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PROD 4.2 Manufacture of insurance products

1Product governance arrangements

PROD 4.2.1R

A firm which manufactures any insurance product must maintain, operate and review a process for the approval of:

  1. (1)

    each insurance product; and

  2. (2)

    significant adaptations of an existing insurance product,

in each case before it is marketed or distributed to customers.

[Note: first subparagraph of article 25(1) of the IDD]

PROD 4.2.1AG

3For the purposes of PROD 4.2:

  1. (1)

    whether a proposed change to the product would be a ‘significant adaptation’ should include consideration of the potential impact the adaptation may have on an existing or potential customer (when compared to the unadapted version of the product);

  2. (2)

    a ‘significant adaptation’ in relation to a non-investment insurance product may include, but is not restricted to, a proposed change to the insurance coverage, costs, exclusions, excesses, limits or conditions and any other significant change to the terms and conditions.

PROD 4.2.2R

The product approval process referred to in PROD 4.2.1R must be proportionate and appropriate to the nature of the insurance product.

[Note: second subparagraph of article 25(1) of the IDD]

PROD 4.2.3G

Manufacturers should take into account the following when considering whether the product approval process is proportionate and appropriate:

  1. (1)

    the complexity of the insurance product;

  2. (2)

    the degree to which publicly available information can be obtained;

  3. (3)

    the nature of the insurance product and the risk of consumer detriment related to it;

  4. (4)

    the characteristics of the target market; and

  5. (5)

    the scale and complexity of the relevant business of the manufacturer or distributor.

[Note: recital 2 to the IDD POG Regulation]

PROD 4.2.3AG

3In addition to, and/or by way of elaboration of, the factors set out in PROD 4.2.3G, for a non-investment insurance product a firm should take into account:

  1. (1)

    the potential risk, and possible levels, of harm to customers if the product design is flawed, in particular, due to the potential scale of harm if the product is intended for a wide target market;

  2. (2)

    the nature of the cover that the product is intended to provide;

  3. (3)

    whether the distribution arrangements could mean customers are at a greater risk of not receiving fair value from the insurance product, for example where:

    1. (a)

      the insurance product will be distributed with additional products;

    2. (b)

      where the insurance product will be distributed on an ancillary basis to another product; or

    3. (c)

      there is complexity in the distribution arrangements including the use of multiple parties in the distribution chain or reliance on persons not regulated under FSMA when selling the insurance product;

  4. (4)

    the nature and complexity of the firm’s existing or intended customer base, for example whether it includes or is likely to include;

    1. (a)

      different types of customers with varying characteristics including in relation to their understanding of financial matters;

    2. (b)

      a significant number of vulnerable customers;

    3. (c)

      a significant number of customers of long tenure;

  5. (5)

    any particularly notable features of, or relating to, existing products (including how it has been distributed).

PROD 4.2.4G

For the purposes of PROD 4.2.2R proportionality means that the product approval process should be relatively simple for straightforward and non-complex products that are compatible with the needs and characteristics of the mass retail market. On the other hand, in the case of more complex products with a higher risk of consumer detriment more exacting measures should be required.

[Note: recital 2 to the IDD POG Regulation]

PROD 4.2.4AG
  1. (1)

    3In relation to a non-investment insurance product, PROD 4.2.2R does not allow a firm to assume a simple product approval process will be appropriate for a product intended for a mass retail market even if the product and/or distribution arrangements are straightforward and not complex. For example, the potential risks and levels of harm which could result even from a straightforward and non-complex product, with simple distribution arrangements, intended for the mass market could mean that more exacting measures are required.

  2. (2)

    An example of a straightforward and non-complex product could be cover for a single item (such as mobile phone insurance), or in relation to a single risk (such as ticket cancellation insurance), with straightforward distribution arrangements. However, there could be potential risks of such a product not providing fair value and therefore potentially leading to significant levels of harm. Firms should ensure the product approval process has the necessary measures to identify and mitigate any potential risks and harms.

Product approval process

PROD 4.2.5UK

24(1) Manufacturers shall maintain, operate and review a product approval process for newly developed insurance products and for significant adaptations of existing insurance products. That process shall contain measures and procedures for designing, monitoring, reviewing and distributing insurance products, as well as for corrective action for insurance products that are detrimental to customers. The measures and procedures shall be proportionate to the level of complexity and the risks related to the products as well as the nature, scale and complexity of the relevant business of the manufacturer.

[Note: article 4(1) of the IDD POG Regulation]

PROD 4.2.5AR

3For a non-investment insurance product, a firm must ensure a product approval process has all necessary measures and procedures for identifying whether the product is, or remains, appropriate to be marketed or distributed to customers in light of the requirements in PROD 4.2.14A (Fair value for non-investment insurance products: individual insurance product and packages) to PROD 4.2.14SR (Fair value for non-investment insurance products: additional provisions).

PROD 4.2.6UK

24(2) The product approval process shall be set out in a written document (“product oversight and governance policy”), which shall be made available to the relevant staff.

[Note: article 4 (2) of the IDD POG Regulation]

PROD 4.2.7UK

29 Relevant actions taken by manufacturers in relation to their product approval process shall be duly documented, kept for audit purposes and made available to the Financial Conduct Authority upon request.

