The FCA recently surveyed 12 insurance firms, who make up an estimated 70% of the market, to assess firms’ claims-handling processes for valuing total-loss claims – focusing on how settlement amounts compared with initial guide valuations.
The regulator has now published its findings, and while it acknowledges that the Consumer Duty wasn't in force during the period it reviewed, it has commented where it observed practices which may have fallen short of the requirements.
Given the recent focus on insurance products providing fair value, this shouldn’t come as a surprise to participants in the market. These findings outline a concern around how firms are establishing the Consumer Duty. It's therefore important to take a proactive approach to ensure that market standards are being met and customers are being treated fairly.
The FCA observed instances where the reported average settlement values were lower than the available guide prices. While the FCA didn't examine individual cases, it considered these low average settlement figures indicated that some customers’ claims may have been handled unfairly.
It also found that while most firms reported making deductions based on the pre-accident condition of the vehicle, the FCA considered these deductions may be unfair in some cases and explained that deductions should be supported by the evidence available and can be robustly justified, rather than blanket deductions. Furthermore, while respondents stated that they employed the use of multiple valuation methodologies to determine claim settlement values, the FCA saw little evidence that firms monitored the related consumer outcomes to ensure this didn't lead to customer harm.
The FCA also noted that some firms didn't collect basic data on total-loss claims, such as the number, scale, and reason for increases to initial settlement offers, nor did they monitor the average deviation between vehicle valuations and their corresponding guide prices. Under the Consumer Duty firms are required to evidence the steps they take to avoid foreseeable harm – including monitoring a suitable range of information.
The FCA also found that some firms didn't have sufficient oversight arrangements over third-party providers, stating that where a firm outsources any aspect of their claim process, it should take steps to assure itself that this doesn't lead to systematically different customer outcomes. This will require a strong internal framework to ensure that customer outcomes are being met and establishing best practice.
In the first instance, firms should consider the FCA’s findings and take steps to identify whether any of these observations apply to their business and, where applicable, assess whether they may have caused customer harm. Such consideration shouldn't be limited to the motor insurance total-loss. We have previously seen the FCA seek to identify whether harms it has observed in one product are also prevalent in other products or sectors. As such, firms should assess whether these findings are applicable to other insurance products they offer.
While the concept of a total-loss may have limited applicability elsewhere, the FCA’s concerns about deductions from claims settlement values have potentially much wider relevance, for example property insurance where valuation tools are also used. Where firms outsource the handling of their motor claims, they should consider whether the oversight of their third party is sufficiently robust to assess their provision of good customer outcomes.
When the FCA identified evidence of poor customer outcomes related to valuation of motor total-loss claims, or other insurance products, it used supervisory tools, including requiring firms to undertake past business reviews (in some instances leading to remediation programmes).
There will be continued focus on fair value and good outcomes from the FCA as the Consumer Duty becomes further established. Firms should therefore appropriately consider claims outcomes and performance when undertaking fair value assessments. Moving forward, they must ensure they consider their findings in detail, including examples of good practice and areas of improvement, including the Consumer Duty to address potential issues and meet best practice.
For more insight and guidance, contact Blandine Arzur Kean.
