27 March 2023
6 min
Associate Consultant
Legacy products can be an important part of many life insurers businesses. The potential for them to be administered on outdated systems and potentially with higher charges raises the question of whether these products always provide good outcomes for consumers.
The Financial Conduct Authority (FCA) released their finalised guidance on Consumer Duty in July 2022, with all firms expecting to have implemented the standards of the Duty for all new and existing products by 31 July 2023. For legacy back-books, the FCA has recognised the potential complexity of reviewing these products so has allowed a one-year extension, with implementation being required by 31 July 2024. This doesn’t mean that insurers can relax though. Following the release of their “Dear CEO” letter in February 2023, the FCA have made a clear warning to firms that they should not be complacent in the reviews of their closed-book products as they believe a lot of work will need to be done in order to fully comply by the deadline. Their tone makes it clear that the new duty set higher and clearer standards of consumer protection and that there is work to be done.
One of the main challenges in reviewing the appropriateness of legacy products in light of the Duty is the volume of business that some firms hold. Insurance groups who have been active in buying books of business are likely to be most impacted. It’s expected that insurers with large books of closed business will need to act early to review these products, as it’s anticipated to be a rigorous process to achieve compliance with the Duty. As well as the volume of business, many legacy products are held on outdated legacy systems which can cause strain in various ways. For example, they can be costly to maintain and pose operational risks such as poor data, manual processes leading to data errors and key person risk which can have a negative impact on customer outcomes.
Charges that have been allocated to legacy business also tend to be higher than is seen for newer products. Although it could be argued this is to offset the more costly systems used to house such products, firms are required to demonstrate under the Duty a “fair relationship between the price paid for a product or service and the overall benefit a consumer receives from it”. This may lead to the charging structure currently in place providing unsatisfactory outcomes for consumers, with better alternative products now available in the market. Firms also need to check that there are no hidden or unexpected costs for customers, or other deterrents to transferring.
Customer journeys for those in legacy business may not be as comprehensive as those for new customers, where digital journeys and tooling are greatly helping consumers to understand their products and the associated risks more clearly and also to provide faster and easier communications with insurers. Legacy policyholders may be burdened with longer wait times on claims processes, poorer customer service and outdated terms and conditions. It is important that thought is put into how these policies can be improved to ensure legacy customers are not disadvantaged on their overall level of service compared with newer cohorts and this should be considered across all possible sales channels too.
The policyholder demographic within a closed-book portfolio will often include older generations and long-standing consumers who are disengaged, and potentially vulnerable to harm without the right support. A plan will need to be put in place as to how an insurer will re-engage with these customers to ensure they can deliver good outcomes for them.
Whilst Consumer Duty brings with it challenges on how insurers can demonstrate compliance with their legacy business by the end of July 2024, it also gives insurers the opportunity to provide good outcomes that will be genuinely valued by customers by putting their needs at the centre of their business decisions.
There are many ways insurers can tackle these challenges to help with their implementation of the Duty. These include:
Perform product simplification where legacy products are found to be too complex. This could include exercises such as fund rationalisations;
Refining their processes to obtain better volumes of granular data to evidence of good outcomes for policyholders;
Move legacy customers onto the latest products and close down costly and outdated legacy systems;
Ensure charging structures on closed-book business is appropriate and fair for the benefits provided;
Update policyholder communications and product literature so that clear information can be found in a timely manner; and
Undertake an exercise to re-engage consumers to ensure good outcomes can be delivered to them
Insurers are expected to engage with the FCA to show how they’re approaching the variety of challenges posed to them and the actions they intend on carrying out in order to achieve compliance with the Duty.
For a conversation on how we can support you with implementing the Consumer Duty requirements or what they mean for your legacy business please get in touch with one of our team, Karen Brolly, Paul Waters and Siobhan Lough.
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