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London, January 2014
Ladies and gentlemen, thank you for the invitation to speak to the Institute today.
The Financial Ombudsman Service is not just about bringing common-sense solutions to problems and disputes. It’s also about plain speaking – feeding back what we see clearly and authoritatively.
We do so in order that others can make better business decisions, more informed consumer choices and prioritise regulatory focus. We do so based on our experience of dealing with complaints from consumers.
So we speak conscious that what we see represents only a part of a wider picture of consumer and industry experience. But it is a valuable and I think often revealing part.
For the past five years much of the public discourse about financial services has been focused on banks and banking. Consumers and banks, regulators and banks, government and banks.
The competing assessments of both the problem and the solution for financial services has, perhaps inevitably, focused on the particular issues of the banking sector. That is not surprising given the journey that banks and their customers have been on for the past 5 years and more.
And of course that focus has been reflected in the workload of the ombudsman service. As you will have seen from our plans for next year and the latest edition of ombudsman news, payment protection insurance continues to dominate our inbox.
And if it’s not PPI, then paid for bank accounts, interest rate swaps, credit card protection etc, all bring out similar themes of banks and their past relationship with customers. By any measure the issues at stake are large.
PPI is estimated to have involved well over 40 million sales, and the costs of correcting systemic past failings is counted at £15bn and rising.
The burdens placed on the ombudsman service have been entirely unprecedented – we received over 400,000 PPI cases in 2013 alone.
To put that in some context, that is over 75% of our caseload and while many of you might contrast it with the peak of "mortgage endowments" – be aware that PPI is at least five times larger.
But underneath all this tectonic activity the position of insurance (and investment) has progressed almost unremarked. Indeed sometimes it has been obscured.
For example, complaints about insurers have not exploded in volume, but nor are they now falling rapidly. So today I want to set some of the record straight and contribute to the debate about the future of insurance in a changing market.
Insurance is of course a business built on assurance. We trust that in hard times the insurer will help, and will meet its commitment – not to overcome the terrible events that may befall us – but at least to help mitigate the financial consequences.
So I think it is really important to start my remarks today on a positive note. We all rely on insurers to ‘step up to the plate’ when things get tough. And things can scarcely get tougher for those suffering the effects of flood and storm this winter.
A lot of people assume that floods and major storms are the bread and butter of my business as ombudsman. Far from it.
In fact what we see are insurers going to great lengths to help, to step in and try to resolve the distressing and difficult problems of flooded or storm-damaged homes.
Yes, of course there can be issues – not least the ability of the industry to maintain cover. And yes, in a few cases things don’t go according to plan. But those genuinely seem to be very much the exception. The rule is an industry that responds well to major crises.
That is the industry at its best. But, I still see an industry – or perhaps to be fair large parts of it – that relies too heavily on that infamous small print.
As you will recall, we dealt with many cases stemming from Icelandic volcanic ash disruption. Was an ash cloud weather or not? Or rather, when customers were stranded across the continent by circumstances outside their control, was it understandable that they looked to their travel insurer for assistance? After all, their insurer stressed the benefits of an anxiety free holiday.
And when you pause to look down the list of the cases we handle and in particular the number of cases we ‘uphold’ – that is, where we require the business to change its approach – many parts of insurance remain well represented. Some surprisingly so.
High uphold rates in areas like warranties, mobile phone insurance, and home emergency cover may not surprise, but should still disappoint you. However high uphold rates in more ‘traditional’ areas like motor insurance and travel are less easy to explain.
I should I think also pause here to note that the list I started with today – the list of large scale complaints about banks – has its fair share of insurance products in the story.
On another occasion, we might discuss the extent to which the insurance industry can insulate itself from responsibility for the ways in which its products are sold by others. For what it is worth, I think the industry will need to place far greater weight on the fair distribution of its products.
Reform has already taken place in investment, and it is arguably overdue in insurance. But any reform will need to be set against a background of rapidly changing market interactions. So today I want to concentrate more on those changing circumstances; how insurers and customers will interact in future and how some old stories might be retold in new circumstances.
Let me start somewhere familiar. It has never been attractive to see cover held out with one hand, but quietly, surreptitiously and deliberately largely swept aside with the other.
Of course insurance can be complex. Small print can matter, and yes, customers are well advised to think before they buy. But consider redundancy cover that in fact excludes all those circumstances where people lose their job, except formal compulsory redundancy. Or health cover, that largely excludes mental health, or chronic conditions.
We here may understand the rationale for the terms – but do these product features and descriptions build trust?
These are not of themselves new issues. But insurance and its customers face new circumstances. And those new circumstances are putting old challenges in a very new context.
The most fundamental change – and certainly the most rapid, is the internet and the new opportunities it provides for contact between insurance and its customers.
Comparison sites have intensified pressures on insurers to compete primarily on price. And have added to pressure on consumers to view insurance as a homogenous product – where price is the only meaningful choice differential.
