FCA: reliance on third parties leaves London Market vulnerable to systemic risk

UK regulator the Financial Conduct Authority (FCA) has issued a scathing rebuke of the London Market in which it suggests that the current reliance on third parties and technology outsourcers presents a potential for systemic risk.

In a letter to the market from Charlotte Cross, head of department, Wholesale General Insurance, FCA Supervision Strategy for Lloyd’s & London Market Insurers and Others (LLM), the FCA said that if a large number of firms rely on the same service provider (concentration risk), this could cause customer detriment if the third-party is impacted by operational resilience including cyber issues.

The letter also criticises the market’s performance across a number of areas including culture; operational resilience; and claims outcomes.

On a positive note, the FCA noted that the insurance sector, alongside the financial services industry, has faced significant challenges in the past year as a result of the pandemic and EU Withdrawal:

“Despite these challenges, firms in the portfolio have generally proved to be operationally resilient, adapting to the operational demands of home working, onshoring services at pace and some responding to consumers’ changing needs.”

“The wholesale insurance market has made some progress towards delivering good outcomes for customers, for example in relation to how they considered the expectations set out in our guidance in our pandemic related work. We also recognise the industry’s commitment and actions to date on driving change and reducing the impact of climate change.”

However, it added, in terms of expectations of the treatment of customers, the FCA’s view is that firms in the portfolio have not embraced some of its key messages (for example around firm culture and purpose) or kept up with the pace of regulatory change:

“Although some progress has been made on diversity, the industry still has a long way to go, both as employers and in serving the diverse needs of customers.”

“Firms in this portfolio are diverse, both in terms of size and business models: in addition to traditional London market insurers, the portfolio includes reinsurers, run-off firms and P&I clubs. Despite this, we believe that the risks of harm we have identified apply to most firms in the portfolio.”

With regard claims outcomes, the FCA said it has observed a number of issues in relation to claims handling suggesting that firms do not always deliver claims outcomes that are fair and timely.

It noted that this has been particularly observed with business interruption insurance, where it has continued to observe claims outcomes through monthly data return:

“On historic claims, intelligence suggests that some insurers’ approaches have created undue barriers for customers or third- party claimants (e.g., for civil claims of child sexual abuse, as highlighted by the Independent Inquiry into Child Sexual Abuse).”

On the issue of diversity & inclusion (D&I), the regulator was no less forthcoming:

“Whilst firms talk about the importance of attracting diverse talent, we hear less on the work being done to build an inclusive environment. It is encouraging to see that the market has been engaging with the issue and D&I is increasingly on firms’ agenda. But most efforts to date have focused on gender diversity, and there is still a long way to go before the London market becomes a truly diverse and inclusive sector.”

“We see the break from office life, as creating an opportunity for firms to evolve their expectations of individuals and their behaviours, both as participants in firms and as members of the market, as the return to the office and in person engagements rises.”

To access the full letter, click here

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