16
Examination of witness
Matthew Brewis.
Q17 The Chair: Welcome to the second part of today’s meeting, which is the second oral evidence session as part of the committee’s inquiry into the regulation of the consumer insurance market. I thank Mr Brewis for attending. The session is open to the public; it is broadcast and is subsequently available on the parliamentary website. A verbatim transcript will also be taken of the evidence and put on to the parliamentary website. Welcome to the session, Mr Brewis; if you could explain your background, we will then move on to questions.
Matthew Brewis: For the last six months I have been a partner in risk and regulation at KPMG. For five years prior to that, I was director of insurance at the FCA, responsible for the supervision of 6,000 or so insurers and brokers operating in the UK; prior to that I spent 15 years at the Bank of England and five years as Andrew Bailey’s chief of staff when he was head of the FCA.
Q18 The Chair: Excellent; you bring a very special perspective to our inquiry. Can you give us an overview of how regulation in the insurance sectors that we are looking at—home and travel insurance—fits with the various players, including brokers and other intermediaries?
Matthew Brewis: In terms of conduct of business, insurers are regulated by the Bank of England through the PRA, and by the FCA. Brokers are solely regulated for prudential and conduct reasons by the FCA. That is set out in FSMA, which provides the basis for all financial services regulation in the UK. There are then various source books: ICOBS is the main one for the insurance industry, and it sets the rules as to how insurers should operate. The main powers and principles for regulation sit on top of the consumer duty—as was mentioned in the last session—and my old team regulate the insurance sector through that in all parts of the process, from understanding the price and value of the products that are sold, to what is sold, how customers are supported, and how they understand the products that are sold. Elsewhere within the FCA there is the enforcement area; there are various elements of how firms are supervised, but when things go very wrong, enforcement is the final part and the FCA has powers to investigate.
The Chair: Are the aggregator or comparison websites covered by FCA regulation?
Matthew Brewis: Yes, they are covered as intermediaries in the same way as brokers.
Q19 The Chair: Can you give an outline of the FCA’s approach to supervision and enforcement? I ask in particular because those were areas that were criticised in the super-complaint; the regulation was okay, but maybe the supervision and enforcement were not contributing to good outcomes.
Matthew Brewis: As I mentioned, there are between 5,000 and 6,000 firms, and the insurance area of the FCA involves approximately 100 people. The firms it regulates and is responsible for cover a vast range, from large multinational insurers to individual insurance brokers operating from their own homes.
The FCA supervision focuses on looking at how those large firms operate, their governance, and their controls. It looks at things such as claims handling and areas that are arising. For the vast majority of firms, supervision works on a reactive basis; information comes from the Financial Ombudsman to say, “These are the types of complaints we are getting, and these are the firms where we are receiving the most complaints”. I would frequently receive letters from you and from Members of Parliament setting out their constituents’ concerns, and there would be whistleblowers. Lots of other forms of information come into the regulator, and all those are assessed and put together to build a picture of the firms where the biggest issues need to be addressed. Supervisors focus their time on understanding what those firms are doing, where things are going wrong, and where there need to be interventions at a firm level.
Additionally, where issues are happening across a number of firms at the same time, or across a single product, there might be an intervention looking into that product as a whole. To give an example from the motor insurance sector, three years ago the ombudsman started receiving a lot of complaints. People were saying, “My car’s been written off in an accident, and the payout I’m getting from the insurer is insufficient for me to buy the same car again”. My team at the time looked into that and discovered that many firms were using the cheaper or cheapest version of car cost guidebooks, as opposed to a range and an appropriate average across them. As a result, we wrote to all those firms saying, “Stop that, this is the approach you should be using”, trying to quickly stop the harm, and then asking them to remediate—to look back over their records over the last few years and repay all those people who had been underpaid, rebating the money they should have received at the time. The intention of all that supervision is to say, “We have noticed a harm: stop it”. We then look back and resolve those issues. There is a mixture of individual firm supervision, then issue supervision based on our research.
The Chair: Is it good enough to use a reactive approach to supervising the smaller firms, which are probably the majority of players in the market?
