The UK regulator shared its thinking on financial inclusion with Parliament’s Treasury Committee recently. It was clear that they recognised the issue, but also that they didn’t understand, in terms of insurance, what was behind it.


Sheldon Mills, the Executive Director for Consumers and Competition, summarised what the FCA was already doing on financial inclusion. He emphasised how it had required regulated firms to have procedures for handling vulnerable consumers. And he talked about how the FCA received consumer input via the Financial Services Consumer Panel and the Financial Consumer Taskforce.

He saw the proposed ‘must have regard’ provision (more here) as deeper and more challenging than what they were already doing. He wanted to do more with industry to analyse it and he made specific mention of the complexity that comes from risk based insurance.  And he was keen to encourage more innovation and investment to tackle the problem.

A significant point he put forward was that it would be a challenge for the regulator to use funds to support non-profitable business. In other words, if low income families had to pay more for their insurance just because they were on low-incomes, then he didn’t see it as feasible for that extra to be funded by or through the regulator. He did mention however that firms might want to provide such support as a form of ESG investment. You can listen to what he said here.

In summary, while recognising that it was up to Government to decide what was within the FCA’s remit and what wasn’t, Mills didn’t think that a ‘must have regard’ provision should be introduced. That’s hardly a surprise. What was a surprise is what their rationale for this seems to be premised upon.

A Poor Lens

The FCA is clearly thinking about financial inclusion through a lens of markets and competition. Yet it is not a very good lens. It is failing to show them why the poverty premium in insurance has grown, and will continue to grow, most likely at an ever increasing rate.

They’re right to see the trend in insurance underwriting as complex, but wrong to not then see the relatively simple outcomes from that trend. Simple, in that as the individualisation of risk pricing advances, the stratification of the market increases, so leaving more people facing the poverty premium. Unless the regulator pays more attention to the systemic consequences of underwriting trends, they will fail to grasp the scale of the problem that is starting to develop.

This is more fundamental than something that a bit of investment, innovation or ESG funding can address. Indeed, those references seem to show just how much the regulator is under-estimating the issues here. I’ve previously been told by former senior FCA executives that personalisation is not really a problem, that in fact it’s just what markets should do.

A Cultural Problem

The FCA has a cultural problem. Their people come from a fairly homogeneous background and so see things in pretty similar ways. They struggle to recognise fundamental change, preferring to look at what I might call ‘market landscapes’ while ignoring how the tectonic plates are moving.

If you think about what happened with the pricing review, insurers should be worried. Over several years, the personal lines insurance market adopted lifetime value modelling as their core approach to pricing. Because the FCA ‘didn’t see it’ as a problem, and neither did the people they listened to (the consumer panel and inclusion taskforce), the super-complaint took the regulator by surprise. Yet it was entirely predictable (as per here). The quid pro quo for insurers has turned out to be a huge amount of disruption as a result of LVM being banned. That’s not good for business, nor good for public trust in the sector.

Yet the same, and likely much worse, could happen if the ramifications of current underwriting trends aren’t given more considered attention by the regulator. Insurance as now the biggest contributor to the poverty premium should be signalling something to the regulator, but they clearly haven’t ‘seen it’. Their reference to ‘some ESG funding’ makes me think they’re got their telescope the wrong way round.

We Must Look Ahead

I’ve heard a number of comments along the lines of ‘I wonder where personalisation will take us’ from insurance executives, so I believe that there is some level of realisation in the market that there are questions worth looking into. This is because these people are hearing the increasing noise being made around what data is doing to insurance.

I don’t expect the FCA to undergo a cultural revolution anytime soon, but that shouldn’t stop them from initiating a review of some kind into the direction in which underwriting trends are taking the market. Just as they’ve worked with the Alan Turing Institute for several years on data science, it shouldn’t be too difficult for them to find a partner to do the same on the restructuring underway in insurance.

Insurers need to watch for this happening, and to think about what their own narrative would be when asked to contribute. I firmly believe that there are several such narratives floating around the market and so while the ABI might talk for the majority, some powerful minority alternatives will emerge, wanting to be heard.

Duncan Minty
Duncan Minty
Duncan has been researching and writing about ethics in insurance for over 20 years. As a Chartered Insurance Practitioner, he combines market knowledge with a strong and independent radar on ethics.
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