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Insights and News /

16 December 2020

What does vulnerability mean to insurers in 2021?

Margarida Ferreira

Margarida Ferreira
Analyst | Finance Risk and Compliance | London

Jo Cordner

Jo Cordner
Senior Manager | Finance Risk and Compliance | London

How to best serve the needs of potentially vulnerable customers in 2021 against the backdrop of a difficult economic environment is a vast challenge for Insurers. Vulnerability drivers are rising, from increased unemployment to shorter-term factors such a bereavement, whilst expectations from the regulator are unwavering. Many firms are sensibly looking at 2021 as a defining year to demonstrate that their organisations are set up to accommodate potentially vulnerable customers.

Here we explore some of the key vulnerability topics in insurance and how insurers can act now to mitigate key risks.

What does vulnerability mean to insurers in 2021?

Before Covid-19 the FCA estimated that nearly 50% of the UK population displayed at least one driver of vulnerability. The current societal and economic climate in the wake of the pandemic has caused a significant stimulus to many vulnerability drivers, in turn pushing many individuals further into the spectrum of vulnerability. From February to July alone the percentage of adults with low financial resilience increased from 19% to 24%1. This number is not expected to diminish in 2021 – in fact, the OECD has forecasted that unemployment will rise from its current 4.5% to 7.5%.2

Insurers are experiencing an increase in vulnerability indicators across both personal and commercial lines. Some business customers, such as sole traders, are considered "natural persons" and are covered by the new FCA guidance on vulnerability. The Business Interruption test case resolution has highlighted the significance of this where insurers will be looking to adapt their policies and processes to address previously unconsidered instances of vulnerability in business lines.

What can insurers do to mitigate risk?

Baringa hosted a discussion session with CROs from leading UK general insurers. One of the main concerns raised was complying with regulatory requirements in light of the expected increase in the volume of customers in vulnerable circumstances in 2021.

Across the industry, insurers have been taking steps to ensure fair treatment of vulnerable customers, but there are two particular areas where we are observing challenges:

1. Capturing data in a legal and sensitive way

There is inherent tension in the FCA requirement to collect data relating to customer vulnerabilities and the ICO requirement to establish an appropriate legal basis before processing and protect personal data. Firms are at risk of missing critical information relating to customer needs, but also at risk of obtaining or capturing data in the wrong way. There is the additional challenge to capture information relating to vulnerabilities in a way that will not upset or offend a customer if shared later through a subject access request.

Insurers can tackle this challenge is by asking clients about their specific needs, rather than focusing on their vulnerabilities and making sure all staff receive regular training and support to have sensitive conversations.

2. Ensuring good practices across the distribution chain

Many insurers sell through price comparison websites (PCWs) and find it harder to determine how to ensure vulnerable customer needs are identified and met when using this distribution method.

Several firms have enhanced their product oversight and governance processes over the last 12 months. We expect this to continue in light of the recent FCA GI Pricing consultation.

Insurers need to ensure that products are designed to meet a specified target market, and that appropriate scenario testing has taken place to understand the outcomes delivered by products (including ‘mass market products’) for different groups of potentially vulnerable customers. If vulnerable customer risks are identified at the product design phase, firms can ensure that products are only sold through PCWs where appropriate checks and controls can be put in place to deliver good customer outcomes. Insurers may also give customers the opportunity to enter specific requirements when they are redirected to their websites or work directly with PCWs to enhance the quality of data that is being captured.

Insurance is designed to protect people from risk and management of vulnerabilities is integral to many insurers business models – yet insurance companies are often perceived to be behind the curve when it comes to fair treatment of vulnerable customers. 

Unlike many other financial organisations, insurers have unique experience in engaging with potentially vulnerable customers that they can learn from. The claims process, for example, deals with those who may be bereaved, distressed, or have suffered an unforeseen life altering event. This is a clear advantage as firms should be able to use the knowledge from their claims journeys and bring it to other parts of the business such as product design or underwriting.

There is no doubt that 2021 will see many enhance and adapt their customer propositions to meet the changing needs of their customers. We encourage insurers to reflect on each stage of the customer lifecycle and leverage the knowledge and resources they already possess across the organisation to ensure potentially vulnerable customers are a core part of their proposition.

For more information on our previous research and blogs, please visit our vulnerable customer webpage, from here you can also access our online maturity assessment tool.  This tool will help assess where your company is on the journey to delivering great outcomes for vulnerable customers.

References:

1 https://www.fca.org.uk/news/speeches/fca-regulation-consumer-credit-during-pandemic-and-beyond

2 http://www.oecd.org/economy/united-kingdom-economic-snapshot/