FCA focus on clarifying insurance policy wordings for understanding

The Financial Conduct Authority (FCA) has told insurers to improve claims handling and make policies clearer following the "super-complaint" by consumer group Which? about the home and travel insurance sectors.

The problem

Last year, 22 million home insurance policies were in force with £7bn in premiums, whilst 6.8 million travel insurance policies generated £1.2bn in premiums. However, acceptance rates reveal significant issues: 99% of motor claims were accepted compared with just 80% of travel claims and 74% of home contents claims.

The FCA said this partly reflected poor consumer understanding of policy coverage. Which? argued the sectors were "broken", with poor claims processes.

Key concerns

The super-complaint focused on three areas: outsourced claims handling by specialists, inappropriate sales practices causing confusion over coverage, and inadequate regulatory protection for consumers.

Specific issues identified

1. Storm claims

Only a small percentage of storm damage claims (in a FCA sample) resulted in a payment, with a significant number rejected and many abandoned by customers.

The FCA found weaknesses in firms' storm definitions, poor communication, and insufficient customer understanding of what constitutes storm damage versus wear and tear.

2. Cash settlements

Some home insurers reviewed had no approach or criteria to determine whether cash settlements were appropriate. Some firms actively promoted cash settlements without considering customer vulnerability or whether customers would benefit from insurer support services.

3. Service quality

The most common problems experienced by claimants in service-related complaints included claims taking longer than expected (8.8%), poor service or communication from the insurer (8.1%), and poor service from outsourced providers (6.0%).

4. Outsourcing failures

Insurers reviewed had limited control over their outsourced claims handling arrangements, with some of these being UK branches of overseas firms. The FCA found material weaknesses in oversight, raising concerns about compliance with outsourcing rules and potential customer harm.

Regulatory action

The FCA will expand its workplan to ensure improvements in claims processing and consumer understanding of their cover. The FCA has said that it will expand its scrutiny of how claims are processed and how clear policies are to customers.

What this means for insurers

1. Enhanced oversight: The FCA will enhance scrutiny of outsourcing arrangements and claims handling. Insurers should strengthen governance over third-party handlers and management information systems.
2. Clearer communications: Insurers should invest in simpler policy documents, transparent sales processes, and better consumer education. Complex, jargon-filled policies are not acceptable.
3. Policy wordings: The FCA has reported that 31% of customers find it difficult to assess the quality of policies due to insufficient information. Nearly one-third of consumers can’t properly evaluate what they are purchasing. This is a massive issue for the insurance industry. The FCA has said that, in part, lower levels of acceptance of single trip travel claims and home content only claims reflects low levels of understanding among consumers of what they insurance policy covers. The message to insurers is clear: policy wordings must be comprehensible to the average consumer, not just legally compliant.
4. Industry collaboration: The Association of British Insurers (ABI) has said the improvements demanded by the FCA are "a top priority" for the sector. Insurers should engage actively with industry-wide improvements.