FCA raises concern about insurance outsourcing arrangements

In a speech at the Insurance Institute of London, the FCA's director of supervision Clive Adamson said the regulator had found examples where insurance firms' "oversight of delegated authorities" was lacking.

"We are still finding that oversight of delegated authorities regularly falls short of our standards and should be more robust, with insurers needing to give further consideration to how they fulfil their obligations as product providers and deliver good consumer outcomes through their distribution networks," Adamson said. "In particular, insurers must consider whether those to whom they have delegated authority for underwriting or claims handling are capable of acting in the manner they expect and have adequate information to ensure that their agents are acting properly."

Adamson said that it seen evidence that some insurance companies in London had not undertaken "effective due diligence or oversight" of agent companies to ensure those businesses operated in line with "their provider responsibilities for both customer outcomes and financial crime control". In another example of poor practice, a lack of clarity by insurers about what they expect from "coverholders and third party administrators" meant those businesses were "acting in a way that is contrary to what the insurer thinks they should be doing", he added.

He also said it was wrong that some insurers were willing to underwrite products through coverholders that they were unwilling to directly underwrite themselves on the basis that "the product does not fit with their ethics, culture or customers’ needs".

Insurance companies remain responsible for the actions of businesses that they outsource services to and the FCA will be focusing its attention on the issue when it engages with insurers, Adamson said.

"Clearly the scope of a delegated authority needs to be absolutely clear and the requisite protections to be put in place," insurance law expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said. "However, the contract could be the most watertight delegated authority possible – the protections in it are only as good as the extent to which they are implemented. This is where the FCA has concerns and where firms will need to ensure they can satisfy the FCA – not just that they have well drafted contractual arrangements in place for outsourcing their services, but that they manage and oversee these arrangements going forward in practice."