PROD 4.2 Manufacture of insurance products

3For the purposes of PROD 4.2:

1. (1)

   whether a proposed change to the product would be a ‘significant adaptation’ should include consideration of the potential impact the adaptation may have on an existing or potential customer (when compared to the unadapted version of the product);

2. (2)

   a ‘significant adaptation’ in relation to a non-investment insurance product may include, but is not restricted to, a proposed change to the insurance coverage, costs, exclusions, excesses, limits or conditions and any other significant change to the terms and conditions.

Manufacturers should take into account the following when considering whether the product approval process is proportionate and appropriate:

1. (1)

   the complexity of the insurance product;

2. (2)

   the degree to which publicly available information can be obtained;

3. (3)

   the nature of the insurance product and the risk of consumer detriment related to it;

4. (4)

   the characteristics of the target market; and

5. (5)

   the scale and complexity of the relevant business of the manufacturer or distributor.

[Note: recital 2 to the IDD POG Regulation]

3In addition to, and/or by way of elaboration of, the factors set out in PROD 4.2.3G, for a non-investment insurance product a firm should take into account:

1. (1)

   the potential risk, and possible levels, of harm to customers if the product design is flawed, in particular, due to the potential scale of harm if the product is intended for a wide target market;

2. (2)

   the nature of the cover that the product is intended to provide;

3. (3)

   whether the distribution arrangements could mean customers are at a greater risk of not receiving fair value from the insurance product, for example where:

   1. (a)

      the insurance product will be distributed with additional products;

   2. (b)

      where the insurance product will be distributed on an ancillary basis to another product; or

   3. (c)

      there is complexity in the distribution arrangements including the use of multiple parties in the distribution chain or reliance on persons not regulated under FSMA when selling the insurance product;

4. (4)

   the nature and complexity of the firm’s existing or intended customer base, for example whether it includes or is likely to include;

   1. (a)

      different types of customers with varying characteristics including in relation to their understanding of financial matters;

   2. (b)

      a significant number of vulnerable customers;

   3. (c)

      a significant number of customers of long tenure;

5. (5)

   any particularly notable features of, or relating to, existing products (including how it has been distributed).

For the purposes of PROD 4.2.2R proportionality means that the product approval process should be relatively simple for straightforward and non-complex products that are compatible with the needs and characteristics of the mass retail market. On the other hand, in the case of more complex products with a higher risk of consumer detriment more exacting measures should be required.

[Note: recital 2 to the IDD POG Regulation]

1. (1)

   3In relation to a non-investment insurance product, PROD 4.2.2R does not allow a firm to assume a simple product approval process will be appropriate for a product intended for a mass retail market even if the product and/or distribution arrangements are straightforward and not complex. For example, the potential risks and levels of harm which could result even from a straightforward and non-complex product, with simple distribution arrangements, intended for the mass market could mean that more exacting measures are required.

2. (2)

   An example of a straightforward and non-complex product could be cover for a single item (such as mobile phone insurance), or in relation to a single risk (such as ticket cancellation insurance), with straightforward distribution arrangements. However, there could be potential risks of such a product not providing fair value and therefore potentially leading to significant levels of harm. Firms should ensure the product approval process has the necessary measures to identify and mitigate any potential risks and harms.

1. (1)

   3Firms will need to consider the matters in PROD 4.2.14ER and PROD 4.2.14ME to identify if there is fair value both for the initial term of a non-investment insurance product and renewals for a reasonably foreseeable period. What may constitute a ‘reasonably foreseeable period’ will depend on the type of the non-investment insurance product (including the intended term of any policy and the underlying risk) and the expected length of time a customer in the target market will keep the product, including in particular where it would be reasonably expected that a customer would renew the product on a number of occasions.

2. (2)

   When considering whether a product will provide fair value for a reasonably foreseeable period, a firm should consider at least:

   1. (a)

      any expected changes to the total price a customer would pay during the period that they hold the product (including at the first or any subsequent renewal or any other point in time);

   2. (b)

      any expected change to the insured risk over time, for example in the nature, financial value or a customer’s usage of an underlying good to which the insurance relates;

   3. (c)

      whether the number of expected claims that may be made, or financial value of any such claim, would be expected to change over time due to the nature of the product, the customer’s needs or any relevant features of the insured risk, for example:

      1. (i)

         as a result of expected depreciation in the value of the insured asset;

      2. (ii)

         where the customer’s need, or eligibility, for certain cover may change including as a result of features identified in (b) or where claims have been made;

   4. (d)

      whether the total premiums expected to be paid over the length of time a customer would hold the product would exceed the benefits that could be received from claims for example due to cover limits applying across the foreseeable period (taking into account any deductions permitted by the contract such as any relevant policy excess for such claims);

   5. (e)

      whether the benefits offered by the policy at inception may not be available at subsequent renewals, due to exclusions or claims limits, without any commensurate reduction in the premium;

   6. (f)

      whether customers could be discouraged from or be unable to renew due to the level of ongoing premiums including increases at renewal meaning they may not be receiving the full intended benefits of the product (where these are intended to be spread across the reasonably foreseeable period).

