PROD 4.2 Manufacture of insurance products

A firm which manufactures any insurance product must maintain, operate and review a process for the approval of:

1. (1)

   each insurance product; and

2. (2)

   significant adaptations of an existing insurance product,

in each case before it is marketed or distributed to customers.

[Note: first subparagraph of article 25(1) of the IDD]

The product approval process referred to in PROD 4.2.1R must be proportionate and appropriate to the nature of the insurance product.

[Note: second subparagraph of article 25(1) of the IDD]

1. (1)

   6A manufacturer must maintain, operate and review a product approval process for newly developed insurance products and for significant adaptations of existing insurance products.

2. (2)

   6The process in (1) must contain measures and procedures for designing, monitoring, reviewing and distributing insurance products, as well as for corrective action for insurance products that are detrimental to customers.

3. (3)

   6The measures and procedures must be proportionate to the level of complexity and the risks related to the products as well as the nature, scale and complexity of the relevant business of the manufacturer.

[Note: article 4(1) of the IDD POG Regulation]

3For a non-investment insurance product, a firm must ensure a product approval process has all necessary measures and procedures for identifying whether the product is, or remains, appropriate to be marketed or distributed to customers in light of the requirements in PROD 4.2.14A (Fair value for non-investment insurance products: individual insurance product and packages) to PROD 4.2.14SR (Fair value for non-investment insurance products: additional provisions).

6The product approval process required under PROD 4.2.1R must be set out in a written document (“product oversight and governance policy”), which must be made available to the relevant staff.

[Note: article 4 (2) of the IDD POG Regulation]

6Relevant actions taken by a manufacturer in relation to its product approval process must be duly documented, kept for audit purposes and made available to the FCA upon request.

[Note: article 9 of the IDD POG Regulation]

6The product approval process must:

1. (1)

   ensure that the design of insurance products:

   1. (a)

      takes into account the objectives, interests and characteristics of customers;

   2. (b)

      does not adversely affect customers;

   3. (c)

      prevents or mitigates customer detriment;

2. (2)

   support a proper management of conflicts of interest.

[Note: article 4(3) of the IDD POG Regulation]

6A manufacturer’s governing body responsible for the manufacturing of insurance products must:

1. (1)

   endorse and be ultimately responsible for establishing, implementing and reviewing the product approval process;

2. (2)

   continuously verify internal compliance with that process.

[Note: article 4(4) of the IDD POG Regulation]

6A manufacturer must ensure that staff involved in designing and manufacturing insurance products have the necessary skills, knowledge and expertise to properly understand the insurance products sold and the interests, objectives and characteristics of the customers belonging to the target market.

[Note: article 5(4) of the IDD POG Regulation]

6A manufacturer designating a third party to design products on its behalf remains fully responsible for compliance with the product approval process.

[Note: article 4(5) of the IDD POG Regulation]

6A manufacturer must regularly review its product approval process to ensure it is still valid and up to date. A manufacturer must amend the product approval process where necessary.

[Note: article 4(6) of the IDD POG Regulation]

6Where there is more than one firm involved in the manufacture of an insurance product, the firms must have a written agreement which specifies:

1. (1)

   their collaboration to comply with the requirements for manufacturers referred to in PROD 4.2, including in particular PROD 4.2.1R, PROD 4.2.2R, PROD 4.2.29R, PROD 4.2.33R and PROD 4.2.34R;

2. (2)

   the procedures through which they will agree on the identification of the target market; and

3. (3)

   their respective roles in the product approval process.

[Note: article 3(4) of the IDD POG Regulation]

In circumstances other than PROD 4.2.13R6, when firms collaborate to manufacture an insurance product, they must outline their mutual responsibilities in a written agreement.

3For a non-investment insurance product, a firm must ensure that the product approval process identifies whether the product provides fair value to customers in the target market including whether it will continue to do so for a reasonably foreseeable period (including following renewal).

1. (1)

   3Where a non-investment insurance product is intended to be distributed with one or more additional products, a firm must identify whether:

   1. (a)

      each component product; and

   2. (b)

      the package as a whole,

   will provide fair value to the customer including that it will continue to do so for a reasonably foreseeable period (including following renewal).

2. (2)

   The assessment referred to in (1) must include (but is not limited to) consideration of:

   1. (a)

      the value of the core insurance product;

   2. (b)

      the value of any additional products; and

   3. (c)

      the overall price of the package to the customer, taking into account the proposed distribution arrangements.

3. (3)

   A firm is not required to assess the value of a component product under (1) where the component is a non-investment insurance product for which the firm is not a manufacturer.

