(Re)thinking Insurance - Series 4: Episode 16
Suky Mann is joined by James Tanser to discuss their view on how firms have responded to conduct related regulations across pricing, as well as a look to the future and how things may change in this space over the next 12 months.
Transcript for this episode:
JAMES TANSER: Being in the middle is a safe place to be. Some of the best companies I've seen have had two-sided value measures. If you're looking at loss ratio, they'll say, my loss ratio shouldn't be higher than-- pick a number... 80%-- but also it shouldn't be lower than 60% / 70%. So that's kind of the essence of being in the middle of the pack. You don't want to be too far out in either direction.
SPEAKER: You're listening to (Re)thinking Insurance, a podcast series from WTW, where we discuss the issues facing P&C, life, and composite insurers around the globe, as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance.
SUKY MANN: Welcome to another episode of (Re)thinking Insurance. I'm your host, Suky Mann. And today, I'm joined by James Tanser, who's a director within our product, pricing, claims and underwriting team. Hi, James.
JAMES TANSER: Hi, Suky. How are you?
SUKY MANN: Good, thanks. Good. Thanks for joining us today. So today we'll be discussing our take on how firms have responded to conduct related regulations across pricing and other technical and non-technical domains over the last 12 months. And we'll also very importantly be taking a look ahead over the next 12 months and sharing our view on where we see firms focusing their efforts to build efficiency and value around their activities in the conduct-related space.
So I guess I'll start off, James. I was going to ask for your views on the FCA and how the approach they've taken. But I guess as context of that, it's worth just sharing a view that 2022 and 2024, I guess we've seen a lot of firms put a lot of hard work in first around GIPP compliance and then consumer duty compliance to meet deadlines and pretty tight deadlines.
And they've spent a lot of overhead, I think it's fair to say, to make sure they're in a decent place ahead of and in line with various deadlines and regulations. I think that's a fair comment. What's your view on that? And then also actually, if you wouldn't mind then sharing your take on what the regulator's been doing up to about now and how you think they've responded and liaised with firms throughout this time.
JAMES TANSER: Yeah, sure. So happy to. So well, the FCA, let me say, so they like to pedal a utopian vision of the way the world is going to be. So they set out very broad principles about how everyone needs to be nice to each other and everybody needs to be treated fairly, which has been with us for a long time, of course. But also, everybody's got to have good value all of the time.
So I think we all understand that vision and we want to get to the place where these things are true. But what they're not necessarily as good at is setting out the route. So they tell you the destination is this magic castle on a hill somewhere that we need to get to, the promised land. But they don't give you the route you need to travel down, what the milestones are, what you need to achieve in order to get to the place we all need to be.
So what they do instead is they set out the vision, and they let lots of clever people all over the market scratch their heads for a bit, and they come up with, oh, why don't we try this, why don't we try that, I think maybe it means this. And what the FCA has been doing over the last-- I don't know-- 12, 18, 24 months or so, is going around the market and looking at what people are doing.
And this lets them then form a view about what good looks like, what things need to be done in order to meet their vision. And then they'll take the insights they gain from seeing three or four of the leading companies, and they will take those and that will then give them a lens to go and see the next tier of companies and the next tier of companies. And so as this process goes around, the market organizes itself to some degree, and that you end up with some common themes emerging from different companies across that.
And inevitably, some people will have wandered beyond off the path visiting slightly different destinations than the one the FCA had in mind. And there's some slight risks there. The FCA is coming in and going do you know when you did this, that wasn't really what we had in mind. Would you like to explain why you think this is in line with the consumer duty?
And the clearest example of that is, of course, what happened to insurance this year, where the market was effectively closed down for a few months because the FCA wasn't happy with the answers that were given about how those products were representing good value to the customers. And the market had to scratch its head and come up with a different approach before they're allowed to go back to the business of selling that.
SUKY MANN: So yeah, no, that's all-- that's really interesting. There's a couple of points that I'd probably pick up on or add to. It's interesting to see the FCA relatively recent survey that it's issued to the market on vulnerable customers and the treatment of vulnerable customers. I think that plays into very much what you were saying about let's form a view on what players are doing across the market, consolidate that, combine that, and then go out and with a view of what is good practice or what is less good practice. So I think we'll see that in the not too distant future.
And I guess some of the things we're seeing as we work with clients, aren't we, things that are commonly happening, such as everyone's had a focus on improving their MI and reporting off the back of that, which have become much more outcomes focused, whether that's in relation to product reviews or pricing fairness. I guess we've also seen them new committees form, whether that's brand new committees or adjusted committees or hybrid committees where new outcomes and customer focused responsibilities are added to existing committees.
