Product oversight and governance
With the continued focus from the regulator on 'fair value', Tony Darwall, our Head of London Markets, considers the necessary processes firms need to go through before, during and after bringing products to the market.
When designing a new insurance product and bringing it to market, product manufacturers need to be acutely aware of the applicable regulatory requirements.
The FCA expects product manufacturers to operate an appropriate and proportionate product approval process. You should follow this process, step by step, both when you’re creating a new product and whenever you adapt it in any significant way. Your approval process itself should be regularly revisited and, if necessary, updated to ensure it remains valid and effective.
No product should be marketed or distributed before it has been through this process. This requires embedding a compliant process for product approval right from the outset of the product design journey. You should keep a written record of every step in the process and make this available to all relevant staff.
When designing a product approval process, it’s important to take a proportionate approach that reflects a range of factors including: the complexity of the product, the risk of customer detriment it brings, and the characteristics of its target market. For example, you would be expected to apply a more rigorous process for a complex new-to-market product than for a simple, well established mass market offering.
A good place to start is thinking about your product’s intended market. For example, what characteristics do its target customers share? Which types of customer would your product not be suitable for?
It’s important to consider whether likely purchasers of your product might include vulnerable customers. If so, you’ll need to make sure you have processes in place to cater for this. Crucially, your staff need to have received sufficient training to identify and treat vulnerable customers appropriately. As the longer-term impact of Covid-19 becomes clear, the number of potentially vulnerable customers is only likely to increase, so taking account of their needs when designing new products will be more important than ever.
You need to consider how your product will be sold and whether your intended distribution channel is appropriate. You should provide distributors with adequate information on the product’s target customers and how it meets their needs, as well as making sure distributors are aware of which types of customer the product is not suitable for. It is also important to consider how distributors will be remunerated. Is what you’re proposing in line with current market norms – or could it potentially drive poor outcomes for customers?
It’s vital any product you bring to market can be shown to deliver fair value for customers. So you’ll need to monitor, review and assess this throughout the products lifetime. The key here is data. You need to ensure that all relevant data is being recorded and reported regularly, and take action promptly whenever required. This means identifying key performance indicators that enable you to judge whether or not a product continues to offer fair value for customers.
Metrics you could look at in this context would typically include: cancellations within the cooling-off period, lapse ratios, claims frequency, loss ratios, and complaint ratios. To be sure a product is performing as it should, you need to be confident you’re getting accurate data across each of your selected metrics. You should benchmark actual figures against projections and undertake any necessary remedial work as soon as possible.
One telling indicator as to whether a product continues to offer fair value is the volume of complaints it generates. Analysing complaints data is a fundamental part of product oversight and governance. Whenever complaints data look higher than expected, it’s important to carry out a thorough root-cause analysis. This will highlight whether multiple complaints have a common cause, for example, or whether a disproportionate volume of complaints relate to a particular distributor or distribution method.
Even when your products are well established in the market, you should continue to benchmark them regularly against your governance process and make sure they still meet the needs of their target market. It’s easy to see how a huge upheaval like the Covid-19 pandemic could impact a product’s usefulness. But, even in the absence of such seismic events, the simple passage of time can erode a product’s usefulness – and ultimately render it obsolete, which is why it’s so important you review your products regularly.
If you would like to know more about how to design and apply an appropriate, proportionate and compliant product oversight regime for your business, our expert consultants are here to help. So please do get in touch. You can call us on 01892 539600 or email us at firstname.lastname@example.org.