Matthew Brewis: There is always a debate as to the appropriate size for a regulatory body and how much regulation is necessary. To my mind, it never felt as if there were enough people to look at those issues, but equally, there is a cost to regulation; trying to achieve the right size is a very difficult thing to do. I am proud of the actions that were taken by my team over the time I worked at the FCA, for instance in looking at the significant issues that arose from the price of multiple-occupancy buildings insurance after the Grenfell tragedy, and to business interruption insurance during Covid that resulted in over £2 billion being paid out to small businesses that otherwise would not have been. There was always sufficient resource to focus on the issues that mattered, but did that mean we covered everything that needed to be looked at? There is always a risk-based decision that needs to be made as to how to focus existing resources.
The Chair: There were clearly consistently poor outcomes for consumers in relation to travel and home insurance claims.
Matthew Brewis: Indeed; last July, there was a publication from the FCA that looked into this issue. During the few years prior to when it came out, the focus of many consumer groups, parliamentarians, and my team, was more on the price of products and being able to ensure that people were able to buy the products they needed, especially during the cost of living crisis and in the aftermath of the pandemic. What has changed over the last couple of years is a focus on the other end of the journey. I might have a product that is cheap or cheaper than it was previously, but what does it provide for me if I need it? There has been a hollowing-out of some products, such as motor insurance. You can get ones that pay out that are either online-only policies or bronze level, which vary from quite basic policies to very fulsome ones. To Lord Sharkey’s questions in the previous panel, consumers well understand what is in those.
Customer understanding around home insurance is one of the main issues that arose from the investigation that my previous team carried out last year; the subsequent Which? super-complaint built on that as well. In previous evidence, Matt focused on the crucial part around consumer understanding of what is covered and what is not.
Q20 Lord Smith of Kelvin: What impact—if any—do you think the consumer duty has had on how insurance firms manage claims?
Matthew Brewis: I have seen differing approaches during my experience at the regulator. The previous evidence suggested that while some firms have adopted it and embraced it very closely, others see it as an annoyance and something to be avoided. I have generally seen firms seeking to embrace it, but with claims what I have seen a lot more is a focus on root cause analysis. Where a firm has had increased levels of claims declinature and rejected claims, the consumer duty requires you to understand why that has occurred. At what point in the process do people fall out? Is it because they phone up and say, “Hey, my fence has just blown down in a storm”, and the insurer says, “I’m very sorry to hear that, but your fence is not covered, it is explicitly excluded”. That would count towards the level of claims declinature because that question has been asked.
There will be other examples where it goes all the way through, a claim is put in and it is rejected for a reason. The FCA’s expectation is that firms should understand the main reasons why those claims are being declined; either the documentation is not clear enough at the outset, customers do not understand it or the coverage level of the product is incorrect. Insurers are expected to understand the root cause and take action to resolve it, through better information, changing the levels of cover, or taking other steps. That is an area where the consumer duty has led to significant improvements. There is still a long way to go, but progress is being made.
Lord Eatwell: I am the non-executive director of a small bank. For the consumer duty, we have a team in the back that not only inspects what everybody else does, but also prepares elaborate, detailed reports that are required and inspected by the FCA. We have to file these documents and then answer questions about them to show that our procedures are what the FCA expects them to be. Is that the case with insurance companies? Do insurance companies have teams within their operation that are responsible for ensuring that the consumer duty is followed? Does the FCA inspect the process and the documentation of the enforcement of the consumer duty?
Matthew Brewis: Yes, it does: to elaborate briefly, the consumer duty is everybody’s responsibility. It should be everyone’s responsibility within an organisation to ensure that the customer is at the heart of the products that are sold. That is the whole ethos behind the consumer duty and why Parliament required it. Ideally, it does not sit in a compliance team so that everyone can say, “It’s their job to sort out the consumer duty”. It should be the job of the salespeople, the people at the counter, and the people designing the products. The regulator should not be requesting vast swathes of new information to be created; it should rely on what you have received as a non-executive director. What does it involve for you to oversee the business appropriately and to understand that your bank is looking after your customers appropriately? In most cases, that will be sufficient information for the regulator to rely on. There are regulatory returns that firms have to submit, but for the most part, I would say insurers would rely on the information that you as a non-executive would receive.
Lord Eatwell: The regulator does not inspect the process itself; it relies on the company boards to take suitable cognisance of the consumer duty.
Matthew Brewis: The role of the board and the role of the regulator should be aligned to the extent of ensuring the continued operation of that company and its ongoing success, so much of the aims of the two are aligned. Most of the management information that you receive in order to run the business should be the same as what the regulator would like to oversee to ensure that the organisation is complying. That is not always the case; there will be times when more information is requested. The FCA recently published a report saying, “These are the things that we expect to see in board annual monitoring of the consumer duty reports”. That is where this all comes together.
