1. Conduct Risk
Ger Bradley
Eamonn Phelan
19 May 2015

2. Background
November 15, 2018

3. 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

4. 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

5. 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

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

7. Regulatory views
November 15, 2018

8. CBI’s Overall Risk Rating
November 15, 2018

9. 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

10. 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

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

12. 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

13. 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

14. Example – Price Optimisation
November 15, 2018

15. 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”

16. Price Optimisation
View 3

17. Price Optimisation

18. Price Optimisation

19. 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.

20. 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

21. Discussion points
November 15, 2018

22. 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