General Insurance Pricing Practices (GIPP) (5) Product Governance 

YOUR COMPLIANCE MATTERS:   General Insurance Pricing Practices (GIPP) (5) Product Governance 

Relevance:                   All firms. 

Action required:         

1) Understand the new rules relating to Product Governance

2) Liaise with your insurers to obtain their Product Governance assessments 

We are aware that a number of firms have received a letter from the FCA, in relation to the above issue. We are therefore providing a reminder of the requirements that apply

Manufacture versus distribution 

The requirements under the rules vary depending on whether you are a manufacturer (you create, develop, design, or underwrite a contract of insurance), or whether you are a distributor (providing advice or proposing a contract of insurance to customers). 

In the main, we believe that most broking firms will fall into the distributor category, and we will therefore concentrate on the rules which apply in this case. 

Product Governance Rules – Manufacturer’s assessment   

You are required to have procedures in place to obtain the product manufacturer’s assessment under PROD 4.2.29/29A. 

This Rule requires that the product manufacturer maintains information relating to the insurance product, its product approval process, and the intended target market for the insurance product. 

But it also requires that the product manufacturer provides information to the distributor to enable them to understand the intended value of the insurance product, and the effect that the distributor’s own pricing approach/distribution strategy may have on the value of the product (where this is not known by the manufacturer) and any customers for whom the product is unlikely to provide fair value. 

Currently, we do not believe that product manufacturers are publishing this information to their distribution channels, even though it has been a requirement for a number of years. 

Action Required:  We would recommend that you send a request to all of your product providers along the line of the draft email at the end of this newsletter: 

Product distribution strategies 

·        A distributor is obliged to have arrangements in place which will aim to prevent and mitigate customer detriment, support proper management of conflicts of interest and ensure that the objectives, interests, and characteristics of customers are duly taken into account, in the sales process. 

·        You need to be able to identify the value that the insurance product is intended to provide to the customer and any impact that your distribution arrangements (including remuneration) have on the overall value of the product, to the customer. 

·        Specifically, you need to consider the overall price paid by the consumer and the extent and quality of any services that you provide, as the distributor (or any service provided by other parties in the distribution chain). 

·        You need to consider whether the costs of distribution lead to the product ceasing to provide fair value for the customer, in addition to any potentially detrimental effect where the product is packaged with another product or service. 

·        In relation to retail premium finance, you need to ensure that the use of premium finance does not adversely impact fair value when the overall cost (including any interest/charges) is taken into account. 

·        You also need to bear in mind that, in relation to all products, not only premium finance, you should not be offering a facility to the customer if there is a better value facility available through another route (for example, direct from the Insurer). You therefore need to ensure that you have benchmarked your own premium finance arrangements, against those available, in order to ensure that you will always provide the most appropriate option to the customer. 

·        When distributing add-on products, you need to ensure that, allowing for the cost of the add-on, the overall package offered to the customer remains fair value. You also need to ensure that products do not duplicate cover if this will lead to a reduction in value for the customer. 

Circumstances likely to lead to a breach of the rules 

·        Receiving remuneration that does not bear a reasonable relationship to your costs, or the contribution, level of involvement or the benefit added by any party in the distribution chain to the overall value received by the customer. 

·        Remuneration arrangements which give an incentive to recommend an insurance product which may not best match the customer’s needs.

 Regular review

 The firm must undertake an annual review of its distribution arrangements, in relation to the product governance requirements. 

Distributor requirements to provide information to the product manufacturer 

On request from a manufacturer, you must provide information about: 

·        Your distribution arrangements and remuneration received 

·        Information on any add-on products that you sell alongside the manufacturer’s product 

·        Confirmation that you are compliant with the conflicts of interest and IDD remuneration incentives rules 

Additionally, you need to inform the product manufacturer if you consider that the insurance product offered is not in line with the interests, objectives, and characteristics of the target market. 

Changes of strategy 

Where the distributor identifies any issues which could have an effect on the value provided to the customer, it is obliged to take action to mitigate the circumstances, change its distribution strategy, cease distributing specific products, change its remuneration strategy or find better value products, when required. 

Information to staff 

Distributors need to have a written product distribution arrangements document, which should be made available to  relevant staff.

 

Suggested email to insurers

 

RE: FCA Product Governance rules 

Dear XXXX, 

We are writing to request your assistance in enabling us to comply with rules effective 1st October 2021. If FCA compliance is outside your remit, please pass this to your Compliance team. 

Under PROD Rules you have specific obligations in respect of the Products you manufacture. These include an obligation under PROD 4.2.29 to share the following information with your Distributors (us): 

PROD 4.2.29R

A firm which manufactures an insurance product, must make available to a distributor: 

1.     (1) all appropriate information on the insurance product

2.     (2) all appropriate information on the product approval process; and

3.     (3) the identified target market of the insurance product.

PROD 4.2.29AG

For a non-investment insurance product, the information required by PROD 4.2.29R should include: 

1.     (1) all appropriate information to enable the distributor to understand the intended value of the insurance product established by the firm;

2.     (2) any effect the distributor may have on the intended value that has not been fully taken into account by the firm when assessing value, and therefore which the distributor should take into account; and

3.     (3) any type of customer for whom the insurance product is unlikely to provide fair value. 

PROD 4.3.1 requires us, as a Distributor, to have systems in place to ensure that we obtain relevant information regarding your products. Hence the request to you.

 

We look forward to hearing from you.

 

Yours etc.