Insurers need to delegate authority without losing control

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Twelve insurers who outsource underwriting, claims handling, and other processes, as well 19 intermediaries and third party administrators were examined by the FCA.

They discovered considerable discrepancies in how insurers appoint and deal such parties.

Of more pressing concern, they also found examples where inadequately managed outsourcing led to a poor customer experience.

Many companies make light work

Insurance isn't a straightforward product where one company handles everything from start to finish.

Commonly it's made up of a collection of retail firms, underwriters, claims handling firms, and additional third party administrators that could include call centres, companies who design the insurance cover, even specialists brought in to handle customer complaints.

The review found considerable differences in both the manner in which insurance companies delegate, and in the extent of the delegation.

For example, the proportion of business underwritten to a delegated authority could range from 10 to 100%. That authority might also vary from a massive composite insurer to a small underwriting specialist.

One of the problems was a lack of communication between an insurer and their delegated authorities. There was no allocation of responsibilities, and confusion between who handled what.

So it was uncertain, for example, who would handle complaints procedures or try to improve them. Insurance was on occasion sold by exempt or non-regulated firms.

Lack of consistency created difficulties too. In one example the FCA discovered an intermediary product provider charging different prices for identical products being sold on the same day. Small wonder consumers complain about lack of clarity on insurance pricing.

The FCA also found insurers didn't always check the suitability of third parties to provide adequate service.

Some companies delegate better than others

Of course, as in any industry, there was a difference in standards between companies. Some thoroughly vetted third parties to ensure they were appropriate while others merely checked that they were an authorised firm and solvent.

Worryingly, the FCA sometimes discovered that some companies didn't sufficiently understand the insurance they were underwriting if it was designed by someone else.

As the FCA points out, aside from the cost, the quality of the claims process is the most important reason for choosing an insurance product.

But while everyone knows it's important to read the small print before signing up, it can be difficult to tell how good an insurance product is until a claim has to be made.

However, the FCA found that at least a third of insurers in their sample had only limited control over claims handling that had been outsourced. Sometimes they were even completely designed and managed by an intermediary.

In such cases the insurer was obviously entirely reliant on a different company to meet their customers' obligations. In the worse instances claims have been declined without the insurer having any idea, and therefore unable to address the issue.

All too often, it was found that the only way insurers were measuring the quality of their product was through customer complaints.

What's more, when complaints were received they were dealt with in different ways; for example general complaints might go to the sales team or customer services while claims-related complaints could go to the insurer, an intermediary, or even a third-party selling the product.

Fixing the problem

As well as providing individual feedback to firms included in their review, the FCA intends to address issues by using regulatory tools.

They'll also work with regulated insurers and intermediaries to ensure they are taking steps to address the issues identified.

Insurance is not a sexy product. Frequently people only buy it because they are legally obliged or feel they have to, especially with something like car or contents cover. They don't necessarily read the small print.

Even if they do, the language is often written with legal compliance in mind and is hard to understand.

However they do expect to get an acceptable service for what they are paying.

Now the FCA is taking steps to assure that, whatever the complexity of outsourcing arrangements, they won't be disappointed.