Conduct Risk Ger Bradley Eamonn Phelan 19 May 2015

Background November 15, 2018

Background Supervisors used to protect policyholders by focusing on financial soundness of companies Increasingly greater emphasis on poor business conduct FCA to the fore IAIS supports the concept and paper due to be released soon Regulators link it to prudential risk Poor customer outcomes could lead to solvency risk or Poor prudential position may lead to unfair pricing November 15, 2018

Conduct Risk – What is it? “Primarily concerned with the fair treatment of customers" IAIS definition “risk to customers, insurers, the insurance sector or the insurance market that arises from insurers and/or intermediaries conducting their business in a way that does not ensure fair treatment of customers” Conduct risks may not post immediate threats to solvency Includes risks to which insurers expose their customers November 15, 2018

Specific Examples of Conduct Risk Issues Self-placement practices Selling financial instruments issued by the group itself Bundling Insurance product bundled with other products Payment Protection Insurance £24bn total provisions to date Sub-prime mortgages Indiscriminate marketing and poorly targeted sales Example of conduct risk resulting in systemic risk Price optimisation November 15, 2018

Risk Management of Conduct Risk Define Identify Measure Respond Report November 15, 2018

Regulatory views November 15, 2018

CBI’s Overall Risk Rating November 15, 2018

Key Drivers of Conduct Risk – FCA Inherent Information asymmetries Biases Inadequate financial capability Environmental Regulatory changes Technology Economic Trends Structures & Behaviours Conflicts of Interest Culture & Incentives Ineffective Competition November 15, 2018

Risk Management of Conduct Risk Review risk classification / taxonomy E.g. might be considered under operational risk Conduct of business risk indicators May be different from those used for prudential supervision Profit levels Commission levels Complaints indicators Lapse rates Growth levels Remuneration policy November 15, 2018

Conduct Risk Cycle Product Governance Product Design Complaints Terms and Conditions Sales Claims Complaints November 15, 2018

Product Oversight and Governance (POG) EIOPA Consultation paper October 2014 Establishment & review of POG arrangements (written document) Board responsibility Conflicts of interest Define target market (products must be of “benefit”) Staff knowledge & ability Product testing (meeting objectives) Product monitoring & remedial action Distribution (manufacturer must take “all reasonable steps”) Documentation Sylvia Cronin speech to DIMA 14 May 2015 (European Insurance Forum) Referenced above paper in detail Need to align strategy with good customer outcomes November 15, 2018

IMF Review of CBI Recommends that CBI establish requirements for: “Insurers to take account the interests of different types of customers in developing and marketing products to the targeted customers” “Replacement of policies by intermediaries and the role of insurers in ensuring that policyholders are not compromised due to unnecessary replacement of policies” So, expect follow up from the CBI… November 15, 2018

Example – Price Optimisation November 15, 2018

Price Optimisation View 1 View 2 “a more sophisticated and accurate means of making the kind of final rating adjustments” View 2 “Best estimate rate making provides a point estimate of the price. But this is generally accepted to be within an acceptable range of actuarially sound rate estimates”

Price Optimisation View 3

Price Optimisation

Price Optimisation

Price Optimisation View 4 I must congratulate Maryland for banning the use of PO. Other states would serve their citizens well by following Commissioner Goldsmith’s lead. I also congratulate Commissioner Jones of California for declaring that PO is illegal in his state. It is not and has never been permissible to deliberately and systematically raise relativities above the indicated relativities because the insurer knows that people with the characteristics for which the relativities are raised will not leave the insurer.

Views in UK and Ireland Price Optimisation the norm in UK and Ireland – several years personal lines Discussions re rights and wrongs always in background Perception that aggregators in UK keep price down – so impact minimal Correct if you go through an aggregator – not if passive renewal (proponents claim a 3% impact however) Used in many industries (airlines, hotels etc.); even the corner shop Willing seller / willing buyer – just normal business practice

Discussion points November 15, 2018

Questions – does your company: Have a conduct risk strategy or policy? Specifically address conduct risk in risk categorisation? Or is it part of some other category e.g. operational Use other practices to address conduct risk? Complaints analysis? Customer committee? Training on conduct risk? Reviewed remuneration policies? November 15, 2018