1. (1)

   3A firm must:

   1. (a)

      be able to clearly demonstrate how any non-investment insurance product, additional product or package provides (and will provide for a reasonably foreseeable period) fair value; and

   2. (b)

      make and retain a record of the value assessment required by PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

2. (2)

   Where a firm is unable to both:

   1. (a)

      identify; and

   2. (b)

      clearly demonstrate,

   that the insurance product and, where relevant, the package will provide fair value, the firm must not market the product or permit the product to be distributed (whether directly or through another person), or must have ensured appropriate changes have been made so that fair value will be provided.

3A firm must consider the value considerations in PROD 4.2.14AR and, where relevant, PROD 4.2.14BR throughout every stage of the product approval process in PROD 4 including, in particular, when:

1. (1)

   identifying the target market and the interests, needs, objectives and characteristics of such customers (PROD 4.2.15R to PROD 4.2.21AG);

2. (2)

   undertaking product testing (PROD 4.2.22R6 to PROD 4.2.26G); and

3. (3)

   selecting any distribution channel (PROD 4.2.27R6 to PROD 4.2.32DR).

3In PROD 4, ‘value’ means the relationship between the overall price to the customer and the quality of the product(s) and/or services provided. The assessment of value must include consideration of at least the following:

1. (1)

   the nature of the product including the benefits that will be provided, their quality, and any limitations (for example in the scope of cover, exclusions, excesses or other features);

2. (2)

   the type and quality of services provided to customers;

3. (3)

   the expected total price to be paid by the customer when buying or renewing the insurance product, and the elements that make up the total price. This will need to include consideration of at least the following:

   1. (a)

      the pricing model used to calculate the risk premium:

      1. (i)

         for the initial policy term; and

      2. (ii)

         any future renewal;

   2. (b)

      the overall cost to the firm of the insurance product (including the underwriting and operating of the product) and, where relevant, any other components of a package;

   3. (c)

      the individual elements of the expected total price to be paid by the customer including, but not limited to, the price paid for:

      1. (i)

         the insurance product, including any additional features which are part of the same non-investment insurance contract;

      2. (ii)

         any additional products, including retail premium finance, offered alongside the insurance product;

      3. (iii)

         the distribution arrangements, including the remuneration of any relevant person in the distribution arrangements, and including where the final decision on setting the price is taken by another person);

4. (4)

   how the intended distribution arrangements support, and will not adversely affect, the intended value of the product.

3When considering the value of a non-investment insurance product under PROD 4.2.14A and, where relevant, PROD 4.2.14BR, a firm must not rely on individual customers to consider whether they are making fair value purchases in place of any part of the firm’s own assessment, in particular where an insurance product is manufactured to be distributed either with additional products or on an ancillary basis to another good or service.

1. (1)

   4For the purposes of PROD 4.2.14ER, and any rules in PROD 4 that rely on the meaning of ‘value’ in this rule, a firm is not required to take into account product distribution arrangements that relate to the distribution of the product to:

   1. (a)

      a customer who is not habitually resident in the United Kingdom; or

   2. (b)

      where the state of the risk is not the United Kingdom

2. (2)

   The effect of (1) includes that a firm is not required to obtain and assess information in relation to the distribution of the product to a customer who is not habitually resident in the United Kingdom or where the state of the risk is not the United Kingdom, from a distributor based outside of the United Kingdom, including, in particular, information pertaining to that person’s remuneration for such distribution.

3. (3)

   5A non-investment insurance product that is used for effecting a multi-occupancy building insurance contract is excluded from (1).

1. (1)

   3When assessing value, a firm must use all necessary and appropriate data and information available to it.

2. (2)

   For the purposes of (1) the data and information a firm should consider using includes, but is not limited to:

   1. (a)

      information available to the firm internally including:

      1. (i)

         customer research;

      2. (ii)

         claims information such as handling times, frequency, severity of claims costs (including total costs and average per claim), claims ratios, rates of and reasons for claim acceptance/declinature, both expected for the product and/or any actual information from a comparable product; and

      3. (iii)

         complaints data (including root cause analysis and handling times), both expected for the product itself and/or any actual information from a comparable product;

   2. (b)

      public information or information obtainable by the firm from external sources including analysis of similar insurance products available from other firms and, where relevant, data published as part of the FCA’s work on value measures in the general insurance market;

   3. (c)

      information available to the firm specifically from persons in the distribution arrangements, including:

      1. (i)

         remuneration and its impact on the value of the product, package or component part;

      2. (ii)

         levels or quality of service provided by any person in the distribution arrangements; and

      3. (iii)

         any results of monitoring and oversight of the processes of any persons in the distribution arrangement (for example, call monitoring or file checks) including in relation to other products that person distributes.

