The Financial Conduct Authority (FCA) has singled out target market statements from private medical insurance (PMI) and income protection (IP) products as “examples of poor practices that could cause customer harm”.
It highlighted the issues in its TR24/2 Product Oversight and Governance thematic review – General Insurance and Pure Protection paper but did not name the insurers involved.
The FCA has warned insurers and advisers that it is taking “urgent” action including ordering the withdrawal of products and holding senior executives accountable as a result of failings identified in the review.
‘Did not adequately consider key underwriting criteria’
In the first of its examples of poor practices that could cause customer harm, the FCA referenced a PMI policy lacking detail of underwriting criteria and which failed to address the subject of excess payments fully.
“We saw a target market statement for private medical insurance (PMI) which did not adequately consider key underwriting criteria or customers’ characteristics and risk appetite,” it said.
“This product excluded pre-existing medical conditions, as do many PMI products.
“However, this core part of the underwriting criteria (the nature of the product) was not reflected in the identification of the target market, though it suggested the product may not be compatible for customers who wanted cover for pre-existing conditions.
“The product also had a range of excesses, but the firm did not adequately consider the customer’s risk appetite or ability to cover the excesses.”
‘Real risk of customer harm’
The second example addressed an IP policy which had too broad a market, did not reference the potential of workplace cover and said it could be sold outside the target market.
“We saw a target market statement which was not granular enough for an income protection product,” the FCA said.
“It stated the product was aimed at anyone in paid employment and covered all occupations.
“This broad statement gave no consideration to the cover that some customers may already have from their employment that provides this protection or any need to protect their income.
“For example, customers who are close to retirement may have adequate savings for immediate retirement.
“Further, it stated distributors could sell the product to a customer who was not included in the target market.
“For any product, this would not meet our expectations. Given the complexity of this product, and the interaction between a customer’s needs and their income sources, this was particularly concerning and created a real risk of customer harm.”
‘Too vague or too broadly defined’
Overall as part of the wider thematic review, the FCA criticised insurer target market assessments for their products for being “too vague or too broadly defined”.
It also criticised the lack of detail around exclusions and said that “underwriting criteria for the product may be helpful”.
It noted that target markets were too vague or too broadly defined and did not adequately consider whether there were groups of customers for whom the product would not provide the intended level of value.
“For example, the product had exclusions that could be inconsistent with the identified target market, but the firm had not identified the market at a sufficiently detailed or granular level to consider the nature of the product,” it said.
“Inadequate consideration of the nature of the product, such as exclusions, creates a risk that the firm may miss groups of customers that may not get the intended level of value.”
The regulator also said it saw many statements that only defined demographic factors (such as the age, gender, income, occupation, geographic location) of the groups of customers.
It warned that in some cases, there appeared to be a need to consider other factors.
“For example, some of the target market statements failed to consider and reflect the risk appetite and tolerance of both the firm and the customer,” it continued.
“Some of the underwriting criteria for the product may be helpful in defining not only the characteristics of the target market but also groups of customers for whom the product is compatible.”
As part of the thematic review the FCA reviewed whole of life over-50s, term assurance and critical illness if sold jointly, and income protection products for pure protection.
In total it reviewed 45 general insurance (GI) and 11 pure protection products in total.
It also included 29 GI and 10 protection distributors in its sample, with the firms representing varying sizes, market sub-sectors, business models and distribution methods.