With the regulatory environment becoming more complex, underwriting management agencies (UMAs), in particular, are feeling the pressure.
Long-standing business models need to be reassessed to incorporate ‘Twin Peaks’ and Treating Customers Fairly (TCF), amongst others. Regulatory supervision is also becoming more invasive. This is evidenced by the recent fines imposed by the regulator as well as Ombud determinations on the significance and transparency of advice provided and the relevance of products in the market segments they are aimed at.
Consequences for consumers
The UMA and broker who want to remain active in the marketplace this year will have to continuously ask the following question: What impact will this business decision have on the consumer?
Recent and imminent regulatory changes and developments that impact the UMA and insurance broker include:
- The Retail Distribution Review (RDR);
- The Solvency Assessment and Management (SAM) framework;
- Treating Customers Fairly (TCF); and
- Conduct of Business Quarterly Returns (CBR).
During November 2015 the Financial Services Board (FSB) issued the RDR Phase 1 Status Update which included a brief summary of the progress being made on the competency framework for approved persons.
The UMA is often caught between a rock and a hard place as it must provide the best possible experience for the broker whilst acting in the best interest of the customer on behalf of the insurer. We are of the opinion that UMAs offer efficiency and excellence by virtue of their area of specialisation, skills and expertise as well as their relationships with the customer, broker and insurer.
Whilst UMAs with specialised niche lines of business seem to be more successful than the UMAs that underwrite general lines of business, the true success and sustainability of a UMA depends on its readiness and ability to respond to ever-changing market demands and risks through innovative products and services.
During December 2015 the regulator also published a proposed revision to the fit and proper requirements. Both the RDR and the revised fit and proper requirements are relevant to the competency framework currently under review.
Changes to the competitive environment
Although RDR does not directly impact the UMA, it does aim to change remuneration structures for brokers. As a result brokers with binder agreements may start competing directly with UMAs – especially if they regard the UMA structure as a more sustainable business model.
Alternatively – unless the broker finds a competitive advantage and builds its business model and offering around sound ongoing advice – we may see a reduction in the number of brokers in the industry.
The ongoing implementation of SAM (on the prudential side) as well as the proposed CBR guidelines (on the market conduct side) will result in insurers making more frequent requests for information from their brokers. For non-direct insurers with outsourced business models the UMA plays a vital role in this regard – because UMAs obtain and provide the insurer with information on behalf of their brokers.
Although the onus to comply with market conduct regulations is primarily on the insurer, the role of the UMA and broker, as partners of the insurer, should not be underestimated.
Stricter contract terms necessary
The UMA and broker alike will be required to agree to stricter contractual terms in intermediary, binder holder and outsourcing agreements to ensure the delivery of fair outcomes to customers and the provision of any market conduct-related information that may be required by the regulator.
Stakeholders throughout the insurance landscape are thus wrestling with an important question: Is the UMA model sustainable under the current Binder regulations? And will it still be sustainable if additional changes are made under the RDR?
Adapting to new regulations
In order to consistently provide the market with personalised and sustainable insurance solutions UMAs need to meet regulatory demands by adapting their business models and structures accordingly.
Business models need to be robust and unique and the UMA must respond to the convergence of legislative influences, the need for more focused risk selection and specialisation and direct risk sharing. The sustainability of the UMA also depends on its ability to add value to the customer, broker and insurer within the distribution value chain and its product life cycle.
Centriq has always emphasised the importance of the UMA model. The UMA plays a vital role in shifting the focus from profit to one of driving the right behaviour and ensuring fair treatment of customers, especially in relation to brokers. It can safeguard value through sound technical underwriting, the proper selection of risks and by applying (and re-engineering) underwriting rules to accommodate both current and emerging risks.
Value is also enhanced by streamlining procurement needs, scaling economies and managing efficiency and expenses through the use of enabling technology and IT systems. Brand differentiation goes beyond price and plays an important part in achieving this value, as does a focus on innovation, skills and relevance in the market place.
An effective TCF culture
Traditional products require innovative re-engineering to adapt to changing consumer needs and emerging market segments. This requires the UMA to identify market conduct risk indicators. Its TCF culture also needs to be tested: How effective is the UMA’s TCF culture at an operational implementation level?
From a broker’s perspective the UMA should respond to their need to do business with ease and should therefore:
- Enable the broker to deliver fair market conduct outcomes in relation to product suitability from a risk perspective;
- Adapt to consumer needs in a more resourceful, affordable and ‘barrier-free’ way; and
- Allow for a channel that enables and advances reasonable claims and complaints handling and changes to products.
To ensure and strengthen long-lasting partnerships with brokers, UMAs are expected to provide product training and innovation, use technology that enhances service delivery and the customer experience and employ solutions-oriented approaches to regulatory changes that impact brokers. The UMA should be cognisant of the impact of RDR on brokers and provide innovative solutions that muster regulatory requirements.
Brokers, on the other hand, should use this opportunity to engage with UMAs and insurers; leverage from, and align themselves with the processes and systems implemented; and establish a mutually beneficial relationship.
Embracing ‘sustainable’ regulation
For the longevity of the insurance industry (and the role players within the distribution value chain), it is paramount for all to embrace regulatory change, avoid circumvention of regulation and abstain from undesirable market practices. We need to take hands and work towards sustainable solutions within an ever-changing regulatory environment.
Each role player must reassess its current business model and processes and align company strategy, product development, marketing, customer communication and distribution models with that which best evidences fair outcomes to customers. Entities analysing customer information to derive intelligence for business strategies and offerings are the ones that will be successful during times of change.
Charles Darwin said: It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. Or in the words of George Gilder: In embracing change, entrepreneurs ensure social and economic stability. My wish is that the industry collectively endeavours to adopt the correct attitude and strategy within the current regulatory regime to drive both financial growth and fair outcomes for customers.
Whilst new or amended regulation is complex and concerning it is aimed at promoting financial stability, improving the financial soundness of individual financial institutions, safeguarding the integrity of the financial services industry and strengthening consumer protection. Carefully considered regulatory change will benefit both the insurance industry and consumers.