1. Insurance Distribution Directive
Product Governance & Target Markets
Richard Cockbain,
Senior Compliance Manager, Aviva
March 2018

2. Product Governance
Target Markets
Questions

3. Product Governance Annex N of PS 18/01 … on page 227 or 399 (Appendix)
Near-final rules but unlikely to change materially

4. Product Governance Designing Distributing Taking action Monitoring
The Insurance distribution directive (IDD) builds on the existing guidance in The Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD).
FCA will create a new sourcebook on Product (PROD).
Designing
Distributing
Taking action
Monitoring

5. Product Governance Designing:
IDD changes apply to new and significantly adapted products.
Existing products can rely on your current approval process.
Proportionate and appropriate to recognise the complexity of the product.
Stress testing is needed for possible scenarios and performance risks.
Design takes account of:
customers objectives and interests
how to deliver fair outcomes for customers
conflict of interest
potential for detriment

6. Designing - Considerations/ Oversight:
Product Governance
Designing - Considerations/ Oversight:
Does product coverage create any overlap or gaps?
What are the likely needs of the target market?
What is the expected claims ratio?
Is the product offering good value to customers?
What if the market deteriorates?
Is performance reliant on the tax regime?
What is the risk/ reward?
Might the customer regret their purchase?

7. Product Governance Distributing:
Identify the distribution models which can be used with this product (face-to-face, telephone, internet or mailshot).
If customers’ level of engagement and financial capability could differ between distribution channels then some routes may be unsuitable.
Consider whether the product can be sold without advice.
Distributors need to follow a distribution strategy that is aligned with the manufacturer’s intended approach.
Intermediaries need to be competent to sell the product; as a manufacturer it is important to consider whether training would be helpful, particularly when the product is innovative.

8. Product Governance Monitoring:
There is no set percentage of sales that need to be in the target market. However, firms should understand why customers are buying a product which is not designed for them; the greater percentage outside of scope the more thorough the investigation.
Proactive MI depends on the complexity of the product.
Retrospective analysis is acceptable for simpler products (e.g. Household):
actual sales v projections
profiling customers who purchase the product
analysis using Pricing data e.g. age groups of customers
claim acceptance and rejections ratios
complaints volumes
performance; expectations -v- actual
If detriment is found then take action

9. Product Governance Designing Distributing Taking action Monitoring
Whenever monitoring identifies an issue it will be necessary to take action, even if this is simply to note that no action is required.
Designing
Distributing
Taking action
Monitoring

10. Target Markets

11. Target Markets Designing Distributing Taking action Monitoring
Target Markets are your intended customers so they are central to the governance process.
Designing
Distributing
Taking action
Monitoring

12. Target Markets Overview:
Provides clarity on who the product is intended for (and who it is not).
Customers who have common characteristics at a generic level.
Need to consider financial capability and level of information available.
Applies to all on-sale products but not closed back-books.
Target markets will be shared with distributors.
Failing to properly consider customer needs or poorly defining the target market could create customer detriment and a mis-selling exposure.
Proportionate and appropriate to recognise the complexity of the product.

13. Which customers are in or out of scope:
Target Markets
Which customers are in or out of scope:
Firms should not assume that a product is suitable for the mass market.
Where the product is designed for the mass market are there any customers on the on the margins due to eligibility or exclusions?
What limitations might inhibit a customer from getting full value from the product? Can this be mitigated using underwriting and point of sale questions?
Is the product simple to understand or does it require a level of financial capability?
What are the potential risks from buying the product, do these constrict the Target Market?
Marketing messages have to be aligned to the Target Market.

14. Target Markets Sharing: Target markets to be shared with distributors:
aid training/ awareness of the manufacturer’s intent for the product
provides a reference point for developing demands and needs
does not inhibit a distributor selling to a customer who is outside of the Target Market where the product meets their demands and needs
The criteria and level of granularity should be proportionate, varying by product and customer types.
If there are multiple customer segments in the Target Market (e.g. vulnerable or different levels of financial capability) they may have different information needs.

15. Target Markets Sharing:
Additionally, manufacturers will share information on:
the insurance product, including any risks and costs
product approval process
identified target market
distribution strategy

16. A couple of examples

17. Product Governance Example (Pet)
Target Markets
Product Governance Example (Pet)
Where Lifetime Pet Insurance is offered has consideration been given to age thresholds:
premium increases
exclusion of certain types of conditions
higher excess/ co-insurance
If these features are included in the product are these brought to the customer’s attention at point of sale or later on when they are triggered?
What information is in the marketing and policy literature?
How would these limitations affect the customer’s demands and needs?
Does this alter the target market?
Customers are likely to focus on the immediate price and terms but for a lifetime product the longer-term has to be considered.
Pet example reflects FCA letter on Lifetime Pet Insurance (July 2017)
Other considerations:
Cost of the lifetime product (risk/ reward)
The TM customers should intend to retain the pet for the longer term
Availability of alternative cover now and later when the pet is older (perhaps with a pre-existing condition)

18. Product Governance Example (PPI)
Target Markets
Product Governance Example (PPI)
PPI was a mass-market product which was considered simple in design and easy to sell:
protected the customer’s repayment obligations
benefits typically lasted for 12 months
flat rated price

19. Product Governance Example (PPI)
Target Markets
Product Governance Example (PPI)
PPI was a mass-market product which was considered simple in design and easy to sell:
protected the customer’s repayment obligations
benefits typically lasted for 12 months
flat rated price
However there were some caveats, for example:
if the customer had a pre-existing condition this was excluded for the first 12 or 24 months (sometimes for the lifetime of the policy).
for self-employed persons they had to wind up their business to make an unemployment claim.
Target Markets might have helped reduce the potential for mis-selling.

20. Customers should not regret their purchase
Applies to POG but is probably a summary of the wider intentions in IDD

21. Any Questions?

22. Thank you
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