[Note: article 9 of the IDD POG Regulation]

PROD 4.2.8UK

24(3) The product approval process shall

  1. (a) ensure that the design of insurance products:

    1. (i) takes into account the objectives, interests and characteristics of customers;

    2. (ii) does not adversely affect customers;

    3. (iii) prevents or mitigates customer detriment;

  2. (b) support a proper management of conflicts of interest.

[Note: article 4(3) of the IDD POG Regulation]

PROD 4.2.9UK

24(4) The manufacturers’ body or structure responsible for the manufacturing of insurance products shall:

  1. (a) endorse and be ultimately responsible for establishing, implementing and reviewing the product approval process;

  2. (b) continuously verify internal compliance with that process.

[Note: article 4(4) of the IDD POG Regulation]

PROD 4.2.10UK

25(4) Manufacturers shall ensure that staff involved in designing and manufacturing insurance products has the necessary skills, knowledge and expertise to properly understand the insurance products sold and the interests, objectives and characteristics of the customers belonging to the target market.

[Note: article 5(4) of the IDD POG Regulation]

PROD 4.2.11UK

24(5) Manufacturers designating a third party to design products on their behalf shall remain fully responsible for compliance with the product approval process.

[Note: article 4(5) of the IDD POG Regulation]

PROD 4.2.12UK

24(6) Manufacturers shall regularly review their product approval process to ensure that that process is still valid and up to date. They shall amend the product approval process where necessary

[Note: article 4(6) of the IDD POG Regulation]

Manufacture by more than one firm

PROD 4.2.13UK

23(4) An insurance intermediary and an insurance undertaking that are both manufacturers within the meaning of Article 2 of this Delegated Regulation, shall sign a written agreement which specifies their collaboration to comply with the requirements for manufacturers referred to in [PROD 4.2.1R, PROD 4.2.2R, PROD 4.2.29R, PROD 4.2.33R and PROD 4.2.34R] the procedures through which they shall agree on the identification of the target market and their respective roles in the product approval process.

[Note: article 3(4) of the IDD POG Regulation]

PROD 4.2.14R

In circumstances other than PROD 4.2.13UK2, when firms collaborate to manufacture an insurance product, they must outline their mutual responsibilities in a written agreement.

Fair value for non-investment insurance products: individual insurance product and packages

PROD 4.2.14AR

3For a non-investment insurance product, a firm must ensure that the product approval process identifies whether the product provides fair value to customers in the target market including whether it will continue to do so for a reasonably foreseeable period (including following renewal).

PROD 4.2.14BR
  1. (1)

    3Where a non-investment insurance product is intended to be distributed with one or more additional products, a firm must identify whether:

    1. (a)

      each component product; and

    2. (b)

      the package as a whole,

    will provide fair value to the customer including that it will continue to do so for a reasonably foreseeable period (including following renewal).

  2. (2)

    The assessment referred to in (1) must include (but is not limited to) consideration of:

    1. (a)

      the value of the core insurance product;

    2. (b)

      the value of any additional products; and

    3. (c)

      the overall price of the package to the customer, taking into account the proposed distribution arrangements.

  3. (3)

    A firm is not required to assess the value of a component product under (1) where the component is a non-investment insurance product for which the firm is not a manufacturer.

Fair value for non-investment insurance products: record keeping and steps following value assessment

PROD 4.2.14CR
  1. (1)

    3A firm must:

    1. (a)

      be able to clearly demonstrate how any non-investment insurance product, additional product or package provides (and will provide for a reasonably foreseeable period) fair value; and

    2. (b)

      make and retain a record of the value assessment required by PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

  2. (2)

    Where a firm is unable to both:

    1. (a)

      identify; and

    2. (b)

      clearly demonstrate,

    that the insurance product and, where relevant, the package will provide fair value, the firm must not market the product or permit the product to be distributed (whether directly or through another person), or must have ensured appropriate changes have been made so that fair value will be provided.

Fair value for non-investment insurance products: relevance through the product approval process

PROD 4.2.14DR

3A firm must consider the value considerations in PROD 4.2.14AR and, where relevant, PROD 4.2.14BR throughout every stage of the product approval process in PROD 4 including, in particular, when:

  1. (1)

    identifying the target market and the interests, needs, objectives and characteristics of such customers (PROD 4.2.15R to PROD 4.2.21AG);

  2. (2)

    undertaking product testing (PROD 4.2.22UK to PROD 4.2.26G); and

  3. (3)

    selecting any distribution channel (PROD 4.2.27UK to PROD 4.2.32DR).

