA stated that it had set out to understand better (i) the extent to which SMEs, being less likely to be sophisticated customers, had their claims handled fairly, and (ii) the role of different firms (e.g. brokers and loss adjusters) in such claims.

At face value, the review covers a particular issue for a particular class of insured. It has the potential however to be a significant stepping stone with the FCA's focus moving or expanding from consumers towards the commercial and wholesale insurance markets.

The balance of media response to the review has been fairly negative, focusing on adverse findings about insurance claims services not meeting customer expectations, with examples of unfair treatment of, and poor communication with, insureds.

The FCA has said that it will engage with firms, senior figures in the industry, and relevant trade bodies to discuss the findings of the review, its expectations, and the changes that may be required to improve outcomes for SME customers. Judging by the media comment, the SME insurance market may face significant change. Market practitioners should note that there are discernible links between the SME claims review and the more recent thematic review on delegated authorities, which may raise more fundamental questions for the operating model of the wider general insurance industry.

The review does indicate a significant spread of good claims handling practice. Most notably, the review found no evidence of insurers unfairly delaying admissions of coverage or liability. The review also found no instances of insurers asserting that they had no liability by reason of alleged breaches of the duty of good faith or warranties, unless such breaches were material to the losses being claimed. Auditing by insurers of their agents, such as coverholders, was found to be extensive.

The report is generally more positive than reports on the commercial insurance market issued in 2010 and 2011 by Mactavish. There is, however, a key common theme. The Mactavish reports concluded that there were major flaws in the way insurance cover is arranged and that there was insufficient understanding among insureds, intermediaries and insurers of the nature and scale of the risks requiring insurance, and how the terms of cover should properly address such risks. The FCA's review also found substantial evidence of insureds failing to obtain sufficient levels of cover for their risks. Such 'underinsurance' or 'average' can result in claims payments being substantially reduced (by the ratio of insured values as against loss-assessed risk values), which can be an unwelcome surprise for insureds.

A further common factor between the FCA review and the Mactavish reports is the non-attribution of quotes from interviewees. This methodology raises questions as to whether insureds and others might be less critical of claims processes if they openly had to stand by their words.

As well as general media comment, the FCA's own press releases tend to emphasise the negative issues in the review. This may herald further and more extensive scrutiny of the insurance market, and possibly guidance or rule changes, such as around ICOBS 8.1.1R and its requirements as to prompt and fair claims handling and payments, and reasonable guidance and appropriate information for policyholders.

While there was some good practice, the review identified that in the "majority of cases" SMEs had to chase for updates, there were "numerous examples of delays" for initial assessment visits, and in a "significant number of cases" poor communication led to delays in reaching a settlement.

The FCA may be interested in providing a regulatory solution to such problems because of the limitations of the legal remedies: Sprung v Royal Insurance [1997] CLC 70 is authority for the proposition that interest, and not damages, is the appropriate compensation for delay in paying claims. Interestingly, Sprung does raise the possibility of a damages claim if an insurer were found to have breached an implied or express term to take certain steps within a particular time, and this concept may yet inform the FCA's considerations.

The FCA may also be interested in a rule-based solution because large numbers of even quite small businesses are excluded from pursuing complaints with the Financial Ombudsman Service because they are not micro-enterprises with fewer than 10 staff and an annual turnover of less than 2 million euros. Businesses are also prevented from pursuing claims for breach of statutory duty under the Financial Services and Markets Act 2000, which affects disputes over compliance with ICOBS.

The overriding practical lesson from the review is that the quality of communication with insureds directly influences the quality of their experience and comment. Insureds often have little experience in making a claim and therefore are reliant on assistance from insurers and their loss adjusters, regardless of any purely legal assessment of the latter's duties.

Insureds that understood the process had a timescale to follow and a clear point of contact had a positive experience. Improving communication is a relatively easy step that insurers and intermediaries can take to improve customer satisfaction and perhaps distinguish themselves within the market.

It is worth considering how the economic, legal and compliance environment revealed in the report could change when the Insurance Act 2015 takes effect. The advantages for insurers under the Marine Insurance Act 1906, and insureds' concerns that insurers' delays in handling or paying claims presage a denial of liability on the grounds of, say, breach of the duty of utmost good faith or breach of warranty, seem likely to become less significant.

The Insurance Act is likely to bring its own pressures to bear on the claims adjustment and settlement process. For instance, insurers' remedies for insureds' failure to make a fair presentation of a risk, especially re-appraising the underwriting of the risk with a view to increasing premium, could prove just as detrimental to the value of insureds' claims, and even the wider finances of smaller businesses.

The FCA has now published three thematic reviews on the general insurance industry (on outsourcing / delegated authorities, SME claims and premium finance), principally in the retail market, in some three weeks. Further, since mid-2014, there have been seven thematic reviews (including the three most recent) in relation to the general insurance industry. Again, the focus has largely been on the retail market, but commercial market intermediaries' conflicts of interest, and anti-bribery and corruption systems and controls, have also been reviewed.

Comparing this level of scrutiny with previous years suggests that there is substantial and increasing interest in the workings and operating models of the general insurance market. The scale of the Financial Services Authority's intervention in the payment protection insurance industry between 2007 and 2012, and what the FCA may have perceived or learned from this, should not be overlooked as a continuing factor in the FCA's approach to general insurance regulation. Moreover, the FCA has made plain in its 2015/16 Business Plan its interest in the interaction and commonality between the retail and wholesale or commercial markets, so the experiences of SME insureds may have wider and longer-term significance.

This article by DWF was first published on Thomson Reuters website, 'Accelus' ('Complinet').

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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Jeremy Irving

Partner

I specialise in providing compliance, regulatory and operational advice to clients in the insurance sector, including investigations, disputes and commercial/corporate matters that could affect clients’ standing with regulators.