Lord Davies of Brixton: I took you to say that when you were at the FCA on insurance, there were 100 staff. There are 5,800 people at the FCA. What do the other 5,700 do?
Matthew Brewis: Yes, that is what I said. The 100 or so are the direct supervisors of the firms. There are many other colleagues who support them: there will be a separate team of actuaries, a separate team responsible for the authorisation of firms, and a separate team for enforcement.
Lord Davies of Brixton: Is there, for example, a staff of 100 supervising banks?
Matthew Brewis: I do not know the exact number. It is more than that, but not vastly so.
Lord Davies of Brixton: Is that a reflection of the extent to which the FCA feels responsible for these markets?
Matthew Brewis: The decision around the allocation of resources is probably one on which the FCA should provide details, but to summarise my understanding: based on the risks, there is a set formula of, “This is the size of the organisation, and these are the risks the organisation has in terms of the statutory objectives”. Resourcing is allocated accordingly.
Q21 Lord Lilley: My previous question was about information on claims rates and acceptances. The presumption was that companies differed in their acceptance rates. To what extent is there a fraud problem in claims? Some years ago, I had a flood in my house. In the end, I did not claim, but while I was toying with claiming, I talked to people, and they said, “Oh, this is a wonderful opportunity. You can get the whole house redecorated. You can get new carpets”. I was astonished. Very reputable people assumed that an insurance claim was an opportunity for you to rip off the insurance company. The person who caused the flood accepted responsibility and it did not come to an insurance claim, but I wonder how general this view is, that an insurance claim is a chance to rip off insurance companies.
Matthew Brewis: Unfortunately, insurance fraud is a real issue, but it is not something that the FCA tends to look at. There is an organisation called the Motor Insurance Bureau that looks specifically at motor insurance fraud, there is the ABI and firms share information. There are logs of claims, so it is possible to understand what is being claimed. But loss adjusters exist for a reason: part of their role is to assess a claim. The job of insurance should always be to put you back in the position you would have had, absent the issue occurring that has caused you to claim. Unless you have bought a policy that offers new for old, you are not meant to be able to redecorate your house.
Lord Lilley: Do you think insurers have brought fraud under control by means of loss adjusters, rather than just making it difficult to claim?
Matthew Brewis: It is an interesting balance. It is incredibly important that consumers can make their claims easily. One of the key tenets of the consumer duty is customer support. What support are you given at the point of claim? It is a time when you are at your most vulnerable because you are never in a good place when you are phoning up an insurer to claim. How are you treated? Consumers rightly complain about large walkaways and difficult processes. Those are issues that, individually, are looked at by the Financial Ombudsman, but in aggregate, the FCA looks at them to understand whether there is a macro issue with that particular firm or with that part of the market as a whole.
One of the difficulties with home insurance is that a weather event such as a flood will generally affect a number of houses, not just one, so it uses up all the skilled people in that town. All the plasterers get used, all the decorators, and it is a very difficult job. It is not the same for motor insurance; there are not enough garages, and that is a problem, but you do not have a vast number of cars all requiring fixing at the same time. Many home issues occur because something has occurred in the vicinity; there are many externalities that impact on the ability of those claims to be dealt with.
Q22 Lord Griffiths of Fforestfach: You have a vast experience in this area. We have had the consumer duty for three years or so; where do you come out in terms of whether we now need more regulation? Are there specific areas where we should be thinking about more regulation, or is the way that people embrace the principles of the consumer duty sufficient to deal with the problems that the consumer duty was introduced to deal with?
Matthew Brewis: That is a good question. There are many different views, but I will give you mine. In my time at the FCA, the Insurance Distribution Directive came in, a European directive around how products were sold. The General Insurance Pricing Practice Rules were introduced to stop loyal customers being charged more for staying with the same insurer. The Product Governance Rules were introduced which, again, looked at fair value assessments. All these were very detailed rules and very prescriptive as to, “This is what you can and can’t do”. A lot of it was really good stuff, and some was not; it got in the way, it made life more difficult for insurers, and it did not have the intended impact.