Fair value for non-investment insurance products: meaning of value

PROD 4.2.14ER

3In PROD 4, ‘value’ means the relationship between the overall price to the customer and the quality of the product(s) and/or services provided. The assessment of value must include consideration of at least the following:

  1. (1)

    the nature of the product including the benefits that will be provided, their quality, and any limitations (for example in the scope of cover, exclusions, excesses or other features);

  2. (2)

    the type and quality of services provided to customers;

  3. (3)

    the expected total price to be paid by the customer when buying or renewing the insurance product, and the elements that make up the total price. This will need to include consideration of at least the following:

    1. (a)

      the pricing model used to calculate the risk premium:

      1. (i)

        for the initial policy term; and

      2. (ii)

        any future renewal;

    2. (b)

      the overall cost to the firm of the insurance product (including the underwriting and operating of the product) and, where relevant, any other components of a package;

    3. (c)

      the individual elements of the expected total price to be paid by the customer including, but not limited to, the price paid for:

      1. (i)

        the insurance product, including any additional features which are part of the same non-investment insurance contract;

      2. (ii)

        any additional products, including retail premium finance, offered alongside the insurance product;

      3. (iii)

        the distribution arrangements, including the remuneration of any relevant person in the distribution arrangements, and including where the final decision on setting the price is taken by another person);

  4. (4)

    how the intended distribution arrangements support, and will not adversely affect, the intended value of the product.

PROD 4.2.14FR

3When considering the value of a non-investment insurance product under PROD 4.2.14A and, where relevant, PROD 4.2.14BR, a firm must not rely on individual customers to consider whether they are making fair value purchases in place of any part of the firm’s own assessment, in particular where an insurance product is manufactured to be distributed either with additional products or on an ancillary basis to another good or service.

Fair value for non-investment insurance products: guidance on reasonably foreseeable period

PROD 4.2.14GG
  1. (1)

    3Firms will need to consider the matters in PROD 4.2.14ER and PROD 4.2.14ME to identify if there is fair value both for the initial term of a non-investment insurance product and renewals for a reasonably foreseeable period. What may constitute a ‘reasonably foreseeable period’ will depend on the type of the non-investment insurance product (including the intended term of any policy and the underlying risk) and the expected length of time a customer in the target market will keep the product, including in particular where it would be reasonably expected that a customer would renew the product on a number of occasions.

  2. (2)

    When considering whether a product will provide fair value for a reasonably foreseeable period, a firm should consider at least:

    1. (a)

      any expected changes to the total price a customer would pay during the period that they hold the product (including at the first or any subsequent renewal or any other point in time);

    2. (b)

      any expected change to the insured risk over time, for example in the nature, financial value or a customer’s usage of an underlying good to which the insurance relates;

    3. (c)

      whether the number of expected claims that may be made, or financial value of any such claim, would be expected to change over time due to the nature of the product, the customer’s needs or any relevant features of the insured risk, for example:

      1. (i)

        as a result of expected depreciation in the value of the insured asset;

      2. (ii)

        where the customer’s need, or eligibility, for certain cover may change including as a result of features identified in (b) or where claims have been made;

    4. (d)

      whether the total premiums expected to be paid over the length of time a customer would hold the product would exceed the benefits that could be received from claims for example due to cover limits applying across the foreseeable period (taking into account any deductions permitted by the contract such as any relevant policy excess for such claims);

    5. (e)

      whether the benefits offered by the policy at inception may not be available at subsequent renewals, due to exclusions or claims limits, without any commensurate reduction in the premium;

    6. (f)

      whether customers could be discouraged from or be unable to renew due to the level of ongoing premiums including increases at renewal meaning they may not be receiving the full intended benefits of the product (where these are intended to be spread across the reasonably foreseeable period).

Fair value for non-investment insurance products: general

PROD 4.2.14HG
  1. (1)

    3When considering the costs of, or associated with, any distribution arrangements, firms should consider the justification in value terms of any difference between the risk price and the total price paid by the customer including where the difference is mainly due to the costs (including remuneration) of any person in the distribution arrangements or where this is due to the combined costs (including remuneration) of multiple parties involved in the distribution arrangements.

  2. (2)

    Where a firm identifies that an insurance product, package or individual component has poor value or there is an unreasonable relationship between either the cost to the firm and the price paid by the customer, or the price paid by the customer and product quality or service provided, the product or package will not be providing fair value. However, a firm should not assume there is fair value simply due to the absence of an unreasonable relationship in the costs or where they identify an absence of poor value. Firms will need to consider all relevant aspects of value in the particular context and consider whether overall there is fair value provided.

  3. (3)

    Where a non-investment insurance product has negligible, or no obvious, benefit for the customer this will not be providing fair value regardless of the price of the product. For example, the product will not provide fair value where the cover under the non-investment insurance contract is significantly limited, whether by exclusions or limits on the amount that would be paid in settlement, meaning that the customer is unlikely to be able to make a successful claim or where the customer could conclude it is not in their interests to make a claim due to the disproportionate time or effort which would be required, compared to the claim settlement which would be expected.

  4. (4)

    When assessing whether a package provides fair value for the purposes of PROD 4.2.14BR, a firm will need to consider both the components individually and the package as a whole to identify whether there is fair value. This should include whether there is a risk that the individual components do not provide the same level of value to the customer when combined in a package. For example, where the package includes more than one non-investment insurance product, a firm should consider the type and level of insurance cover provided by each of these products and whether this would result in duplicate insurance cover that could detrimentally affect the value of the package.

Fair value for non-investment insurance products: retail premium finance guidance

PROD 4.2.14IG
  1. (1)

    3Where the manufacturer will provide, or arrange for another firm to provide, the option for customers to buy a non-investment insurance product using retail premium finance, it will need to consider if the additional costs of, or relating to, the retail premium finance have a material detrimental effect on the value of the insurance product when the two products are taken together.