1. (1)

   3When considering the costs of, or associated with, any distribution arrangements, firms should consider the justification in value terms of any difference between the risk price and the total price paid by the customer including where the difference is mainly due to the costs (including remuneration) of any person in the distribution arrangements or where this is due to the combined costs (including remuneration) of multiple parties involved in the distribution arrangements.

2. (2)

   Where a firm identifies that an insurance product, package or individual component has poor value or there is an unreasonable relationship between either the cost to the firm and the price paid by the customer, or the price paid by the customer and product quality or service provided, the product or package will not be providing fair value. However, a firm should not assume there is fair value simply due to the absence of an unreasonable relationship in the costs or where they identify an absence of poor value. Firms will need to consider all relevant aspects of value in the particular context and consider whether overall there is fair value provided.

3. (3)

   Where a non-investment insurance product has negligible, or no obvious, benefit for the customer this will not be providing fair value regardless of the price of the product. For example, the product will not provide fair value where the cover under the non-investment insurance contract is significantly limited, whether by exclusions or limits on the amount that would be paid in settlement, meaning that the customer is unlikely to be able to make a successful claim or where the customer could conclude it is not in their interests to make a claim due to the disproportionate time or effort which would be required, compared to the claim settlement which would be expected.

4. (4)

   When assessing whether a package provides fair value for the purposes of PROD 4.2.14BR, a firm will need to consider both the components individually and the package as a whole to identify whether there is fair value. This should include whether there is a risk that the individual components do not provide the same level of value to the customer when combined in a package. For example, where the package includes more than one non-investment insurance product, a firm should consider the type and level of insurance cover provided by each of these products and whether this would result in duplicate insurance cover that could detrimentally affect the value of the package.

1. (1)

   3Where the manufacturer will provide, or arrange for another firm to provide, the option for customers to buy a non-investment insurance product using retail premium finance, it will need to consider if the additional costs of, or relating to, the retail premium finance have a material detrimental effect on the value of the insurance product when the two products are taken together.

2. (2)

   When assessing the value of any particular retail premium finance under PROD 4.2.14BR, a manufacturer should consider the relationship between:

   1. (a)

      the total price a customer would pay (including the applicable APR) for the retail premium finance; and

   2. (b)

      the quality of that retail premium finance including any relevant factors and features. For example, any benefit that a customer could have from using retail premium finance including the ability to spread the cost of a non-investment insurance contract instead of paying up front, taking into account the higher overall price the customer will have to pay.

3The information that a firm will need to use for PROD 4.2.14JR will depend on the nature of the particular non-investment insurance product and (where relevant) the package, the particular distribution arrangement(s), the target market, the nature of any actual customer base, and any existing information on customer outcomes (for example claims experiences, outcomes of claims and complaints related data).

3The following evidential provision provides examples of arrangements the FCA considers will breach PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

1. (1)

   3Where the firm is considering the effects of the distribution arrangements on value it should consider whether the additional costs of any individual party in the arrangements that add to the total price paid by the customer deliver any, or a proportional, additional benefit. If not, firms should consider how they can be satisfied that the arrangements are consistent with their obligations to be able to clearly demonstrate fair value to the customer.

2. (2)

   A benefit that could be consistent with fair value might include where the party’s inclusion in the distribution arrangements increases access to the product for customers in the target market in a way that is proportionate to the additional cost involved.

3Firms should take into account what is necessary to satisfy PROD requirements together with any wider legal obligations, for example, competition law to which they are subject.

The identification of the target market by the manufacturer should be understood as describing a group of customers sharing common characteristics at an abstract and generalised level in order to enable the manufacturer to adapt the features of the product to the needs, characteristics and objectives of that group of customers.

The identification of the target market should be distinguished from the individual assessment at the point of sale to determine whether a product meets the demands and needs and, where applicable, whether an insurance-based investment product is suitable or appropriate for the individual customer.

[Note: recital 5 to the IDD POG Regulation]

The level of granularity of the target market and the criteria used to define the target market and determine the appropriate distribution strategy should be relevant for the product and should make it possible to assess which customers fall within the target market. For simpler, more common products, the target market should be identified with less detail while for more complicated products or less common products, the target market should be identified with more detail taking into account the increased risk of consumer detriment associated with such products.

[Note: recital 6 to the IDD POG Regulation]

3In relation to a non-investment insurance product, a firm should consider whether the target market needs to be identified in more detail, even for a simpler, more common product, where there is a material risk of customer harm associated with it.

For the purposes of PROD 4.2.22UK2, manufacturers should include assessments of the performance and risk/reward profile of their insurance product where appropriate.

[Note: recital 8 to the IDD POG Regulation]

1. (1)

   PROD 4.2.25R does not affect the manufacturer’s freedom to set premiums.

2. (2)

   In relation to a non-investment insurance contract a firm should consider whether, as a result of the charging structure it has put in place, the overall cost for the customer is consistent with its obligations under PROD 4.2.14AR (and, where relevant, PROD 4.2.14BR),3 the Principles and ICOBS.

