The UK’s Financial Conduct Authority (FCA) has called on the Lloyd’s and intermediated London insurance market to explain and educate clients on the impacts of a hardening market environment.
In response to a range of drivers, including a series of natural disaster losses, low prices, persistently low interest rates and more recently, the COVID-19 pandemic and the residual effects of the economic downturn, the insurance market is hardening for the first time in almost two decades.
Recently, the FCA in the UK sent a letter detailing its Supervision Strategy for Lloyd’s and London market intermediaries and MGAs, which sets out its view of the key risks of harm to their customers or the markets they operate in; outlines the FCA’s expectations of the firms; and allows companies to consider to what extent their firm presents such risks and their strategies for mitigating them.
Included in the letter is a section on the hardening marketplace, which, according to the FCA, is being seen in certain lines of insurance business.
“Where this is the case,” says the FCA, “the intermediated market will need to (re)acquire the skills to explain and educate clients about why their premium is rising, while cover may reduce.”
For insureds, a hardening market typically means higher insurance premiums as underwriting discipline returns and insurance capacity declines. As some insurers exit certain lines of business and supply fades alongside the tightening of terms and conditions, competition in the marketplace subsides and carriers are able to push up rates.
“We understand some intermediaries have been active in addressing this issue, but we remind firms that inadequate insurance coverage is a potential outcome of a hardening market and poses harm for customers; firms will need to ensure they are meeting their obligations under our rules (when providing cover),” continues the FCA.
Adding: “This includes requirements on assessing customer demands and needs, product oversight and governance, acting honestly, fairly and professionally in the customer’s best interest and providing appropriate product information to address the risk of customer harm that may arise from a hardening market.”
Of course, for some operating in the insurance sector today this hardening market environment will be a first, so it’s likely just as important for brokers to not only explain the workings of a hardening market to their clients, but also to (re)educate themselves and refine their own skills.