  2. (2)

    When assessing the value of any particular retail premium finance under PROD 4.2.14BR, a manufacturer should consider the relationship between:

    1. (a)

      the total price a customer would pay (including the applicable APR) for the retail premium finance; and

    2. (b)

      the quality of that retail premium finance including any relevant factors and features. For example, any benefit that a customer could have from using retail premium finance including the ability to spread the cost of a non-investment insurance contract instead of paying up front, taking into account the higher overall price the customer will have to pay.

Fair value for non-investment insurance products: information to be used

PROD 4.2.14JR
  1. (1)

    3When assessing value, a firm must use all necessary and appropriate data and information available to it.

  2. (2)

    For the purposes of (1) the data and information a firm should consider using includes, but is not limited to:

    1. (a)

      information available to the firm internally including:

      1. (i)

        customer research;

      2. (ii)

        claims information such as handling times, frequency, severity of claims costs (including total costs and average per claim), claims ratios, rates of and reasons for claim acceptance/declinature, both expected for the product and/or any actual information from a comparable product; and

      3. (iii)

        complaints data (including root cause analysis and handling times), both expected for the product itself and/or any actual information from a comparable product;

    2. (b)

      public information or information obtainable by the firm from external sources including analysis of similar insurance products available from other firms and, where relevant, data published as part of the FCA’s work on value measures in the general insurance market;

    3. (c)

      information available to the firm specifically from persons in the distribution arrangements, including:

      1. (i)

        remuneration and its impact on the value of the product, package or component part;

      2. (ii)

        levels or quality of service provided by any person in the distribution arrangements; and

      3. (iii)

        any results of monitoring and oversight of the processes of any persons in the distribution arrangement (for example, call monitoring or file checks) including in relation to other products that person distributes.

PROD 4.2.14KG

3The information that a firm will need to use for PROD 4.2.14JR will depend on the nature of the particular non-investment insurance product and (where relevant) the package, the particular distribution arrangement(s), the target market, the nature of any actual customer base, and any existing information on customer outcomes (for example claims experiences, outcomes of claims and complaints related data).

Fair value for non-investment insurance products: compliance with fair value requirement

PROD 4.2.14LG

3The following evidential provision provides examples of arrangements the FCA considers will breach PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

PROD 4.2.14ME
  1. (1)

    3A firm should not have a non-investment insurance product where the difference between the risk price to the firm and the total price paid by the customer bears no reasonable relationship to:

    1. (a)

      the actual costs incurred by the firm or any another person involved in the distribution arrangements;

    2. (b)

      the quality of any benefits (including of the insurance product or any additional products); or

    3. (c)

      the costs or quality of any services provided in connection with the insurance product or additional products, by the manufacturer or any another person involved in the distribution arrangements.

  2. (2)

    A firm should not increase the price of an insurance product based on:

    1. (a)

      policies being subject to auto-renewal compared to policies that are not subject to auto-renewal;

    2. (b)

      the customer’s vulnerability or any protected characteristic(s) (unless the firm is clearly permitted to rely on them under the Equalities Act 2010); or

    3. (c)

      where customers purchase the policy using retail premium finance,

    unless the firm has an objective and reasonable basis for making the change.

  3. (3)

    A firm should not use an estimated final price to the customer to assess value that does not represent the expected total price to the customer including any additional products the firm expects to be purchased by the customer. For example, where the firm is responsible for providing or making available retail premium finance (the costs of which will be part of the total price paid by the customer).

  4. (4)

    Contravention of any of (1) to (3) may be relied on as tending to establish contravention of PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

Fair value for non-investment insurance products: distribution arrangements

PROD 4.2.14NR

3A firm must, as far as reasonably possible, ensure the distribution arrangements for a non-investment insurance product avoid or minimise the risk of negatively impacting the fair value of the insurance product or package. This includes, but is not limited to:

  1. (1)

    avoiding or reducing the risks arising from:

    1. (a)

      any remuneration of a party, or parties, involved in the distribution arrangements increasing, directly or indirectly, the total price paid by the customer without adequate monitoring or oversight of the nature, level and fairness justification for their inclusion; or

    2. (b)

      providing discretion to another person to set the final price, for example through a net pricing arrangement, without adequate monitoring or oversight of the final price paid by the customer;

  2. (2)

    ensuring that appropriate arrangements will be in place to identify if the actions of another person involved in the distribution arrangements would adversely affect the value of the insurance product or package; and

  3. (3)

    reducing the scope for the overall effect of any distribution arrangements to detrimentally affect the value of the products or package including where the cumulative effects of the remuneration of multiple parties unreasonably add to the overall price paid by the customer.

PROD 4.2.14OG
  1. (1)

    3Where the firm is considering the effects of the distribution arrangements on value it should consider whether the additional costs of any individual party in the arrangements that add to the total price paid by the customer deliver any, or a proportional, additional benefit. If not, firms should consider how they can be satisfied that the arrangements are consistent with their obligations to be able to clearly demonstrate fair value to the customer.

  2. (2)

    A benefit that could be consistent with fair value might include where the party’s inclusion in the distribution arrangements increases access to the product for customers in the target market in a way that is proportionate to the additional cost involved.