3A firm must, as far as reasonably possible, ensure the distribution arrangements for a non-investment insurance product avoid or minimise the risk of negatively impacting the fair value of the insurance product or package. This includes, but is not limited to:

1. (1)

   avoiding or reducing the risks arising from:

   1. (a)

      any remuneration of a party, or parties, involved in the distribution arrangements increasing, directly or indirectly, the total price paid by the customer without adequate monitoring or oversight of the nature, level and fairness justification for their inclusion; or

   2. (b)

      providing discretion to another person to set the final price, for example through a net pricing arrangement, without adequate monitoring or oversight of the final price paid by the customer;

2. (2)

   ensuring that appropriate arrangements will be in place to identify if the actions of another person involved in the distribution arrangements would adversely affect the value of the insurance product or package; and

3. (3)

   reducing the scope for the overall effect of any distribution arrangements to detrimentally affect the value of the products or package including where the cumulative effects of the remuneration of multiple parties unreasonably add to the overall price paid by the customer.

3A firm must obtain from any person in the distribution arrangements all necessary and relevant information to enable it to identify the remuneration associated with the distribution arrangements to allow it to assess the ongoing value of the product, including at least:

1. (1)

   the type and amount of remuneration of each person in the distribution arrangement where this is part of the premium or otherwise paid directly by the customer, including in relation to additional products (other than where this relates to another non-investment insurance product for which the firm is not a manufacturer);

2. (2)

   an explanation of the services provided by each person in the distribution arrangements; and

3. (3)

   confirmation from any firm in the distribution arrangements that any remuneration is consistent with their regulatory obligations including SYSC 19F.2 (IDD remuneration incentives).

3A firm manufacturing a non-investment insurance product must ensure the manufacture of an insurance product is driven by features that benefit the customer and not by a business model which relies on poor customer outcomes to be profitable.

3In relation to a non-investment insurance product to be sold in a package with additional products, a firm must not set or increase the price of those additional products to the customer in a way that detrimentally impacts the package delivering fair value, including where this is done to minimise the financial effects on the firm of reducing the price of, or making other changes to, an insurance product as a result of the fair value assessment.

For each insurance product the product approval process must:

1. (1)

   specify an identified target market;

2. (2)

   ensure that all relevant risks to the identified target market are assessed;

3. (3)

   ensure that the intended distribution strategy is consistent with the identified target market; and

4. (4)

   require the manufacturer to take reasonable steps to ensure that the insurance product is distributed to the identified target market.

[Note: third subparagraph of article 25(1) of the IDD]

3The effect of PROD 4.2.14AR and, where relevant, PROD 4.2.14BR, when taken together with PROD 4.2.15R, is that a firm will need to be able to show that a non-investment insurance product offers fair value to the specified target market, taking into account in particular their needs, objectives, interests and characteristics.

1. (1)

   6A firm’s product approval process must, for each insurance product, identify the target market and the group of compatible customers.

2. (2)

   The target market in (1) must be identified at a sufficiently granular level, taking into account the characteristics, risk profile, complexity and nature of the insurance product.

[Note: article 5(1) of the IDD POG Regulation]

6A manufacturer may, in particular with regard to insurance-based investment products, identify groups of customers for whose needs, characteristics and objectives the insurance product is generally not compatible.

[Note: article 5(2) of the IDD POG Regulation]

1. (1)

   3For a non-investment insurance product, when identifying the target market a firm must identify if there are groups of customers for whom the product or package would not provide the intended level of value identified for PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

2. (2)

   A firm must take reasonable steps in its use of the distribution arrangements to ensure the product is not distributed to any such groups of customers identified in (1). The information required in PROD 4.2.29R to be provided to distributors must include a clear description of these customers.

1. (1)

   6A manufacturer must only design and market insurance products that are compatible with the needs, characteristics and objectives of the customers belonging to the target market.

2. (2)

   When assessing whether an insurance product is compatible with a target market, a manufacturer must take into account the level of information available to the customers belonging to that target market and their financial literacy.

[Note: article 5(3) of the IDD POG Regulation]

1. (1)

   6A manufacturer must test their its insurance products appropriately, including scenario analyses where relevant, before bringing that product to the market or significantly adapting it, or in case the target market has significantly changed.