This industrialised commoditisation of many retail insurance products brings benefits. It allows large scale comparison at speed. It provides, at least for tech savvy customers, great opportunities to uncover best value. And it provides insurers and other market participants with new routes to consumers and new opportunities to attract and retain our business. But it also has a darker side.
It intensifies the temptation to shave cover through exclusions on exclusions. And it encourages unsustainable pricing policies, with introductory offers and headline discounts that would seem most at home in the local carpet warehouse.
These wider market structure developments are already feeding through into the ombudsman’s inbox.
Today we see the challenges of ensuring that commoditised products and digital distribution channels result in fair outcomes for customers – with products and terms that are well matched to customer needs and information shared accurately between the various participants in the distribution chain.
And here lies the first challenge that the ombudsman is already being called on to tackle. Consumers have high expectations of the ability of digital channels to shape suitable offers. So it won’t be a surprise to learn that consumers are increasingly drawing to our attention new problems brought about by these new circumstances.
We have all become used to our digital retailer bombarding us with increasingly accurate recommendations for potential purchases. Offers doubtless carefully crafted by my previous buying habits and location, and perhaps a wider set of demographic and other data that retailer holds about me – as well of course as by the retailer’s own commercial considerations.
So in this data rich world is it reasonable for my digital insurer to draw my attention to a product that – say – I cannot really use because I am too old, or for which I have the wrong type of employment or health history?
And thinking now about price as well as others terms, is it right, in a contract that is after all typically one of "utmost good faith", for an insurer not just fail to reward loyalty, but to adopt practices which seem to positively penalise it?
Can the ombudsman say with confidence that the insurer here has acted fairly and reasonably in all the circumstances?
My concern is that these early case issues presage wider-ranging challenges for the industry and its customers.
After all we have seen in banking the corrosive effect that unsustainable pricing can have on the relationship between businesses and their customers.
We have seen the damage that can be done, not just to the interests of customers but also to the proper interests of efficient companies seeking to deliver sustainable value for their customers.
And we have seen the baleful impact on trust of pricing arrangements designed to trap the unwary, the careless and the busy.
And does our data rich world provide new opportunities and threats that must start to re-shape what we mean by insurance? It certainly starts to reshape what we can reasonably expect the parties to know about the circumstances that underpin the policy.
Let me pick an old example familiar to many here I am sure. Have I remembered correctly all my previous claims and driving convictions? And those of my partner? If I am incorrect, was that because I am I trying to hide unattractive truths, or simply because I am forgetful?
This memory test may have been a sensible – indeed necessary – process in insurance’s past. But can it be its future?
Surely the question today should be why would an industry place this test on its customers? Shouldn’t I, as the customer, have confidence that the insurer has this correct information to factor into its offer to me?
So it’s good to see the industry thinking how it can move in this direction. I am sure there is further to go.
The data revolution is a fact of life, and its impacts on retail financial services generally, and insurance in particular, have yet to be understood. The information now readily available to me as an informed customer about my health (a range of underlying measurements of all those things that until recently were seldom – if ever – measured ), is unprecedented.
Gadgets can, if I choose, provide me with megabytes of data about my activity levels, my vital signs and so forth. My moment-by-moment location is typically tracked by my phone, and in my car tracked again by my sat nav.
Meanwhile home automation is on the point of providing similar data about the ‘vital signs’ of my home. And in case you think I have forgotten investment questions today – let me add the information now available about my expenditure patterns, about my life expectancy – information that is becoming yet richer and deeper.
Precisely what impact this will all have is for our future. But a lot of this story is with us now.
I think this is an exciting future. A future certainly of challenge, but also of real opportunity to strike a new relationship between insurers and consumers. But it seems to me inevitable that we will also face significant and perhaps painful change. These new themes will draw out new problems, new disputes.
The ombudsman service is already thinking ahead. We presently have an independent review underway to give us a better sense of what the future may hold for customers and financial businesses – and what ‘complaining’ may be like in the next decade. We hope financial businesses, consumer groups and other experts will contribute to our developing thinking here.
But the ombudsman also has a role today in looking at the issues that arise from this rapidly evolving new environment for insurance. One benefit of an ombudsman scheme is that it can respond promptly to changing circumstances. We will need to do so.
I am sure that we won’t again wait 100 years and more for Insurance Law reform. But I am also sure that the law today will need fresh insight and development to meet these new challenges.
And that is where the ombudsman can play a part. These issues will come to be tested in the cases we deal with. Not in a big bang, but through the steady development of case decisions on the issues in question.
Our ombudsman decisions are published. We set out our approach with care. And of course we directly involve businesses and consumers in the decision making process.
But I hope, and indeed expect, that the ombudsman will not bear the full brunt of adjudicating these new circumstances.
There is, I suggest, a role for the industry itself, with regulators, consumers and others to tackle some of these questions upfront. Learning the lessons from large scale failures elsewhere, but also bringing fresh thinking and innovation to some new problems.
There are many questions left unanswered. I want the ombudsman to work with its stakeholders in consumer groups, regulators and industry to understand the issues and to help ensure that the decisions we make keep in touch and stay relevant for our fast-changing world.