PROD 4.2.14PR

3A firm must obtain from any person in the distribution arrangements all necessary and relevant information to enable it to identify the remuneration associated with the distribution arrangements to allow it to assess the ongoing value of the product, including at least:

  1. (1)

    the type and amount of remuneration of each person in the distribution arrangement where this is part of the premium or otherwise paid directly by the customer, including in relation to additional products (other than where this relates to another non-investment insurance product for which the firm is not a manufacturer);

  2. (2)

    an explanation of the services provided by each person in the distribution arrangements; and

  3. (3)

    confirmation from any firm in the distribution arrangements that any remuneration is consistent with their regulatory obligations including SYSC 19F.2 (IDD remuneration incentives).

PROD 4.2.14QG

3Firms should take into account what is necessary to satisfy PROD requirements together with any wider legal obligations, for example, competition law to which they are subject.

Fair value for non-investment insurance products: additional provisions

PROD 4.2.14RR

3A firm manufacturing a non-investment insurance product must ensure the manufacture of an insurance product is driven by features that benefit the customer and not by a business model which relies on poor customer outcomes to be profitable.

PROD 4.2.14SR

3In relation to a non-investment insurance product to be sold in a package with additional products, a firm must not set or increase the price of those additional products to the customer in a way that detrimentally impacts the package delivering fair value, including where this is done to minimise the financial effects on the firm of reducing the price of, or making other changes to, an insurance product as a result of the fair value assessment.

Target market

PROD 4.2.15R

For each insurance product the product approval process must:

  1. (1)

    specify an identified target market;

  2. (2)

    ensure that all relevant risks to the identified target market are assessed;

  3. (3)

    ensure that the intended distribution strategy is consistent with the identified target market; and

  4. (4)

    require the manufacturer to take reasonable steps to ensure that the insurance product is distributed to the identified target market.

[Note: third subparagraph of article 25(1) of the IDD]

PROD 4.2.15AR

3The effect of PROD 4.2.14AR and, where relevant, PROD 4.2.14BR, when taken together with PROD 4.2.15R, is that a firm will need to be able to show that a non-investment insurance product offers fair value to the specified target market, taking into account in particular their needs, objectives, interests and characteristics.

PROD 4.2.16UK

25(1) The product approval process shall for each insurance product identify the target market and the group of compatible customers. The target market shall be identified at a sufficiently granular level, taking into account the characteristics, risk profile, complexity and nature of the insurance product.

[Note: article 5(1) of the IDD POG Regulation]

PROD 4.2.17UK

25(2) Manufacturers may, in particular with regard to insurance-based investment products, identify groups of customers for whose needs, characteristics and objectives the insurance product is generally not compatible.

[Note: article 5(2) of the IDD POG Regulation]

PROD 4.2.17AR
  1. (1)

    3For a non-investment insurance product, when identifying the target market a firm must identify if there are groups of customers for whom the product or package would not provide the intended level of value identified for PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

  2. (2)

    A firm must take reasonable steps in its use of the distribution arrangements to ensure the product is not distributed to any such groups of customers identified in (1). The information required in PROD 4.2.29R to be provided to distributors must include a clear description of these customers.

PROD 4.2.18UK

25(3) Manufacturers shall only design and market insurance products that are compatible with the needs, characteristics and objectives of the customers belonging to the target market. When assessing whether an insurance product is compatible with a target market, manufacturers shall take into account the level of information available to the customers belonging to that target market and their financial literacy.

[Note: article 5(3) of the IDD POG Regulation]

PROD 4.2.19G

The identification of the target market by the manufacturer should be understood as describing a group of customers sharing common characteristics at an abstract and generalised level in order to enable the manufacturer to adapt the features of the product to the needs, characteristics and objectives of that group of customers.

PROD 4.2.20G

The identification of the target market should be distinguished from the individual assessment at the point of sale to determine whether a product meets the demands and needs and, where applicable, whether an insurance-based investment product is suitable or appropriate for the individual customer.

[Note: recital 5 to the IDD POG Regulation]

PROD 4.2.21G

The level of granularity of the target market and the criteria used to define the target market and determine the appropriate distribution strategy should be relevant for the product and should make it possible to assess which customers fall within the target market. For simpler, more common products, the target market should be identified with less detail while for more complicated products or less common products, the target market should be identified with more detail taking into account the increased risk of consumer detriment associated with such products.

[Note: recital 6 to the IDD POG Regulation]

PROD 4.2.21AG

3In relation to a non-investment insurance product, a firm should consider whether the target market needs to be identified in more detail, even for a simpler, more common product, where there is a material risk of customer harm associated with it.

Product testing

PROD 4.2.22 UK

26(1) Manufacturers shall test their insurance products appropriately, including scenario analyses where relevant, before bringing that product to the market or significantly adapting it, or in case the target market has significantly changed. That product testing shall assess whether the insurance product over its lifetime meets the identified needs, objectives and characteristics of the target market. Manufacturers shall test their insurance products in a qualitative manner and, depending on the type and nature of the insurance product and the related risk of detriment to customers, quantitative manner.