2. (2)

   The product testing in (1) must assess whether the insurance product over its lifetime meets the identified needs, objectives and characteristics of the target market.

3. (3)

   A manufacturer must test its insurance products in a qualitative manner and, depending on the type and nature of the insurance product and the related risk of detriment to customers, quantitative manner.

[Note: article 6(1) of the IDD POG Regulation]

6A manufacturer must not bring insurance products to the market if the results of the product testing show that the products do not meet the identified needs, objectives and characteristics of the target market.

[Note: article 6(2) of the IDD POG Regulation]

Manufacturers must consider the charging structure proposed for each insurance product, including examination of the following:

1. (1)

   whether the costs and charges of the insurance product are compatible with the needs, objectives and characteristics of the target market;

2. (2)

   where relevant, whether the charging structure of the insurance product is appropriately transparent for the target market, such as that it does not disguise charges or is too complex to understand; and

3. (3)

   where relevant, whether the charges undermine the return expectations of the insurance product, such as where the costs or charges equal, exceed or remove almost all the expected tax advantages linked to a life policy.

6A manufacturer must carefully select distribution channels that are appropriate for the target market, thereby taking into account the particular characteristics of the relevant insurance products.

[Note: article 8(1) of the IDD POG Regulation]

A firm which manufactures an insurance product, must make available to a distributor:

1. (1)

   all appropriate information on the insurance product

2. (2)

   all appropriate information on the product approval process; and

3. (3)

   the identified target market of the insurance product.

[Note: fifth subparagraph of article 25(1) of the IDD]

1. (1)

   6A manufacturer must provide a distributor with all appropriate information on the insurance products, the identified target market and the suggested distribution strategy, including information on the main features and characteristics of the insurance products, their risks and costs, including implicit costs, and any circumstances which might cause a conflict of interest to the detriment of the customer.

2. (2)

   The information in (1) must be clear, complete and up to date.

[Note: article 8(2) of the IDD POG Regulation]

6The information required under PROD 4.2.30R must enable the distributor to:

1. (1)

   understand the insurance products;

2. (2)

   comprehend the identified target market for the insurance products;

3. (3)

   identify any customers for whom the insurance product is not compatible with their needs, characteristics and objectives;

4. (4)

   carry out insurance distribution activities for the relevant insurance products in accordance with the best interests of their customers as prescribed in ICOBS 2.5-1R or COBS 2.1.1R (as relevant).

[Note: article 8(3) of the IDD POG Regulation]

1. (1)

   A manufacturer must make available to any distributor information about the target market assessment.

2. (2)

   The information made available under (1) must be of an adequate standard to enable distributors to:

   1. (a)

      comprehend the identified target market for the insurance products; and

   2. (b)

      be able to identify any customers for whom the insurance product is not compatible with their needs, characteristics and objectives.

3. (3)

   A manufacturer is not required to disclose specific information objectively considered to be commercially sensitive if the information it does make available would still allow distributors to meet (2)(a) and (b).

3In relation to a non-investment insurance product, a firm must not use a distribution channel unless it is able to demonstrate clearly that the channel results in fair value to customers in the target market.

3In relation to a non-investment insurance product, whenever making a change to the distribution arrangements a firm must:

1. (1)

   obtain all necessary information from the distributor or any other person who will be involved with the distribution arrangement, including that set out in PROD 4.2.14PR; and

2. (2)

   identify whether the proposed change to the distribution arrangements is consistent with the fair value requirement in PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

A firm must understand the insurance products it offers or markets.

[Note: fourth subparagraph of article 25(1) of the IDD]

A firm must regularly review the insurance products it offers or markets taking into account any event that could materially affect the potential risk to the identified target market. In doing so, the firm must assess at least the following:

1. (1)

   whether the insurance product remains consistent with the needs of the identified target market; 3

2. (2)

   (in relation to a non-investment insurance product) whether the insurance product remains consistent with the fair value assessment required under PROD 4.2.14AR and, where relevant, PROD 4.2.14BR; and3

3. (3)

   3whether the intended distribution strategy remains appropriate.

[Note: fourth subparagraph of article 25(1) of the IDD]

3For a non-investment insurance product, a firm must undertake the regular review required by PROD 4.2.34R:

1. (1)

   every 12 months; or

2. (2)

   more frequently where the potential risk associated with the product makes it appropriate to do so.

3A firm must obtain all necessary and relevant information in order to enable it to properly understand and monitor a non-investment insurance product including verification of the information in PROD 4.2.14PR.

1. (1)

   6A manufacturer must continuously monitor and regularly review insurance products it has brought to the market, to identify events that could materially affect the main features, the risk coverage or the guarantees of those products.