That's generally what we've seen across the main as well. And I guess that plays into a point you were making when we last discussed this topic around almost the formation of a pack, which we often see in the market around topics such as this or where there's new regulations. And you had an interesting analogy, didn't you, when we were discussing actually what does the pack mean and what's our definition of the pack?
JAMES TANSER: Yes, that's right. So I was thinking about that a bit more just before the recording. We're kind of in the middle of the Olympics as we're recording this. And so being in the middle of the pack isn't necessarily something that an athlete wants to be. They want to be at the front of the pack. They want to be leading.
And so what do we actually mean by the pack here? We're not talking about a pack of wolves where you need to be at the front because that way you get to eat first. We're talking about very much the prey and not the predator. So being in the middle is a safe place to be.
So when you see a herd of cows wandering around the field, the important high ranking animals are actually the ones in the middle. And the lower ranking ones are the ones scattered around the periphery. And why is this? It's because if there's a lion lurking behind a rock or a pack of wolves about to come out of the woodline, you want to be in the middle because the animal, which is going to get nibbled off by the predators, are the ones at the edge, the ones at the back, and maybe even the ones at the front if there's an ambush.
So being in the middle gives you a bit more of an opportunity to see what's going on. And I was reflecting on some of the work I've done over the years looking at value measures. And some of the best companies I've seen have had two-sided value measures, and they've done this for a long time where if you're looking at loss ratio, they'll say, my loss ratio shouldn't be higher than-- pick a number-- 80%, but also it shouldn't be lower than 60% 70%.
And they've always had this two-sided test. And there's lots of different metrics you can use. I know one company I remember I had like a six pack, six different metrics they used. But they were all two sided. And so that's kind of the essence of being in the middle of the pack. You want to be in the middle in the green bit, in the middle. You don't want to be too far out in either direction because if you're too aggressive with your application of consumer duty, then you'll end up stopping or yourself doing things that others in the market are doing and you will lose money.
But if you're not sufficiently rigorous enough, then you're going to find that you start getting penalties. The regulator looks at you. You have to redress any concerns that there are. There are a number of serious financial consequences from not doing enough. And so being in the middle is the key. And what we're seeing is the market is coming to a consensus.
So when we say in the middle of the pack, they've got a consensus about where they are. There's a range. There's not a single way of interpreting the rules. But there's a range of acceptable interpretations. And there are some people who are pushing the envelope one way or the other, and they will probably not fare as well.
SUKY MANN: Sounds good. No, I totally agree with that. I totally agree. And then is there-- deep diving into or just touching on specific topic areas, what do you think-- what have you seen based on your work with clients over the last six months, what kind of topic areas have they been focusing on or been more front of mind when they're thinking about making sure they comply with specific elements of the consumer duty?
JAMES TANSER: Oh, I was just going to say-- there are lots of different things that people are looking at. You need to think about how you're going to go about the reviews. You need to make sure you've got the right management information in place. And it's not just enough, I think, to have it as a once a year exercise. If you're doing get compliance once a year, you need to attest that you've done the right stuff for 12 months. But the thing is that that's a continuous assessment.
It's too late in March to realize that you weren't compliant six months ago. You need to know you were compliant all the way through the year. And so making sure that this is part of a continuous cycle, you're doing it all the time.
There's a general increase in interest in vulnerable customers. It's always been there, but I think there's maybe just a little more of that is being focused on now, and also working up and down the value chain. So again, the GAP is an example there where you looked at where the value sat. And it was all in the distributor. And you kind of went, well, why is it that model being used?
And so sharing data and insights across the value chain. Just make sure that everybody involved is doing the right thing for the customer, expecting the right amount of value.
SUKY MANN: I think that last point in particular is something I've come across a few times working with clients, is the ease of obtaining information from other partners across the chain, which sometimes on quite a few occasions has led to work being done to update contracts and agreements to build in the requirements to provide certain information at a certain quality at a certain time.
And sometimes there's been issues that are bigger than that, cultural misalignment between two parties or two or more parties where actually some clients have realized that it might be time to look for another partner in the distribution chain who's more in tune with their way of working and their way of thinking. So they can get hold of the information at the right time to drive insights and reporting that help their management.
And that's-- I think that flows into a point around timeliness of MI that you talked about. It's interesting that there's definitely a shift towards more and more firms were seeing trying to build more forward views of the environment and customer outcomes. So when they're doing product reviews, it's not just backwards looking and point in time. It's forwards looking, what is the emerging environment looking like, what do we see happening, and how could that impact the outcomes delivered by our products and the various features within those products.