[Note: article 6(1) of the IDD POG Regulation]

PROD 4.2.23G

For the purposes of PROD 4.2.22UK2, manufacturers should include assessments of the performance and risk/reward profile of their insurance product where appropriate.

[Note: recital 8 to the IDD POG Regulation]

PROD 4.2.24UK

26(2) Manufacturers shall not bring insurance products to the market if the results of the product testing show that the products do not meet the identified needs, objectives and characteristics of the target market.

[Note: article 6(2) of the IDD POG Regulation]

PROD 4.2.25R

Manufacturers must consider the charging structure proposed for each insurance product, including examination of the following:

  1. (1)

    whether the costs and charges of the insurance product are compatible with the needs, objectives and characteristics of the target market;

  2. (2)

    where relevant, whether the charging structure of the insurance product is appropriately transparent for the target market, such as that it does not disguise charges or is too complex to understand; and

  3. (3)

    where relevant, whether the charges undermine the return expectations of the insurance product, such as where the costs or charges equal, exceed or remove almost all the expected tax advantages linked to a life policy.

PROD 4.2.26G
  1. (1)

    PROD 4.2.25R does not affect the manufacturer’s freedom to set premiums.

  2. (2)

    In relation to a non-investment insurance contract a firm should consider whether, as a result of the charging structure it has put in place, the overall cost for the customer is consistent with its obligations under PROD 4.2.14AR (and, where relevant, PROD 4.2.14BR),3 the Principles and ICOBS.

  3. (3)

    PROD 4.2.25R should be read in light of a firm’s wider obligations under the Handbook which impose specific restrictions or requirements around what costs and charges may be permissible. For example, the rules in COBS 20.2 govern what may be charged to a with-profits policy when considering its charging structure under PROD 4.2.25R.

Distribution channels and information disclosure to distributors

PROD 4.2.27UK

28(1) Manufacturers shall carefully select distribution channels that are appropriate for the target market, thereby taking into account the particular characteristics of the relevant insurance products.

[Note: article 8(1) of the IDD POG Regulation]

PROD 4.2.28G

To ensure appropriate information for customers, manufacturers should select distributors that have the necessary knowledge, expertise and competence to understand the features of an insurance product and the identified target market.

[Note: recital 9 to the IDD POG Regulation]

PROD 4.2.29R

A firm which manufactures an insurance product, must make available to a distributor:

  1. (1)

    all appropriate information on the insurance product

  2. (2)

    all appropriate information on the product approval process; and

  3. (3)

    the identified target market of the insurance product.

[Note: fifth subparagraph of article 25(1) of the IDD]

PROD 4.2.29AG

3For a non-investment insurance product, the information required by PROD 4.2.29R should include:

  1. (1)

    all appropriate information to enable the distributor to understand the intended value of the insurance product established by the firm;

  2. (2)

    any effect the distributor may have on the intended value that has not been fully taken into account by the firm when assessing value, and therefore which the distributor should take into account; and

  3. (3)

    any type of customer for whom the insurance product is unlikely to provide fair value.

PROD 4.2.30UK

28(2) Manufacturers shall provide insurance distributors with all appropriate information on the insurance products, the identified target market and the suggested distribution strategy, including information on the main features and characteristics of the insurance products, their risks and costs, including implicit costs, and any circumstances which might cause a conflict of interest to the detriment of the customer. That information shall be clear, complete and up to date.

[Note: article 8(2) of the IDD POG Regulation]

PROD 4.2.31UK

28(3) The information referred to in paragraph 2 shall enable the insurance distributors to:

  1. (a) understand the insurance products;

  2. (b) comprehend the identified target market for the insurance products;

  3. (c) identify any customers for whom the insurance product is not compatible with their needs, characteristics and objectives;

  4. (d) carry out distribution activities for the relevant insurance products in accordance with the best interests of their customers as prescribed in [ICOBS 2.5-1R and COBS 2.1.1R].

[Note: article 8(3) of the IDD POG Regulation]

PROD 4.2.32R
  1. (1)

    A manufacturer must make available to any distributor information about the target market assessment.

  2. (2)

    The information made available under (1) must be of an adequate standard to enable distributors to:

    1. (a)

      comprehend the identified target market for the insurance products; and

    2. (b)

      be able to identify any customers for whom the insurance product is not compatible with their needs, characteristics and objectives.

  3. (3)

    A manufacturer is not required to disclose specific information objectively considered to be commercially sensitive if the information it does make available would still allow distributors to meet (2)(a) and (b).

Distribution channels: selecting channels for non-investment insurance products

PROD 4.2.32AR

3In relation to a non-investment insurance product, a firm must not use a distribution channel unless it is able to demonstrate clearly that the channel results in fair value to customers in the target market.

PROD 4.2.32BR

3In relation to a non-investment insurance product, whenever making a change to the distribution arrangements a firm must:

  1. (1)

    obtain all necessary information from the distributor or any other person who will be involved with the distribution arrangement, including that set out in PROD 4.2.14PR; and

  2. (2)

    identify whether the proposed change to the distribution arrangements is consistent with the fair value requirement in PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.

PROD 4.2.32CG

3For PROD 4.2.32BR, a change to the distribution arrangements includes adding a further distribution channel.

