FCA publishes Dear CEO letter on cost-of-living expectations for insurance firms

The Financial Conduct Authority published a Dear CEO letter setting out its expectations on the cost of living and insurance, according to the Finance & Leasing Association, which reported the letter on 30 September 2022 and described it as published "yesterday"¹. The FLA said the letter "will primarily only be of direct interest to Premium Finance provider members", while noting read-across for other firms and references to challenges for small and medium-sized enterprises¹.

The letter restates expectations the FCA had already set out in a more general Dear CEO letter on the cost of living sent on 16 June¹. Those earlier expectations covered support for customers in vulnerable circumstances and those in financial difficulty, fair value, premium finance, underinsurance, claims handling and multi-occupancy buildings¹. On insurance premiums and how they are worked out, the FCA said firms must consider whether non-investment insurance products, including when sold with premium finance, represent fair value, and must consider premium finance as part of fair value assessments¹. The FLA summarised the FCA's position that price, in the form of APR, is "likely to be the most significant factor in determining whether the premium finance provides fair value"¹.

The FCA also said firms must give consumers clear information about the cost of any premium finance arrangement and make clear that it makes the contract more expensive¹. It said firms are not permitted to increase the price of an insurance product based on a customer's vulnerability or any protected characteristic, unless permitted under the Equality Act 2010, or where the customer buys the policy using retail premium finance, unless the firm has an objective and reasonable basis for the change¹. The FLA reported the FCA's warning that premium finance products with high APRs combined with typically lower credit risk, because policies can be cancelled on non-payment, "could potentially mean some products may be in breach of their Rules"¹.

On claims, the FCA's expectation is to handle claims promptly and fairly¹. The FLA reported the FCA's view that firms may seek to cut costs in response to financial pressures, which could affect customer service and the ability to handle claims efficiently and on time, and that delays in paying claims can cause significant financial hardship for consumers and SMEs, potentially exacerbated by higher levels of fraudulent claims and increased claims investigation costs¹. On multi-occupancy buildings, the FCA said leaseholders should be included when determining what might constitute fair value or be in the customer's best interests¹.

The FLA said the FCA issued its usual warnings where firms are not meeting expectations and told firms in these markets that "they will be carrying out multi firm reviews"¹. The FCA also referred firms to its Covid insurance and premium finance guidance on customers in financial difficulty, which it said may still be relevant for some customers affected by the cost of living crisis¹.

Why it matters for households

The letter is addressed to insurers and premium finance providers, but it concerns how households pay for cover. Premium finance is a loan arrangement that spreads the cost of an annual insurance premium over monthly instalments, and the FCA's focus is on whether the interest charged represents fair value and whether the extra cost is explained clearly¹. Households that pay monthly rather than annually are the group most directly affected by the fair value and disclosure expectations¹.

The FCA's stated concerns include customers struggling to keep up premium finance payments and then finding it difficult to cancel their insurance, and customers who pay annually facing difficult choices at renewal¹. It also flags the risk that consumers approaching renewal or shopping for a new policy select cover on price alone rather than on their demands and needs, opt for premium finance because of affordability, or go without insurance even where they need cover¹. For anyone dealing with a disputed or delayed claim, the letter restates the expectation that claims are handled promptly and fairly, and identifies claims delays as a source of financial hardship¹. The FLA's summary does not set out new rules or a change in the law; it describes expectations the FCA says firms should already be meeting, alongside a warning that it will carry out multi-firm reviews¹.

What happens next

The FLA reports that the FCA will carry out multi-firm reviews in these markets, but no dates or scope for those reviews are given¹. No deadline for firms to respond to the letter is reported¹.