At the other end of the spectrum, the consumer duty was introduced, which said, “These are the broad principles”. Personally, I much prefer principles because you do not need vast detail underneath them. What the insurance industry needs is guidance; it needs support to understand, “This is what good looks like and this is what we don’t want to see”. The FCA review of outsourcing published last year around travel and home focused on saying, “In this type of market, some risks around outsourcing are potentially leading to bad outcomes for consumers and more needs to be done. We want to remind insurers that you can outsource the work, but you can’t outsource the responsibility. It’s still you on the hook. You need to have better management information. You need to be more on top of it than you are”. All that is helping. No new rules have been written, but insurers have been given that extra information to say, “This is what the expectations are”. Firms can then interpret and implement that information in a way that works for their business. Rules such as price walking, which I mentioned before, created very different incentives for different firms and changed how the market operated in ways that were not necessarily understood at the time they were introduced. I have a preference for a principles-based approach, which allows you to do what is best for your business and your customers.
Lord Griffiths of Fforestfach: How do you manage an insurance company in terms of making sure that people really understand those principles? Maybe it is about providing more information, but do you feel we are doing enough? You can imagine many different ways of getting people to be involved. I just wonder whether the channel is too narrow and whether enough is being done to drive home the principles of the consumer duty.
Matthew Brewis: There are parts that have largely been implemented very well; other parts are more difficult. Customer understanding is a really big one. A lot of what we are talking about here is people not understanding what home insurance is. There is a job for insurers to do, but I do not believe that it is the job of insurers to educate consumers as to what they need. The tricky thing is, when you buy your insurance, you never know what you are going to be claiming for. You do not know that six months down the line you are going to have a burst pipe. Very few people ever go through and read their insurance product documentation, and even if they do, they do not have the perfect information relating to what they might claim later on. Understanding the key aspects of what is in your policy is important. When I buy my own policy, what matters to me is the service I receive: I want to phone up once, I want to make it somebody else’s problem and to have that increased level of service. That may mean that the policy costs more. There are some consumers who are price sensitive and want or need to buy the very cheapest product they can find to protect their house. If they do not make a claim, it is a good deal, they have wasted the least amount of money on the policy: but if they have to make a claim, a basic product may not give them what they want. Some people need to make that decision out of necessity, while others are making it from a lack of understanding. There is a duty for the industry, but financial education is required more broadly to understand the purpose of insurance and when you might need it.
Q23 Lord Hill of Oareford: Is there any reliable data that shows from a consumer point of view that, over a period of time, this market is broadly speaking better, worse, or has stayed the same? The underlying question is about all this activity, whether it is regulatory, supervisory, or due to political interference. You gave some examples of specific areas where it drives sets of behaviour that may or may not have been originally intended. You gave the example of the European framework. Do we know, in broad terms, whether things are better, worse, or have broadly stayed the same? There is the point about definitional issues in policies; no one has ever understood what is in a policy. We have had that issue for ever with insurance. Is claims handling getting better, staying the same, or getting worse? What is your view? What do we know?
Matthew Brewis: That is a really difficult question. When I was working on the motor insurance taskforce a couple of years ago, Ministers were asking the same question about car insurance, “What has happened”? The answer was that cars were more expensive and claims were therefore more expensive, so prices had gone up. Cars are more disposable than they used to be; you are not comparing apples with apples. Generally, we have seen prices—in real terms and for most products—remain broadly stable. There are a number of different quirks around bands and price walking that have caused various changes. For example, home insurance last year was 5% cheaper, on average, than it was the year before. Insurers broadly broke even around those products. From a financial perspective, sometimes costs go up because claims go up and prices go up, but costs have been coming down as well.
For coverage levels, there are more products available now. There is more choice for consumers at the price point that works for them. It is a bigger market and it is a competitive market. There are many new entrants, which shows that the market is working well. How is it working for consumers in claims terms? There are clearly issues that need resolving. Those are the ones that have been flagged in the FCA report and the Which? super-complaint.
We have not talked about travel insurance; it works well for people who do not have underlying health conditions, but there are significant issues around product availability for those who do. In a world where we are living longer and with diseases, understanding how a product is going to continue to develop to work for consumers is probably an area where, although work is being done, more work is required by insurers and regulators.
Lord Hill of Oareford: Can I ask about a topic dear to our heart in this committee? What effect, if any, did the secondary growth and competitiveness objective, which came in while you were still at the FCA, have on how you thought about your work and how you reflect overall on the role of regulation in a well-functioning market?