And one other thing that I'll find really interesting is traditionally, probably what you call traditional technical bodies and committees such as technical pricing committees. We're seeing more and more representation, the likes of compliance and marketing on those as well, which is really interesting because they're there as the voice or a different voice, a different perspective of the customer. And that's led to a lot of rich discussions.
But there is a sort of process to go through to build the value out of that because more traditional ways of working within committees are getting a more diverse viewpoint built into those. And it's taken a bit of time for people around the table to understand each other's perspectives. But that is leading to some really good discussions.
One example of that actually was where a compliance function that we work with was keen for the durations of cars and customers within their approved repair network because that was slow for various operational reasons. They preferred the clients to be paid by their company. And so they could take their car elsewhere and get it fixed elsewhere. Whereas the more technical claims team were saying, is that actually a good outcome because we might be providing those customers with money to take their car elsewhere to get fixed. But they'll encounter the same problem elsewhere, and they'll be outside of our network where we can help them.
And that was a really interesting discussion on the pros and cons of various strategies to help customers and evaluate the quality of those outcomes. But that was a really good example of where you have that diversity of views across bodies and committees to have to facilitate the quality of discussion there as well.
Looking ahead, James. So looking ahead over the next 12 to 18 months, again, from your view in the pricing, product claims and underwriting space, where are you seeing the client conversations going or when you're on site with people, where is their mind, or where do you see the pack moving over the next 12 to 18 months in terms of their focus or efforts?
JAMES TANSER: Well, there's still-- I mean, it's strange to say, since we're so far into this, there's still a degree of bedding down and people understanding exactly what they need to do. So I think the more of the same to a degree. I think there's going to be work done around vulnerability and bias.
So things like predictive vulnerability, so working out which customers are likely to be vulnerable or are likely to become vulnerable in the future. And then making sure you have the right things in place to support them in the right way. So I think that's very interesting.
I think there's going to be more on the ethnicity penalty. I know work has been done by many people in the market. The outcome of that is interesting. I think we will see continued work in that area. There are still many unanswered questions around the extent to which there is inherent bias in our models and whether or not you can address that in some way and indeed what you need to do to address that.
Is it something that the market can do on its own, or do we need further intervention? Do we need the regulator to say this is the method you must follow in order to reduce or remove the implicit bias in your models? Because there's a commercial disadvantage to being first mover here. And while it might be ethically the right thing, it's very difficult to sell that to shareholders.
So I think, yeah, it'll be interesting to see what happens. So I think that's what I would be looking at over the next 12 months or so, where are we going to go on that. And then obviously, we just-- we've got a new government there bedding in. They're busy doing a whole bunch of things. It'll be interesting to see how that unwinds, what the impact of that, what's going to happen to inflation, What new rules and regulations are going to come in now we have a different hand on the tiller.
So yeah, I think there's a lot of uncertainty for all the labor government's trying to reassure us that it's steady as she goes. We all know that change is coming and what that means for us in insurance. That will be interesting.
SUKY MANN: Yeah, no, I think I agree with all of that. And guess what one additional thing that I talk to clients about is there's a big recognition. And there's a big push on investing in data science and artificial intelligence, which is very exciting and could bring a whole range of benefits within insurers.
The interesting thing there is if you think from the FCA's perspective, one thing I do point out is they'll want to see that conduct based thinking and customer outcomes at the heart of discussions around AI and the use of data science and what that means for an organization and also their customers as well.
So I'll do point out it's very important over the next 12, 18, 24 months to make sure that's a core component of thinking in the AI space. I think that's about it from myself, James. Anything else you'd like to leave our listeners with while we've got them?
JAMES TANSER: No, I think. I think we kind of covered the key areas. I think it's interesting to see where we're going. I'm still seeing companies who have not applied the way the consumer duty the way I would have thought they would have done. So I think we will see more action still where some of the stragglers are encouraged to catch up.
So the wolves that are the FCA will be nipping at the heels of the stragglers of the herd, I think, over the next 12 months. And so let's see who gets nibbled and who escapes. That will be interesting.
SUKY MANN: Yeah. No, no, that's a very good-- it's a very good point. Well, I think we'll leave it there then. Thanks, James. Thanks for joining us. That was really good. Really enjoyed that. And thank you to all of our listeners as well for taking in this episode. All the best, James. Thanks, Suky.
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