2. (2)

   A manufacturer must assess whether the insurance products remain consistent with the needs, characteristics and objectives of the identified target market and whether those products are distributed to the target market or are reaching customers outside the target market.

[Note: article 7(1) of the IDD POG Regulation]

1. (1)

   3When reviewing a non-investment insurance product, a firm must consider:

   1. (a)

      whether the insurance product, and where relevant the package, is providing the intended fair value to customers;

   2. (b)

      any impact which the distribution arrangements are having on the value including whether the distribution channels remain appropriate; and

   3. (c)

      whether the use of any retail premium finance arrangement remains appropriate including whether when distributed in a package with a non-investment insurance product it provides fair value.

2. (2)

   A firm in (1) must:

   1. (a)

      ensure that it has sufficient, good quality management information; and

   2. (b)

      use all appropriate and necessary data and information available to it (whether it holds this information already, the information is publicly available or it is able to obtain it from another person),

   to enable it to consider and assess value including the value actually being provided by the insurance product.

3. (3)

   The information in (2) that a firm needs to consider whether to use includes, but is not limited to:

   1. (a)

      information available to the firm internally including:

      1. (i)

         customer research;

      2. (ii)

         claims information (such as handling times, frequency, rates of and reasons for claim acceptance and declinature, severity of claims costs (including total costs and average per claim) and claims ratios); and

      3. (iii)

         complaints data (including root cause analysis and handling times);

   2. (b)

      public information or information obtainable by the firm from external sources including analysis of similar insurance products available from other firms and, where relevant, data published as part of the FCA’s work on value measures in the general insurance market;

   3. (c)

      information available to the firm (including what it would be reasonably able to obtain) in relation to any distribution arrangements through which the product is distributed, including:

      1. (i)

         remuneration information;

      2. (ii)

         levels and quality of service provided by the distributor;

      3. (iii)

         ongoing monitoring and oversight reports relating to the distributor’s processes, for example call monitoring or file reviews.

6A manufacturer must determine the appropriate intervals for the regular review of their insurance products, thereby taking into account the size, scale, contractual duration and complexity of those insurance products, its respective distribution channels, and any relevant external factors such as changes to the applicable legal rules, technological developments, or changes to the market situation.

[Note: article 7(2) of the IDD POG Regulation]

3For the purposes of showing the requirements in PROD 4.2.1R and PROD 4.2.5R6 are met, where a firm makes a change to a non-investment insurance product it must make and retain a record of:

1. (1)

   the assessment of whether that change would amount to a significant adaptation of the insurance product; and

2. (2)

   where the assessment in (1) is that the change would not be a significant adaptation, the reasons for that decision.

6Where a manufacturer identifies during the lifetime of an insurance product any circumstances related to the insurance product that may adversely affect the customer of that product, the manufacturer must take appropriate action to mitigate the situation and prevent further occurrences of the detrimental event. A manufacturer must promptly inform concerned insurance distributors and customers about the remedial action taken.

[Note: article 7(3) of the IDD POG Regulation]

3For a non-investment insurance product, the review process must:

1. (1)

   have the necessary measures to be able to identify if the insurance product is not providing fair value; and

2. (2)

   provide that appropriate actions be taken:

   1. (a)

      for the mitigation and any potential remediation of the harm to existing customers; and

   2. (b)

      to prevent harm to new customers.

1. (1)

   6A manufacturer must take appropriate steps to monitor that distributors act in accordance with the objectives of the manufacturer’s product approval process.

2. (2)

   A manufacturer must in particular verify on a regular basis whether the insurance products are distributed on the identified target market. However, this monitoring obligation does not extend to the general regulatory requirements with which distributors have to comply when carrying out insurance distribution activities for individual customers.

3. (3)

   The monitoring activities in (1) must be reasonable, taking into consideration the characteristics and the legal framework of the respective distribution channels.

[Note: article 8(4) of the IDD POG Regulation]

6Where a manufacturer considers that the distribution of its insurance products is not in accordance with the objectives of its product approval process it must take appropriate remedial action.

[Note: article 8(5) of the IDD POG Regulation]

3In relation to a non-investment insurance contract, where a firm identifies that the distribution is detrimentally affecting the intended value of the insurance product it must take appropriate remedial measures including, but not limited to:

1. (1)

   amending the distribution arrangements, including ceasing to use certain distributors or distribution channels;

2. (2)

   amending remuneration structures;

3. (3)

   withdrawing the insurance product from continued marketing or distribution.