Matthew Brewis: When it comes to consumer products—as we are talking about today—there is a strong focus on consumer protection, and a cloak of regulation exists in that area. In the case of international competitiveness, there has been less focus on these products because the FCA wants to have a strong oversight of them. Another part of my old job was with Lloyd’s and the London markets, where a lot of focus was given to areas of regulatory simplification. There was significant pressure and support from the London Market Group, the LMA and others, for regulation that had overstepped the line. Where consumer regulation was impacting a wholesale business, how should that be taken back? A caveat emptor approach was taken to how wholesale insurance works. That is one of the big successes, but it is more on the wholesale side rather than the consumer side.
Lord Hill of Oareford: Do you see this split between attitudes towards wholesale and retail regulation as a trend that is likely to continue? Is the FCA thinking in those terms more and more?
Matthew Brewis: That is the way I personally thought. Whether it is how the FCA thinks is a different question, but the general drive towards the simplification of wholesale markets is to allow for additional capital injections to be made, while also protecting retail consumers.
Q24 Lord Sharkey: I wonder if you could tell us a little more about complaints overall. Are they, in fact, rising? If they are, what is driving that?
Matthew Brewis: In terms of complaints that were made to the ombudsman last year around home insurance—both buildings and contents insurance—there were about 15,000 or so, which was an increase; it was the second most complained about insurance product. Around 30% of those complaints—about 5,000 or so—were upheld. I do not know how many policies are sold in the UK, but one would imagine it is in the region of 20 million to 30 million, based on the housing stock figures, so an uphold rate of 5,000 complaints is very low.
Lord Sharkey: What about travel?
Matthew Brewis: Forgive me, I do not have the travel data with me. I apologise.
Lord Sharkey: You could drop us a line, perhaps.
Matthew Brewis: Of course I can.
Q25 Lord Davies of Brixton: We are here because it is accepted that there is a problem with claims handling; there is public dissatisfaction, and our work will reflect that. Do you feel that the problem is that it is not regulated properly, or that there are proper regulations but they are not being supervised or enforced adequately?
Matthew Brewis: Last year the FCA’s first review about the outsourcing market highlighted a number of areas. On the back of that, the FCA said that two firms had been put into enforcement. Additional reviews were undertaken in a few other cases, external or section 166 reviews were carried out, and business restrictions were used as well. There has been an increased focus on this issue, and it will continue. There was no suggestion of new rules being introduced. On that basis, the FCA take is that the existing rules for the consumer duty and what sits underneath it are already sufficient; it has highlighted areas where there is perhaps a lack of understanding or where more needs to be done by the industry. My predecessor at this table mentioned storm claims as one of those areas; the FCA has requested that the ABI—the trade body for insurers—does a lot more around storm damage in making clear to consumers what is covered and what is not and tries to get a more industry-wide, consistent approach to those issues.
Lord Davies of Brixton: You left the FCA around four months ago. Have your views changed at all now that you are out of it?
Matthew Brewis: I was waiting for such a question. I have always hoped that firms are trying to do the right thing; I believe that it is in the best interest of businesses to look after their customers, and for the most part, many of them do. That has been consistent with what I have seen on this side of the table. Firms are seeking to understand what the regulator wants and how best to do it. These are complex issues that they are grappling with and they are continuing to work on them. The light shone by consumer groups or by the regulator helps give them more information and more data to improve still further. I would hope that the FCA’s work, the super-complaint, and the additional work that firms are doing on the back of those, will result in a better outcome for consumers that will be visible over the next couple of years.
Lord Davies of Brixton: You may not want to answer this, but can you shed any light on the proposed changes to the relationship between the FCA and the Financial Ombudsman Service, as proposed in the current Bill?
Matthew Brewis: I do not think I am well placed to do so, but what I will say is that when I was in my previous role, the ombudsman was a really strong source of information in terms of, “These are the issues that are coming up from the consumer group, these are the challenges that they’re facing, this is where we’re seeing increased levels of complaints that help drive where the regulator focuses at a macro level”. Close working between the two is essential.
Lord Davies of Brixton: I do not want to put words in your mouth—or maybe I do—but are you suggesting that you saw the relationship between the FOS and the FCA as problematic?
Matthew Brewis: My counterpart in the insurance space and I worked very well together. It is really important that everyone is trying to go in the same direction. For me, in my narrow role, it worked well; I cannot speak for others.
Lord Turnbull: Has a successor been appointed to the role you left a few months ago?
Matthew Brewis: Yes, my successor is Chris Knight. He is currently the chief risk officer of Legal and General and will be joining next month, I believe.
