What’s next for the FCA on insurance

Last week’s FCA insurance publication package delivered broadly positive headlines for the industry. It included analysis of claims handling in motor, home and travel insurance; an update on the premium finance market study; and an evaluation of its General Insurance Pricing Practices (GIPP) rules. 

The regulator has pulled back from what has been a difficult relationship with the industry. But has it mis-read the politics of cost-of-living?  

There’s a mixed picture on firms’ behaviours and margins around premium finance. However, it does not look like the FCA will tackle the market on APRs or commissions; it has once again reaffirmed that it sees value in premium finance for consumers. 

However, the FCA has highlighted ongoing concerns about consumer understanding of home and travel insurance. It pulled out areas where improvements are needed, including outsourcing arrangements and oversight of cash settlements to customers. It has asked industry to work at pace to grip the lack of clarity around storm cover and ‘wear and tear’ ahead of the winter.  

The regulator has also claimed a victory with its GIPP intervention. It found that while profit margins for long-term customers may have risen, there has been a notable reduction in tenure-based price walking.   

Systemic challenges in the claims supply chain  

Of most significance, the regulator notes that rising claims costs have driven higher motor insurance premiums – a point that industry have been emphasising for some time.   

The FCA’s analysis attributes 65% of the 2019-2023 rise in claims costs to higher repair bills. Growing costs around replacement vehicles, bodily injuries and theft also feed back into premiums.  

The recommendations encourage industry to engage with suppliers and others to address these challenges. There are recommendations for the Government’s Motor Insurance Taskforce; though quiet recently, this could be revived if motor premiums persist as a mainstream political issue. 

Industry will be comfortable externalising these challenges and involving other stakeholders to chart a path forward. However, firms will need to face up to a difficult political reality: insurers, much more than other financial services businesses, are uniquely tied to cost-of-living concerns. The FCA’s Financial Lives Survey found that nearly 10% of adults aged 18-44 did not buy insurance in the past year, citing affordability concerns. 

This may come into sharper focus for the Government as rising premiums, especially for compulsory motor cover, become increasingly acute for constituents.  

Supervision-first – what could this approach mean going forward  

On premium finance, the FCA had previously telegraphed its reluctance towards a ban. The regulator has also ruled out blunt interventions like APR caps, mandating 0% APRs, or commission bans – moves that could reduce premium finance availability or raise insurance costs further. The market study continues, with final findings expected later this year that could still affect commission arrangements and distribution practices. 

The FCA has indicated that it will address poor firm practices with existing supervisory and enforcement tools, rather than new rules or guidance. This could mean more multi-firm reviews, greater use of skilled person reports, and Section 166 reviews targeting specific practices. This is a distinct feature of the Consumer Duty era. The Duty itself will continue to be a lynchpin of this approach, with firms facing scrutiny of their fair value assessments.  

Whether this represents a more pro-growth approach over the clarity of prescriptive rules will be up for debate.  

The FCA noted that insurers often earn higher profit margins on premium finance than others in the value chain, including specialist providers. It also raised concerns about ‘double dipping’ – where monthly payment decisions influence underwriting. Yet, the FCA has tempered its approach, reflecting tensions between regulating for growth and protecting consumers. 

Retail insurance has long been a petri dish of sorts for new regulatory approaches. This reflects both long-standing FCA concerns and the industry’s unique distribution and business practices. Examples include GIPP, fair value assessments, and ‘policy stakeholders’  in multi-occupancy buildings insurance. 

Yet, insurers are not out of the woods. While the FCA is manoeuvring its relationship with politics, insurers must not lose sight of their own. The regulator’s pro-growth approach may have underestimated cost-of-living politics. This lighter-touch approach may not hold if political pressure mounts. Firms will need to engage proactively and thoughtfully with political stakeholders as a result.  

What do firms need to do next? 

• Prepare for intensified supervision. The FCA looks set to rely on its supervisory playbook. Invest in supervisory relationships strategically and prepare for increased scrutiny across operations. 

• Demonstrate fair value convincingly. Firms unable to evidence fair outcomes face assertive supervisory intervention, as seen in recent product governance reviews. Premium finance providers should review cost allocation models given FCA concerns about profit margins and 'double dipping' practices. 

• Manage political risk proactively. Cost-of-living pressures create political vulnerability that the FCA's growth-friendly approach cannot shield against. Develop proactive political engagement strategies distinct from your regulatory relationships. 

How can Flint help?  

• Our team at Flint is made up of experts who have experience leading market studies and remedy design at the FCA and other regulators. We can help you understand how the FCA will approach the study going forward, how to maximise your engagement and responses to land key messages and how to mitigate any downstream risks. 

• We also have ex-supervisors and regulatory economists who can help you proactively manage supervisory follow up. We can help you reduce uncertainty and minimise business impact.  

• We understand how both regulatory and political decision-makers think and how these two worlds come together. We can help you think strategically about your regulatory and political engagement. 

This blog was written by Silas Ojo, Jaz Sansoye and Becky Young.