PROD 4.2.32DG

3For a non-investment insurance product sold on an ancillary basis to another product or service, for example a motor vehicle, electrical good or a holiday, a firm should consider whether the proposed distribution channel would be appropriate in light of the risk that the customer’s focus is on the core product rather than the insurance product.

Monitoring and review of insurance products

PROD 4.2.33R

A firm must understand the insurance products it offers or markets.

[Note: fourth subparagraph of article 25(1) of the IDD]

PROD 4.2.34R

A firm must regularly review the insurance products it offers or markets taking into account any event that could materially affect the potential risk to the identified target market. In doing so, the firm must assess at least the following:

  1. (1)

    whether the insurance product remains consistent with the needs of the identified target market; 3

  2. (2)

    (in relation to a non-investment insurance product) whether the insurance product remains consistent with the fair value assessment required under PROD 4.2.14AR and, where relevant, PROD 4.2.14BR; and3

  3. (3)

    3whether the intended distribution strategy remains appropriate.

[Note: fourth subparagraph of article 25(1) of the IDD]

PROD 4.2.34AG

3‘Offers’ and ‘markets’ in the requirements in PROD 4.2.33R and PROD 4.2.34R should be read to include ‘renews’ in relation to the renewal of existing non-investment insurance products.

PROD 4.2.34BR

3For a non-investment insurance product, a firm must undertake the regular review required by PROD 4.2.34R:

  1. (1)

    every 12 months; or

  2. (2)

    more frequently where the potential risk associated with the product makes it appropriate to do so.

PROD 4.2.34CG

3For the purposes of PROD 4.2.34BR, the factors that should be taken into account when considering if more frequent reviews would be appropriate include, but are not limited to:

  1. (1)

    the nature and complexity of the product;

  2. (2)

    the nature of the customer base, including whether there are significant numbers of customers of long tenure and/or vulnerable customers;

  3. (3)

    any specific indicators seen in the firm’s assessment of the product’s value to the customer;

  4. (4)

    any indicators of customer harm potentially emerging from the performance of the product (for example through claims and complaints data); and

  5. (5)

    the nature and type of distribution arrangements being used.

PROD 4.2.34DR

3A firm must obtain all necessary and relevant information in order to enable it to properly understand and monitor a non-investment insurance product including verification of the information in PROD 4.2.14PR.

PROD 4.2.34EG
  1. (1)

    3When reviewing non-investment insurance products a firm may group similar products together where this does not detrimentally affect the firm’s ability to review each product appropriately. This includes the need to review whether any individual product, and where necessary a package, is providing fair value.

  2. (2)

    For the purposes (1) ‘similar products’ will be those products that are intended to deliver similar cover and outcomes for customers where the target markets are consistent.

  3. (3)

    A firm should consider the following factors when identifying whether it is appropriate to group products together for review:

    1. (a)

      the risk of customer harm for each individual product;

    2. (b)

      the complexity of each product;

    3. (c)

      the nature of the target market and existing customer base for each product (including the extent to which this includes vulnerable customers);

    4. (d)

      any specific indicators seen in the assessment of value under PROD 4.2.14AR, and where relevant PROD 4.2.14BR which may make it inconsistent to review that product alongside others;

    5. (e)

      any specific indicators of customer harm emerging from the performance of each product; and

    6. (f)

      the nature and type of distribution arrangements for each product.

  4. (4)

    A firm will need to ensure that the grouping of any reviews does not impair the firm’s ability to identify any risk that a product is not delivering fair value or that there is any other issue which could give rise to customer harm in relation to each individual product.

PROD 4.2.35UK

27(1) Manufacturers shall continuously monitor and regularly review insurance products they have brought to the market, to identify events that could materially affect the main features, the risk coverage or the guarantees of those products. They shall assess whether the insurance products remain consistent with the needs, characteristics and objectives of the identified target market and whether those products are distributed to the target market or is reaching customers outside the target market.

[Note: article 7(1) of the IDD POG Regulation]

PROD 4.2.35AR
  1. (1)

    3When reviewing a non-investment insurance product, a firm must consider:

    1. (a)

      whether the insurance product, and where relevant the package, is providing the intended fair value to customers;

    2. (b)

      any impact which the distribution arrangements are having on the value including whether the distribution channels remain appropriate; and

    3. (c)

      whether the use of any retail premium finance arrangement remains appropriate including whether when distributed in a package with a non-investment insurance product it provides fair value.

  2. (2)

    A firm in (1) must:

    1. (a)

      ensure that it has sufficient, good quality management information; and

    2. (b)

      use all appropriate and necessary data and information available to it (whether it holds this information already, the information is publicly available or it is able to obtain it from another person),

    to enable it to consider and assess value including the value actually being provided by the insurance product.

  3. (3)

    The information in (2) that a firm needs to consider whether to use includes, but is not limited to:

    1. (a)

      information available to the firm internally including:

      1. (i)

        customer research;

      2. (ii)

        claims information (such as handling times, frequency, rates of and reasons for claim acceptance and declinature, severity of claims costs (including total costs and average per claim) and claims ratios); and

      3. (iii)

        complaints data (including root cause analysis and handling times);

    2. (b)

      public information or information obtainable by the firm from external sources including analysis of similar insurance products available from other firms and, where relevant, data published as part of the FCA’s work on value measures in the general insurance market;

    3. (c)

      information available to the firm (including what it would be reasonably able to obtain) in relation to any distribution arrangements through which the product is distributed, including:

      1. (i)

        remuneration information;

      2. (ii)

        levels and quality of service provided by the distributor;

      3. (iii)

        ongoing monitoring and oversight reports relating to the distributor’s processes, for example call monitoring or file reviews.