Lord Turnbull: Supposing you were still there, and you were writing a letter—let us call it a Liam Byrne letter—to your hapless successor, what would you say now? What are the five most pressing, difficult, or controversial things that the incoming person is going to have to deal with?
Matthew Brewis: I assume that sitting at this table and answering questions about what I did in my previous role will be one of the things that he will be doing later, maybe after the recess. There will always be individual products where the world changes, and new issues come up that cannot be foreseen; for example after the Grenfell tragedy, when the cost of insurance for flats went through the roof very quickly. Dealing with the impact that had on people was a really important and difficult job, but one that could not be foreseen in advance. The main piece of advice is that first, almost everything that happens links back to insurance somehow. Finding out what that will be—whether it is a war, a pandemic, or the tragedy of a large fire—and understanding what the impact will be on you as quickly as possible, is always job one.
Secondly, there is the issue I cared a lot about, which is financial inclusion: what more can be done to ensure that not only the poorest in society, but people with pre-existing medical conditions, for example, have access to the products and services that they need, and the insurance that they need. I have worked with the Treasury on this, and it is one of those areas where there is still more to do. I would really encourage the FCA to continue to focus on ensuring that social renters have the ability to cover their possessions and have that product made available to them. I know the Treasury and insurers are working together on that.
Lord Turnbull: An issue that has also come up is how well the customer understands the product that they have bought. What could be done, or needs to be done, to make sure that people understand what the cover is, whether they are buying it for the first time or renewing it later on? When you think about storm damage, there seems to be a big gap in householders’ understanding of what their cover is. What is the best way to go about trying to reduce those gaps and misunderstandings between parties?
Matthew Brewis: I do not know. Whenever you take out an insurance product, you get a one-pager—an IPID, as it is called—that has key information about that product, but it does not cover everything. It is not something you are necessarily going to refer to again; the next time most people will pick up a policy after it gets emailed to them is when they come to make a claim. Nobody has perfect information on what is going to be coming down the road or what issue may cause them to need to claim on their insurance. How do you ensure everyone is aware of all the different exclusions of their policy? It is very difficult. There are some key points that many consumers are unaware of: for instance, wear and tear. If you have tiles hanging off your roof, your gutter is broken or whatever, and there is a storm, that does not mean you will get new gutters; there are exclusions for the poor wear and tear of a building. Another example is that the wind has to be of a certain speed for it to count as storm damage. All these are areas where the FCA has asked that those in the industry collectively put their heads together and think about what more can be done, but there is also a financial education piece that is broader than individual policies.
Baroness Bowles of Berkhamsted: I am trying to work out whether the majority—if not all—of the information you get about troubles and complaints comes from secondary sources. You mentioned letters from MPs; committee expressions from Parliament would come direct to the FCA, but complaints predominantly go to the FOS, so that is, if you like, secondary. I suppose you read the news. Do you do any mystery shopping as such, so that you have first-hand experience? Obviously, each of your 100 people is doing something or other for themselves. Do they bring their experiences to the office, or do you set out to go hunting for things, looking at websites and finding out what is going on? Do you do that by asking questions of the supervised firms?
Matthew Brewis: One of the joys of changing my job is that I do not hear my friend’s insurance woes whenever I bump into them. Second-hand sources are the main way of obtaining information, for instance through the ombudsman, complaints and other pieces, rather than mystery shopping. It is used occasionally in certain parts of regulation, but it is not a primary source of information. Actually, many of the consumer groups do it and share their analysis and their thoughts with us.
Q26 Lord Eatwell: It is striking that almost everyone has a story about an insurance company letting them down, in some way or other; just raising the issue, people will say, “Oh yes, that happened to me”. I would like to repeat the question I asked the previous witness about motor insurance; a lot of what must be insured is legally defined: not all, of course, but certainly the third-party fire and risk stuff. We have a remarkable level of acceptance of claims; is that due to the simplicity of motor insurance—as our previous witness suggested—or is it the fact that there is a very clearly defined legal requirement that ensures that the customer knows what they are getting, and the insurer knows what it must provide? Is the law there important?
Matthew Brewis: When it comes to motor insurance, there are a limited number of things that can go wrong. I can hit you, you can hit me, there could be an uninsured driver involved; there are only a small number of real issues that can occur compared to a home. For instance, if a pipe bursts, is the pipe under your house, is it on your property, is it one that feeds your property? What the issues are and where responsibility lies is much more complex when it comes to home insurance compared to motor. In large part, that is the main reason.
