Compliance consultant Branko Bjelobaba looks back at how Financial Services Authority regulation has affected the PMI sector and forecasts the future outlook.
The storm of heated debate and trepidation surrounding the Financial Services Authority (FSA) regulation of insurance mediation was a long time brewing and, two years after it hit, some could say the winds have yet to die down completely - but how has the private medical insurance (PMI) sector weathered? Did regulation cause devastation or has the market been robust enough to prove itself capable of meeting the needs of consumers even in the face of harsh conditions?
To assess whether regulation really has changed the way in which players operate and by which consumers buy, the FSA's own research reveals a great deal.
In its original consultations in December 2002 on the Insurance Conduct of Business (ICOB) rules, which govern firms' relationships with their customers before, during and after the sale of insurance, the FSA proposed differentiating certain products that it believed posed a higher risk to consumers and, therefore, required more rigorous regulatory requirements.
PMI was among this list of high-risk products on the basis that it related to the sensitive subject of an individual's health and not just to an inanimate object like a car or house. Not surprisingly, there was an outcry from the industry and, after much lobbying from organisations such as the Association of Medical Insurance Intermediaries (AMII), the FSA accepted that the cost of administering a differentiated regime was disproportionate to the unproven risk and a common approach was adopted to cover all general insurance products.
This common approach was far from a breeze, though. Thousands of rules had to be absorbed, interpreted and implemented by general insurance brokers that had, for the most part, little experience of statutory regulation. Fortunately, PMI intermediaries appeared to be in better shape than some sectors of the general insurance market in the transition to statutory regulation in January 2005.
Perhaps this was a combination of strong support from AMII and from product providers, and a determination to prove that the sector had the necessary intelligence and professionalism to take compliance in its stride. Certainly, fears were voiced and issues debated, but, if the disciplinary and enforcement actions of the FSA are to be taken as an indicator, PMI intermediaries have coped well with the new regime - there have been no notable examples of the FSA taking PMI intermediaries to task for rule breaches. Like most regulated firms, there are few willing to put their heads above the parapet to confess their true feelings about the FSA, but, at least anecdotally, after the first two years of regulation there appears now to be a relative calm about compliance. It has become an accepted part of business.
Certainly, the flood of predicted failures has not happened. There has been no mass exodus from the market and consolidations are less common in this sector than in the general commercial environment, for example. This is not to say that regulation has left the sector untouched or, indeed, that its players do not need to be conscious of further gusts of activity from the FSA that could affect their business. Indeed, the effects of the latest torrent from the FSA are still being felt. Treating customers fairly is of great concern to the FSA, particularly as it tries to demonstrate its move away from prescriptive rules towards principles-based regulation.
Principles based
Principle six states that "A firm must pay due regard to the interests of its customers and treat them fairly". This sounds reasonable enough, but, how can firms prove their compliance with this requirement? The FSA gave firms until 31 March 2007 to meet the compliance deadline but, according to its own survey, the FSA reported that only 45% of small brokers had met the deadline. Accordingly, the FSA promised to increase the amount of resources devoted to "supporting and testing firms" in respect of Treating Customer Fairly (TCF).
To help firms understand what it seeks to achieve by its focus on TCF, the FSA has defined six consumer outcomes:
The first one is to make sure consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
The second is to ensure that products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
Outcome three is that consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
The fourth outcome is to certify where consumers receive advice, the advice is suitable and takes account of their circumstances.
The fifth is to make sure consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect.
Outcome six: consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
However, it can be difficult for a firm's directors to assess objectively whether its policies and practices satisfactorily address these points. There are questions a firm can ask itself about, for example, its remuneration arrangements with providers, the robustness of renewal procedures, and the clarity of its terms of business, but it is easy to see why many firms bring in compliance experts to reassure them that the firm would be prepared should the FSA come knocking.
Knock-on effect
That new FSA guidelines will continue to rain down on regulated firms is not in doubt. Few forecasters are willing to be drawn, however, on whether PMI will find itself in the path of a particularly heavy downpour. There is a ray of sunshine in the form of an interim report published in March by the FSA on its review of the ICOB rules. Using a combination of economic analysis, quantitative and qualitative consumer research, and trend analysis of consumer purchasing outcomes, the FSA has been considering its move towards principles-based regulation and simplification of the FSA Handbook at the same time as the possibility of imposing more onerous regulatory requirements on sectors considered to pose a higher risk of consumer detriment. The interim report concludes that the PMI market functions "reasonably well in the interests of consumers". In fact, although the category of "protection products" (into which PMI had originally been grouped by the FSA) is highlighted as showing "considerable evidence of market failure" requiring closer attention from regulation, this report concludes that there are "no market failures with PMI that would justify it being grouped with the protection products".
Does this mean a sunny outlook for PMI? Yes - in the short term at least. The long-range forecast is harder to predict. The FSA has shown itself to be extremely enthusiastic about reviews, which means that regulated firms must remain focused on compliance. To paraphrase the old saying: "Ne'er cast a clout 'til compliance be out": while FSA regulation is in place (and there is little to suggest that either Brown or Cameron would make major changes in this respect) there is always the threat that certain sectors could be targeted for closer attention so PMI intermediaries must ensure they remain up to date and keep compliance firmly on the board agenda. Those that carry an umbrella do not need to worry about getting wet. n
Branko Bjelobaba is regulation and compliance consultant to the Association of Medical Insurance Intermediaries
