Life through a lens: FCA sounds early warning for closed-book life insurance under the Consumer Duty

The introduction of the Consumer Duty for new and existing products on 31 July 2023 is looming large. But for life insurers (and related outsource service providers (OSPs)), the FCA has kicked off the year with repeated warnings for closed-book business - obligations for which will not formally apply until 31 July 2024.

In the FCA's Dear CEO letter to life insurers last month, closed-book products were singled out by the regulator. Having reviewed implementation plans from life insurers and OSPs, the FCA is concerned that firms may be underestimating the work required for closed-book products, and should be augmenting their plans with more clarity and granular detail - sooner rather than later.

The inherent nature of closed-book life - from old terms and conditions and legacy IT systems to mixed data and disengaged (if not vulnerable) customers - means that Consumer Duty alignment will be especially tricky. Even though the product and services outcome is somewhat simpler (there is, naturally, no requirement for firms to have a target market or distribution strategy), this "upside" is dwarfed by the heightened risks of harm crystallising for long-standing customers. 

Underscoring the FCA's concern, at the recent ABI Conference, Matt Brewis (the FCA's Director of Insurance) reiterated the regulator's growing concern with closed-book life insurance. In parallel, the FCA also has a keen eye on OSPs - in particular, those carrying out customer-facing activities who will need to offer "appropriate support to customers". Delegating life insurers will also need to have "assured itself fully as to the adequacy of its customer servicing provider by OSPs". 

The Dear CEO letter provided life insurers with a non-exhaustive list of potential components for firms' implementation plans. These include:

• a clear view of the firm's "total product portfolio" (as well as exhaustive approaches for ongoing product reviews)
• customer journey mapping
• communications reviews (in practice, this will need to cover system-generated correspondence and pro forma materials issued by customer service teams)
• a more considered approach to disengaged customers
• larger-scale changes such as product simplification or migration

In addition, firms will need to ensure that closed-book products offer fair value. Fair value is much more than price - again this is not straightforward for life insurance, particularly for products with vested contractual rights (such as annual fees and exit charges). The FCA suggests that firms may want to look at other ways to prevent potential harm, such as offering greater flexibility or facilitating switches to a new product. Underpinning all of this will be the FCA's general expectations under the price and value outcome. 

Life insurers with open and / or closed book business will also need to pay close attention to the other points in the Dear CEO letter, which includes helpful detail on how the Consumer Duty will variously apply to life insurers and OSPs; and books of business sold to new firms. For firms with pensions and at-retirement business, the letter also reinforces the FCA's heightened standards for customer decision-making: while the FCA is reviewing the boundary between advice and guidance, it ultimately expects firms to be much less risk adverse in providing support for customers as they near retirement (and not be reticent to do so simply because the firm is nervous about straying into advice).

The FCA will continue to engage closely with the industry, with "priority/targeted engagement" promised for insurers using OSPs and firms with significant closed books over the coming months.