Lord Eatwell: If we look at the terms of the consumer duty, they include, “Enable and support customers to pursue their financial objectives. Provide clear information and effective support. Avoid causing foreseeable harm”, et cetera. Do we really think that the insurance industry is following those conditions? Given the nature and scale of the complaints—even though a significant proportion of people who are harmed will not complain and will not realise that the FOS is there—do we really feel that the consumer duty is being followed effectively in this industry?
Matthew Brewis: Many people who have reason to claim have a positive experience. No one claims from a position of happiness; you are claiming because something bad has happened to you. Both before the consumer duty and post the consumer duty, the vast majority of claims have been solved—
Lord Eatwell: A vast majority means that 20% to 30% of households have not. That seems to be a lot.
Matthew Brewis: As I said, there are a number of reasons for walk-away, but 75% to 80% of the claims that we are talking about are paid out. There are no complaints about them and the customer is back to how they were. The sector is on a journey; in my view, it continues to improve how customers understand its products. There are some great companies and charities that have been set up to help insurers change the wording of their policies and make them understandable to people who have a primary level education and lower reading ages. A study that was done a decade ago suggested that some policies were longer than Shakespeare and more complex than a PhD thesis. Insurers are putting in a lot of effort and getting a lot of support from groups to help them improve those languages. It is never going to be perfect. They will never be able to cover every eventuality, but for the most part, the evidence I have from my old role and my current role is that firms are trying to continue to improve and give that good customer service because it is good for their business.
Lord Eatwell: Does the FCA have a measurable target that it wants to achieve? Would it like to see acceptances go up from 60% to 70%, or whatever? Do you have a metric by which you measure your own success?
Matthew Brewis: One of the articles that the FCA published in its publication following the Which? super-complaint was, “How will our success be measured”? If I recall correctly, it included a point on the reduction in declinature levels. Some of that is down to other issues; for example, if I phone up and say, “My fence has blown down, am I covered?”, is that considered a rejected claim? There are definitional points that will also have a significant impact on those numbers, but the transparency of those numbers is important. It gives confidence to consumers, but it only works if it is all done on a level playing field and done in the same way. That is an area where the aggregators, the price comparison websites—where the vast majority of people buy their insurance—have a role to play in ensuring that they provide information on what they are providing in a way that enables consumers to make that decision at the outset.
Lord Davies of Brixton: The evidence we heard in the informal sessions is that the price comparison websites do not do that; they just do it all on price. They do not say anything about—
Matthew Brewis: Yes, exactly; my point is that there is more for them to do. Price is always going to be a factor for many consumers, as Matt said before.
Lord Davies of Brixton: I am sorry, I misunderstood you.
Lord Turnbull: You have contrasted the acceptance levels of home and buildings insurance with the very high acceptance level for motor. Is it a possibility that the industry was accepting too many claims in the motor sector—for whiplash in particular—and was very slow to catch on to the fact that when people said they were harmed, they were not? That showed up in premiums for everyone else, but it made them look good in terms of the acceptances that they reported.
Matthew Brewis: The whiplash reforms came in a couple of years ago. The FCA’s approach to the implementation of the consumer duty—I believe it is the approach of the majority of insurers—is not to look for ways to decline claims. Many of the firms that are writing home insurance also write motor insurance. I do not believe that there is a vast difference between one part of an organisation and the part sitting next to it doing a different product. What it shows is that the customer understanding piece—the lack of clarity as to what is covered—is more significant on products such as home than it is for motor. That is what the FCA’s work is getting to, and what the super-complaint has focused on.
Q27 Lord Hollick: It is clear from what we have heard today, from what one knows generally about the market, and in light of the super-complaint that has been made, that this is a market that is characterised by a lack of transparency; I accept that it is a complicated market with a lot of complexity. Therefore, is the FCA putting sufficient attention on the details of the consumer duty in this area? Should it be rather more forceful about this type of information? You have just listed some exclusions that would come as a surprise to a lot of people, such as wear and tear and tree damage; we heard earlier about excesses being applied, not to the whole house, but to every room in the house. These are simple issues that could be raised at the start. Should the FCA be taking a more vigorous approach? It has responsibilities here, as indeed do the insurers themselves for managing their own risk. It seems a bit sloppy.
