Melissa Collett, formerly senior ombudsman at the Financial Ombudsman Service, and now a consultant on consumer insurance issues, analyses what impact Brexit is likely to have on consumers of life and health insurance – and by extension, their complaints. Despite the pressures on the insurance market, Collett explains there are ways for life and health insurers to buck the trend.
The UK insurance world has reacted strongly to the vote to leave the EU and there has been much commentary on the likely impact it will have on the UK insurance industry.
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There have been many articles speculating about the effect it could have on passporting rights and Solvency II, but as of yet, no definitive decisions have been taken and it remains to be seen what the future insurance regime might look like on a macro level.
In this article, I want to explore on a more micro level what impact Brexit is likely to have on consumers of life and health insurance – and by extension, their complaints. In particular:
- What impact is Brexit likely to have on consumer decisions about insurance?
- What consumer regulations are likely to be affected by Brexit?
- Will Brexit have an effect on how consumer complaints are handled?
- What are the opportunities and challenges for life and health insurers as a result of Brexit?
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By GlobalData
Pictured above: Melissa Collett, formerly senior ombudsman at the Financial Ombudsman Service, and now a consultant on consumer insurance issues
- What impact is Brexit likely to have on consumer decisions about insurance?
Clearly, the recent increase in Insurance Premium Tax (IPT) to 12% (from June 2017), and the restriction of tax benefits on group insurance products in the Chancellor’s Autumn Statement have hit life and health insurers like a cold wind.
Both are likely to affect premiums, making them less affordable for people trying to protect themselves against sickness, injury and death.
In the context of the post-Brexit’s uncertain economic climate and a weak pound, even a slight increase in cost is likely to have a detrimental effect on consumer take up of insurance.
In Maslow’s hierarchy of needs, insurance protection is a low priority next to the basic necessities of life, and where consumers increasing feel under pressure, buying insurance is likely to be pushed even lower down the priority list.
But there are two main ways that life and health insurance may buck the trend:
- Travel insurance
- International life and health insurance
It’s difficult to see how the European Health Insurance Card (EHIC) will survive Brexit.
Without reciprocal health arrangements in Europe, all UK travellers will need comprehensive health insurance cover when travelling abroad. According to ABTA, 20% of British holidaymakers travel overseas uninsured, assuming that they’re already covered by such arrangements.
There is a huge opportunity for those insurers who can capture this market. The recognition of the need to insure against ill health is likely to have a knock-on effect on the desire to insure against death for those UK citizens who live abroad.
Without the ability to fall back on European benefits should the worst happen, UK citizens living abroad will need to protect their homes and families against critical illness or death in the sure knowledge that if they don’t, their host countries are not going to bail them out.
Again, there are significant opportunities here for international life and health insurers to increase sales and grow their client base.
- What consumer regulations are likely to be affected by Brexit?
As insurers will know, a significant proportion of UK consumer insurance law emanates from the EU. For example, the Insurance Mediation Directive (IMD) underpins the whole Insurance Conduct of Business Sourcebook (ICOBS) rulebook.
More recently, the Insurance Distribution Directive (IDD) came into force in February 2016 and must be implemented within two years, which will lead to further amendments to the rulebook.
Post-Brexit, will the UK be tempted to throw away the rules and start afresh?
The FCA shows no signs of doing so. As Andrew Bailey, the new CEO of the FCA said recently to the Treasury Select Committee, there will be no ‘bonfire of the regulations’ following Brexit.
Since the banking crisis and the creation of the new conduct regulator, the FCA, the general direction of conduct regulation has been towards more, rather than less.
It would be rash for insurers to assume that suddenly they’ll be free to dispense with key facts summaries and ‘clear, fair and not misleading’ communications.
And that wouldn’t make business sense for them to do so either. More than ever, customers need to understand what they’re buying.
So how will Brexit impact on regulation?
There’s likely to be a rush by the FCA to finalise outstanding consultations and amend the rulebook before any substantive post-Brexit legislative changes occur.
When these do, it is far from clear where insurance will fit into the rest of the legislative priorities.