PROD 4.2.35BG

3The information that a firm will need to use for PROD 4.2.35AR(2) will depend on the nature of the non-investment insurance product, (where relevant) the package, the particular distribution arrangement(s), the target market, the nature of the actual customer base, and the firm’s existing information on customer outcomes (for example claims experiences, outcomes of claims and complaints related data).

PROD 4.2.35CG

3For PROD 4.2.35AR(1), a firm should identify whether there is a risk to it continuing to provide fair value where there is a material change in the relationship between the price to the customer and the actual costs to the firm or another party involved in the ongoing service/distribution of the product.

PROD 4.2.36UK

27(2) Manufacturers shall determine the appropriate intervals for the regular review of their insurance products, thereby taking into account the size, scale, contractual duration and complexity of those insurance products, their respective distribution channels, and any relevant external factors such as changes to the applicable legal rules, technological developments, or changes to the market situation.

[Note: article 7(2) of the IDD POG Regulation]

PROD 4.2.36AG

3In relation to a non-investment insurance product, when identifying the appropriate intervals for regular review, firms will need to consider the requirement in PROD 4.2.34BR and also whether any event has happened or any issue has arisen requiring the insurance product to be reviewed outside of the minimum review period.

PROD 4.2.36BR

3For the purposes of showing the requirements in PROD 4.2.1R and PROD 4.2.5UK are met, where a firm makes a change to a non-investment insurance product it must make and retain a record of:

  1. (1)

    the assessment of whether that change would amount to a significant adaptation of the insurance product; and

  2. (2)

    where the assessment in (1) is that the change would not be a significant adaptation, the reasons for that decision.

PROD 4.2.37UK

27(3) Manufacturers that identify during the lifetime of an insurance product any circumstances related to the insurance product that may adversely affect the customer of that product shall take appropriate action to mitigate the situation and prevent further occurrences of the detrimental event. Manufacturers shall promptly inform concerned insurance distributors and customers about the remedial action taken.

[Note: article 7(3) of the IDD POG Regulation]

PROD 4.2.37AR

3For a non-investment insurance product, the review process must:

  1. (1)

    have the necessary measures to be able to identify if the insurance product is not providing fair value; and

  2. (2)

    provide that appropriate actions be taken:

    1. (a)

      for the mitigation and any potential remediation of the harm to existing customers; and

    2. (b)

      to prevent harm to new customers.

PROD 4.2.37BG

3In relation to a non-investment insurance product, the actions firms may need to take for the purposes of PROD 4.2.37A include (and may involve a combination of), but are not limited to:

  1. (1)

    making changes to the product (such as amending policy terms or applying them more favourably to customers in the event of a claim);

  2. (2)

    offering existing customers the option to cancel the non-investment insurance contract without additional cost (for example by waiving cancellation fees or charges);

  3. (3)

    providing customers with a refund of the difference between the premium paid for the non-investment insurance contract and the premium for a fair value version of that product;

  4. (4)

    proposing alternative insurance products, whether offered by the firm or another provider, to existing customers or distributors which provide fair value and which would be compliant with other FCA requirements, for example, ICOBS 5.2 (Demands and needs); and

  5. (5)

    withdrawing the insurance product from continued marketing or distribution.

PROD 4.2.37CG

3Where in the review required by PROD 4.2.34R and PROD 4.2.35UK a firm identifies a breach of any rules in place at the time, it should consider what may be necessary to provide appropriate mitigation and/or remediation of the harm including whether redress should be made. The firm should contact any affected customers where this is necessary to inform them of the issues and of the actions being taken.

PROD 4.2.38UK

28(4) Manufacturers shall take appropriate steps to monitor that insurance distributors act in accordance with the objectives of the manufacturers’ product approval process. They shall in particular verify on a regular basis whether the insurance products are distributed on the identified target market. That monitoring obligation shall not extend to the general regulatory requirements with which insurance distributors have to comply when carrying out insurance distribution activities for individual customers. The monitoring activities shall be reasonable, taking into consideration the characteristics and the legal framework of the respective distribution channels.

[Note: article 8(4) of the IDD POG Regulation]

PROD 4.2.39UK

28(5) Manufacturers considering that the distribution of their insurance products is not in accordance with the objectives of their product approval process shall take appropriate remedial action.

[Note: article 8(5) of the IDD POG Regulation]

PROD 4.2.39AR

3In relation to a non-investment insurance contract, where a firm identifies that the distribution is detrimentally affecting the intended value of the insurance product it must take appropriate remedial measures including, but not limited to:

  1. (1)

    amending the distribution arrangements, including ceasing to use certain distributors or distribution channels;

  2. (2)

    amending remuneration structures;

  3. (3)

    withdrawing the insurance product from continued marketing or distribution.