Matthew Brewis: I understand your point. The challenge is that you do not know what part of your insurance product you are going to claim on this year. You do not know if your house is going to be damaged by a storm, or damaged by a water pipe, or whatever. You have your terms and conditions and the policy documents. How does one highlight a key inclusion or exclusion? The fact is that almost all insurance policies will exclude fences that go down as a result of storm damage, but not if a driver drives through the fence, for example. It depends on the context of what has happened and how it has happened. That is in the policy document, but is it right to require consumers to understand or be presented with all that information when they are purchasing the product? If so, what is the most appropriate way of doing that? It is a real challenge, and I am afraid I do not have a simple answer.
Lord Hollick: To what extent does AI play a role here? It is very good at managing processes, and by reference to data it can identify the particular areas where there is a vulnerability. Can it be used to help this process of discovering what the real risks are?
Matthew Brewis: That is a very good point; there are a whole range of different parts of the process where AI could play a positive role. At the moment, insurers are required to understand the demands and needs of every consumer who comes along, so that they are sold the product that makes sense for them; for instance, in understanding where a consumer lives and what, therefore, are the most likely risks that could come into play. Insurers will generally be taking that into account when they are pricing and underwriting that risk. But from a consumer perspective, ensuring that the deductibles or the main risks are highlighted is an area where AI could work well. It is not an area where I have yet seen any real, significant step forward in the way you describe, but I would expect that this type of solution may be available in the not-too-distant future.
Lord Hollick: I presume that the consumer duty applies to the potentially long chain of outsourced claims handling. Each of those entities, some of which are professional bodies, is required to honour the consumer duty. Do they do that? Do they act in the interests of the consumer, or are they rewarded, generally, by reducing the amount of the payout?
Matthew Brewis: Insurers can outsource tasks, but they cannot outsource responsibility for them. Thus, every part of the chain is covered by the duty, in respect of the fact that it is the insurer that remains responsible.
Lord Hollick: Are they incentivised to do it quickly and to act properly in respect of the implied rights of the insured?
Matthew Brewis: One of the areas that the FCA flagged in its report as needing more work was in greater oversight of outsourcers, both in terms of allowing boards to have better management information of what was being done and having a better view as to how those companies were incentivised. I do not believe there will be a contract out there that says, “You are expected to decline X% of claims”, or anything like that; it will not exist. What is necessary is for firms to be incentivised for speed, good customer service and good customer understanding. All those parts of the consumer duty are where outsourcers that are fixing issues on behalf of insurers should be incentivised.
Lord Hollick: Finally, in the previous session I asked about the extent to which there is any careful oversight by mortgage suppliers that the property they are lending against is properly covered.
Matthew Brewis: My understanding is that if you have a mortgage, it is a requirement to insure the building for the value of the mortgage, but I have never been asked to show my bank a copy of my insurance product.
Q28 Lord Sharkey: Is there a simple measure that would significantly improve consumer experience?
Matthew Brewis: I never like to allow one number because you can game it.
Lord Sharkey: Two measures, then.
Matthew Brewis: I believe there are a number of metrics that would help consumers make informed decisions around what insurance to buy and would allow good insurance firms to compete and show that they are providing a good service.
Lord Sharkey: What are those measures?
Matthew Brewis: Claims is a good one, but, as I say, it only works if you are measuring everybody on the same basis. There are some that are more difficult. In motor, for example, you might have what the industry calls “key to key time”: the time from when you hand over your car at a garage to when you get it back. It is difficult to do that for home insurance because, if your house has been flooded, the likelihood is that it will take nine months to a year in order to fix all the issues around drying out the house and redecorating. Claims acceptance is a key one; there should be some level of customer satisfaction that can be measured. I understand there are groups out there that are seeking to do this more broadly across the sector, and price comparison sites as well.
Lord Sharkey: Would you add to the list the desirability of putting exclusions on the front page of a contract? It is certainly simple.
Matthew Brewis: You could do that but, as I said before, it very quickly becomes complex in terms of what those exclusions are. You could not just put fence damage, for example, because it depends on the context of the damage. Transparency is something that the regulator has tried to use across all elements of financial services; it has discovered that people do not read documents until they have to, so transparency alone is insufficient to enable information to get across. Finding novel ways of increasing customer understanding is one of the challenges that is an issue across all the financial services, not just insurance.
The Chair: Excellent; that has been a really interesting session. Thank you very much for taking the time to share your unique perspective of being on both sides of the fence. We found it very valuable.