Passporting and solvency will have to be addressed before the conduct issues, unless there is one Bill drafted that covers all insurance issues – this would be a legislative marvel.
So conduct will probably be addressed piece-meal, if at all. If the conduct rules remain the same for the time being, then at least it’s business as usual for insurers and equivalence is (temporarily) maintained with Europe.
The aspects of insurance law which did not emanate from Europe, most significantly the Consumer Insurance (Disclosure and Representations) Act 2012, the Insurance Act 2015, and the Enterprise Act 2016 will be unaffected by Brexit.
These acts contain the key provisions around disclosure and misrepresentation, fraud and damages for late payment.
The Consumer Rights Act 2015, which contains important provisions for insurers about what constitutes an unfair term, is also unlikely to be unaffected as it a home-grown piece of legislation.
Interestingly, it is not clear whether the Test-Achats case will continue to be good law if the UK withdraws from the jurisdiction of the European Court of Justice (ECJ). That case said that gender pricing was illegal. Now that it has been several years since the case was decided and insurers have adjusted their systems accordingly, would they go back to old pricing methods even if the case no longer applied? The jury’s out on that one.
- Will Brexit have an effect on how consumer complaints are handled?
In the UK, for insurers regulated by the FCA, consumer complaints are handled by the Financial Ombudsman Service.
The ombudsman’s statutory remit comes from the Financial Services and Markets Act 2000, the legislation that created the current UK financial services regulatory system.
The Financial Ombudsman Service is seen as a role model for other European ombudsman schemes and as such, is likely to continue to exist as an alternative dispute resolution service for consumer complaints against UK regulated entities.
Complaints against non-UK regulated entities who passport into the UK will still need to be referred to the relevant European ombudsman scheme. Depending on what happens with passporting, the numbers of these non-UK regulated entities who passport into the UK may dwindle.
Currently, 5,727 firms passport inbound under the IMD. Post-Brexit, many of these may choose to change their corporate structure in order to be directly regulated by the FCA, which will result in more distributors falling under the remit of the Financial Ombudsman Service.
The EU Alternative Dispute Resolution (ADR) Directive made some changes to how ADR providers like the ombudsman service handle consumer disputes.
In particular, the ADR Directive imposed a 90 day limit on dealing with complaints. Since this came into force in July 2015, the ombudsman service has already adjusted its internal processes to bring it into line with the Directive.
Should the Directive fall away as a result of Brexit, it is unlikely that the ombudsman service would want to relax these service standards, given the effort it made in putting them into effect.
What is likely to have a more significant impact on complaints handling is the ombudsman service’s own internal structural change programme.
The transformation of specialist teams into generalists and the removal of the extra layer of the call-centre team to set up complaints are just two examples of change that are designed to speed up complaint handling time.
The focus on speed may however lead to sacrifices in quality and expertise that the ombudsman service had previously enjoyed a good reputation for (especially in insurance). In the long-run, this may have a bigger impact on complaints handling than changes in regulation brought about by Brexit.
- What are the opportunities and challenges for life and health insurers as a result of Brexit?
As the saying goes, the time to fix the roof is when the sun is shining, and those that already have cover will want to hold on to that cover as long as they can afford to.
But as premiums rise, the challenge will be to ensure customers continue to see the value in the product, and thinking creatively about how to engage them.
Insurers spend a lot of time and energy on making it easy to purchase insurance, but it’s even easier to lapse a policy – just stop paying.
How about making it harder for customers to walk away? Consider this: if insurance were harder to purchase, it just might make customers think twice about walking away from a contract.
The inertia factor would be much higher if they thought about all the effort it would take to re-apply for cover.
In an uncertain post-Brexit world, consumer behaviour is likely to be more risk-averse and prone to inertia.
Insurers who want to play safe will encourage renewal, discourage lapsing, and cross-sell inexpensive policies from the same trusted brand.
But on the horizon will be the disrupters, and the InsurTech innovators with the potential to capture market share with a great new idea: the Uber of the insurance world is out there already. It will be interesting to see if and how life and health insurers rise to the challenge.
