FSA Regulation - A Summary of Insurance Distribution

FSA Regulation - A Summary of Insurance Distribution

Introduction
 
This report examines the distribution of general insurance following the start of FSA regulation in January 2005. The number of registrations is examined in order to provide a picture of the number of distributors present in this market and the fallout that occurred on the back of regulation. How these changes will affect the market in terms of routes to market is also investigated.
 

 
Scope
 
The insurance market is put in context in terms of the number of regulation applications to the FSA and the number of authorizations granted
 
The brief considers the impact of regulation on insurance brokers and secondary intermediaries such as motor traders and property agents
 
The brief suggests the lasting impact of FSA regulation and what changes it will cause to the general insurance market in the near future
 
Insight from industry executives provides a balanced assessment of the effect of regulation on the insurance buying and insurance selling experience
 
Highlights
 
By 14 January 2005 over 18,000 firms had received direct authorization and a further 22,000 firms had been granted appointed representative status. The ongoing cost of regulation to the insurance industry is expected to be over £160 million per year.
 

 
Few insurers have noted a significant reduction in broker numbers either in the lead-up to or subsequent to FSA regulation. However, the FSA has identified three 'hotspot' sectors that were delaying their applications for authorization and may cease providing general insurance products.
 

 
Regulation is likely to have an unequal effect on various insurance products, potentially affecting some product lines more than others. There are concerns over the provision of free, add-on insurance products although for niche commercial products the likelihood of successful sales may increase.
 

 
Reasons to Purchase
 
Gain insight into the number of regulated intermediaries and the potential distribution routes under the new regulatory regime
 
Understand the product areas that regulation will most affect and the types of intermediary that may have to curtail insurance sales
 
Assess the overall impact on your business and how the FSA may revise regulations to create a more efficient insurance market

TABLE OF CONTENTS
 
CHAPTER 1 EXECUTIVE SUMMARY 3
 
Introduction 3
 
Regulatory context 3
 
Over 40,000 firms are now regulated 3
 
Regulation will cost the insurance industry over £160 million per year 3
 
Impact of regulation 4
 
Insurers are adapting to new processes 4
 
The impact of regulation will vary by product 4
 
Consumers have not been affected by change to their insurance-buying experience 4
 
There has been modest contraction of primary intermediaries 4
 
The FSA has identified three ‘hotspot’ sectors 5
 
Banks and building societies are deciding on a course of action 5
 
Conclusions 5
 
Regulation will impact all stakeholders in the insurance market 5
 
The scope of FSA regulation will alter 5
 
There will be changes to insurers’ route to market 5
 
CHAPTER 2 INTRODUCTION 13
 
What is this report about? 13
 
Who is the target reader? 13
 
How to use this report 14
 
CHAPTER 3 REGULATORY CONTEXT 15
 
Introduction 15
 
Summary of regulation 15
 
The FSA has taken over from GISC… 15
 
…and is the regulator for all insurance providers 15
 
Number and type of registrations 15
 
Cost of regulation 17
 
Regulation will cost the insurance industry over £160 million per year 17
 
Brokers will face considerable costs, but these may be less than anticipated 18
 
The cost of regulation will be passed on to consumers 19
 
CHAPTER 4 IMPACT OF REGULATION 20
 
Introduction 20
 
Impact on insurers 20
 
New processes have been introduced 20
 
Insurers are abiding by Insurance: Conduct of Business rules 20
 
Agency arrangements have been pressured 21
 
Impact on product distribution 22
 
The impact of regulation will vary by product 22
 
Creditor insurance is likely to come under increasing scrutiny 23
 
There are concerns that creditor insurance will be adversely affected by FSA regulation. 23
 
Travel insurance is outside the scope of regulation 24
 
Regulation could boost health insurance sales… 25
 
…and commercial lines insurance sales may also grow 26
 
New regulation from Europe concerning block transfer rules may prove unworkable 26
 
Impact on consumers 27
 
Consumers have not been affected by change to their insurance-buying experience 27
 
The Financial Ombudsman Service is tasked with dispute resolution 29
 
The Financial Services Compensation Scheme is strengthening consumer rights 32
 
Impact on distributors 33
 
There has been modest contraction of primary intermediaries 33
 
The contraction of secondary intermediaries is a bigger cause for concern 34
 
Interim authorization has given some intermediaries a second chance 34
 
Insurance networks will continue to develop 35
 
There has so far been no evidence of unauthorized practice 35
 
CHAPTER 5 CONCLUSIONS 37
 
Introduction 37
 
Regulatory impact 37
 
Customer service will improve post-FSA 37
 
Business practices will come under heightened scrutiny 38
 
FSA regulation will add to insurers’ costs 38
 
Some secondary intermediaries will pull out of providing insurance 38
 
Travel insurance and extended warranty should become regulated 40
 
Datamonitor’s view 40
 
Regulation has brought about minimal change 40
 
CHAPTER 6 APPENDIX 42
 
Definitions 42
 
Research methodology 42
 
NERA research 42
 
Further readings 43
 
Current titles 43
 
Future titles 43
 
Relevant links 43
 
Datamonitor’s custom research capabilities 43
 
SPP writing team 45
 

 

 
LIST OF TABLES
 
Table 1: Number of firms authorized to carry on general insurance business, 14 January 2005 16
 
Table 2: Estimated compliance costs of FSA proposals 17
 
Table 3: General insurance complaints to the Financial Ombudsman Service, 2003-4 32
 

 

 
LIST OF FIGURES
 
Figure 1: Motor claims were most commonly submitted to the FOS in 2003/4 31
 
Figure 2: Datamonitor’s core consulting capabilities 44