3. (3)

   PROD 4.2.25R should be read in light of a firm’s wider obligations under the Handbook which impose specific restrictions or requirements around what costs and charges may be permissible. For example, the rules in COBS 20.2 govern what may be charged to a with-profits policy when considering its charging structure under PROD 4.2.25R.

To ensure appropriate information for customers, manufacturers should select distributors that have the necessary knowledge, expertise and competence to understand the features of an insurance product and the identified target market.

[Note: recital 9 to the IDD POG Regulation]

3For a non-investment insurance product, the information required by PROD 4.2.29R should include:

1. (1)

   all appropriate information to enable the distributor to understand the intended value of the insurance product established by the firm;

2. (2)

   any effect the distributor may have on the intended value that has not been fully taken into account by the firm when assessing value, and therefore which the distributor should take into account; and

3. (3)

   any type of customer for whom the insurance product is unlikely to provide fair value.

3For PROD 4.2.32BR, a change to the distribution arrangements includes adding a further distribution channel.

3For a non-investment insurance product sold on an ancillary basis to another product or service, for example a motor vehicle, electrical good or a holiday, a firm should consider whether the proposed distribution channel would be appropriate in light of the risk that the customer’s focus is on the core product rather than the insurance product.

3‘Offers’ and ‘markets’ in the requirements in PROD 4.2.33R and PROD 4.2.34R should be read to include ‘renews’ in relation to the renewal of existing non-investment insurance products.

3For the purposes of PROD 4.2.34BR, the factors that should be taken into account when considering if more frequent reviews would be appropriate include, but are not limited to:

1. (1)

   the nature and complexity of the product;

2. (2)

   the nature of the customer base, including whether there are significant numbers of customers of long tenure and/or vulnerable customers;

3. (3)

   any specific indicators seen in the firm’s assessment of the product’s value to the customer;

4. (4)

   any indicators of customer harm potentially emerging from the performance of the product (for example through claims and complaints data); and

5. (5)

   the nature and type of distribution arrangements being used.

1. (1)

   3When reviewing non-investment insurance products a firm may group similar products together where this does not detrimentally affect the firm’s ability to review each product appropriately. This includes the need to review whether any individual product, and where necessary a package, is providing fair value.

2. (2)

   For the purposes (1) ‘similar products’ will be those products that are intended to deliver similar cover and outcomes for customers where the target markets are consistent.

3. (3)

   A firm should consider the following factors when identifying whether it is appropriate to group products together for review:

   1. (a)

      the risk of customer harm for each individual product;

   2. (b)

      the complexity of each product;

   3. (c)

      the nature of the target market and existing customer base for each product (including the extent to which this includes vulnerable customers);

   4. (d)

      any specific indicators seen in the assessment of value under PROD 4.2.14AR, and where relevant PROD 4.2.14BR which may make it inconsistent to review that product alongside others;

   5. (e)

      any specific indicators of customer harm emerging from the performance of each product; and

   6. (f)

      the nature and type of distribution arrangements for each product.

4. (4)

   A firm will need to ensure that the grouping of any reviews does not impair the firm’s ability to identify any risk that a product is not delivering fair value or that there is any other issue which could give rise to customer harm in relation to each individual product.

3The information that a firm will need to use for PROD 4.2.35AR(2) will depend on the nature of the non-investment insurance product, (where relevant) the package, the particular distribution arrangement(s), the target market, the nature of the actual customer base, and the firm’s existing information on customer outcomes (for example claims experiences, outcomes of claims and complaints related data).

3For PROD 4.2.35AR(1), a firm should identify whether there is a risk to it continuing to provide fair value where there is a material change in the relationship between the price to the customer and the actual costs to the firm or another party involved in the ongoing service/distribution of the product.

3In relation to a non-investment insurance product, when identifying the appropriate intervals for regular review, firms will need to consider the requirement in PROD 4.2.34BR and also whether any event has happened or any issue has arisen requiring the insurance product to be reviewed outside of the minimum review period.

3In relation to a non-investment insurance product, the actions firms may need to take for the purposes of PROD 4.2.37A include (and may involve a combination of), but are not limited to:

1. (1)

   making changes to the product (such as amending policy terms or applying them more favourably to customers in the event of a claim);

2. (2)

   offering existing customers the option to cancel the non-investment insurance contract without additional cost (for example by waiving cancellation fees or charges);

3. (3)

   providing customers with a refund of the difference between the premium paid for the non-investment insurance contract and the premium for a fair value version of that product;

4. (4)

   proposing alternative insurance products, whether offered by the firm or another provider, to existing customers or distributors which provide fair value and which would be compliant with other FCA requirements, for example, ICOBS 5.2 (Demands and needs); and

5. (5)

   withdrawing the insurance product from continued marketing or distribution.

3Where in the review required by PROD 4.2.34R and PROD 4.2.35UK a firm identifies a breach of any rules in place at the time, it should consider what may be necessary to provide appropriate mitigation and/or remediation of the harm including whether redress should be made. The firm should contact any affected customers where this is necessary to inform them of the issues and of the actions being taken.