The opening remarks of the FCA’s warming are worth quoting…
“The Financial Conduct Authority (FCA) has seen evidence that some consumers who have had their cars written off after an accident are being offered by their insurance providers a price lower than the vehicle’s fair market value. In some cases, claims staff are only increasing that offer to the fair market price when a consumer complains. Offering a price lower than fair market value is not allowed under FCA rules.”
There are three points worth noting here.
- Motor total loss settlements are complex, especially at the moment. I presume the FCA will have realised this and positioned their warning accordingly, but if not, then they need to recalibrate it after talking with experts in the new and used car markets.
- We see again the regulator making the link between claims settlement practices and complaints. Yet they use complaints as a value measure, while also acknowledging that insurer systems have been designed to predict and optimise around complaints. Mixed signals aren't good.
- Insurers are being told not to incentivise their staff to engage in potentially harmful claims settlement practices. If as the FCA mentions, they’re seeing evidence of this, then the absence of regulatory action to stamp it out is perplexing.
I’ve warned on a number of occasions over the last few years (more here and here) that some claims practices are raising serious ethical questions, and that senior executives needed to deal with them. And by ‘deal with them’, I mean in terms of system design, performance and management. In the light of this FCA warning, independent board members should expect to see compliance and audit reports setting out how the obvious risk from these issues has been managed over the last few years.
Let’s examine the three points I’ve raised above in a little more detail.
Total Loss Settlements
When head of insurance at Europe’s biggest fleet, I became something of a residual value expert, designing and placing what was then the biggest placement of motor residual value risk into the UK and EU markets. So the FCA’s warning about total loss settlements fell on familiar ground for me.
There are two aspects to this. Firstly, insurers should be offering fair market value settlements on motor total losses as a matter of course. That’s what the policy they’ve sold the consumer says they will do. The second aspect is what exactly a fair market value is.
Let’s look at fair market value first. War, a pandemic, supply chain problems, semiconductor shortages, a cost of living crisis and an energy crisis have all played a part in making the used and new car markets (and the way in which the two interact) highly complex. There’s a lot of volatility in those markets at the moment, so the value of say my car now is not going to be much like it was forecast to be back in November 2021.
This means that what was priced into the premium for total losses and their accompanying fair market values last year may well look less than adequate now. And insurers will feel under pressure to manage such settlements carefully.
Business as Usual?
That said however, the system for deriving fair market values is well established and to be honest, all it needs to do is carrying on working as it has always done. The numbers and their volatility is just part of the business risk that insurers should account for. So long as the system is fluid enough to keep up to date in line with that volatility, establishing fair market value is a standard business process.
It is possible that the system is not fluid enough to keep up with that volatility, so resulting in offers being different from what consumers experience in their local used car market. If so, then the providers of such systems need to adapt quickly. It is also possible that how consumers judge their offer has a lag in it. Buying a guide that is published monthly will not provide that accurate a picture. Using an online service is better.
An example of this would be the arrival of a shipload of new left hand drive cars from South Africa into Southampton (it happens). This triggers a ripple across new car markets in the south, which the used market responding accordingly. If an insurer’s system can’t take full account of such regional events, then it is, to put it bluntly, in need of replacement.
Another Way of Seeing This
That’s the pot half full interpretation - a combination of volatile vehicle markets that inadequate systems fail to track properly. For the consumer of course, the outcome is still the risk of an unfair settlement. And that needs to be addressed by the insurer in question.
The pot half empty interpretation takes a more critical line. It is that systems designed to optimise claims settlements are offering below fair value settlements as standard, waiting to see if they are accepted or complained about. The FCA warning explicitly references seeing evidence of something along these lines.
I have cautioned insurers against such practices for several years now (more here). They are indefensible in public. Yet claims people have told me that there’s nothing wrong with offering a lower settlement if the consumer is prepared to accept it. This is ‘willingness to accept’, the claims version of pricing’s ‘willingness to pay’. It is a fundamentally flawed argument that exists because of power asymmetries inherent in the insurance market. Such asymmetries are why the regulator exists.
Complaints and Value
When the settlement of a claim (motor or not, total loss or not) is influenced by the consumer’s likelihood to complain, then the market is sustaining an inherently unfair practice. I’ve written before about how this works (more here) and it is indefensible. What’s more, so long as the regulator uses complaints as a measure of value, it is likely to continue (more here).
This is not a problem with claims handling. This is a problem with how claims systems are designed and maintained, along with the governance and management processes behind them.
The FCA has clearly found evidence of insurers incentivising their staff to engage in potentially harmful claims settlement practices. These are of course only practices that are potentially harmful, but in regulatory language, this is saying that they’ve seen it happening but don’t want to go into specifics.
Incentivising someone to make an unfair decision is unethical, whether that person is an executive meeting firm wide targets or a claims team meeting a settlement target. This need not always be done directly. One indirect practice I’ve seen used are claims staff being required to make decisions in accordance with what the system tells them to do, and the claims manager being performance managed around compliance with those system decisions. Compliance and internal audit then come in to check that ‘standards’ are being maintained and performance management happening according to plan. In one case, I found that it was the claims staff who were complaining the most, about having to make decisions that they quite rightly thought were unfair to complainants.
One reason why the FCA is not being more specific about this is perhaps the apparent lack of regulatory action so far to shut such practices down. A warning may well have been issued to the people concerned, but then a ‘yellow card’ doesn’t really change the culture that allowed the practice to emerge in the first place. To put it in World Cup terms, why hasn’t the regulator issued any red cards around this practice? Wasn’t it for such cases that the SMCR was designed?
A Provocative View
I’m going to be provocative now. Another way of putting it might be bluntly realistic. You’ll recall my concern about the near threefold rise in the numbers of suspected cases of motor application fraud between 2017 and 2019 (more here). I questioned what had brought this rise about.
Now I’m no lawyer, but as a person on the Clapham omnibus, I wonder whether there’s that much difference between an insurer who deliberately under settles a claim, and a claimant who deliberately over presents a claim. It’s an obvious question that a presenter on say BBC Radio 4’s Today Programme would put to an insurance executive when discussing claims practices. I’m presenting it here simple to forewarn insurance executives of how the more critically minded (as journalists tend to be) might draw lines connecting different practices. IF they don't want to defend it in public, why do it?
The problem with principles based regulation is that when it appears that principles are being broken, and the regulator signals as such in a press release, the market then waits for the regulator to respond in specific terms . If that response is unclear or delayed, then a sense of ‘they had to say that, didn’t they’ takes hold. Normal practice resumes.
So in highlighting their concerns, it is now down to the regulator to act upon them, and to show, to the same public audience to whom the press release was directed, what has happened as a result.