What is Conduct Risk for Insurers?

In recent years, the Financial Conduct Authority (FCA) has been working towards an agenda they refer to as “conduct risk”.

Customers trust insurers to provide a service that offers maximum value at the best possible price. Conduct risk is a measure of how effectively insurers meet this brief. In short, conduct risk is a question of whether insurers are acting in their customers’ best interests.

Conduct risk is a measure of how well insurers meet the brief of offering maximum value at the best possible price.

What Exactly is Conduct Risk?

The Institute of Operational Risk provides two possible definitions of conduct risk:

Any action from any financial institution, whether it’s a bank or an insurance firm, that detriments the customer or negatively impacts market stability.
The risk that a firm’s behaviour will deliver poor outcomes for customers.

What Does Conduct Risk Mean for Insurers in Practice?

Good practice means providing customers with an insurance product that meets their needs while providing good value for money.

Conduct risk is any action which does not lead to this optimum outcome. Examples might include:

Providing customers with products that offer poor value for money – for example, they might pay too much for cover they don’t need.
Selling policies with exceptions that might lead to gaps in cover.
Selling an insurance product in which the wording means that it’s all but impossible to even make a claim in the first place.

What Drives Conduct Risk?

Sometimes, conduct risk is driven by unethical or unlawful conduct – such as insider trading, or the disclosure of inside information. Yet conduct risk is not always the result of unscrupulous or dishonest insurers acting unethically. Certain examples of poor practice can drive conduct risk in even the best insurance firms.

Examples of Poor Practice Driving Conduct Risk

Internal incentive schemes, where sales teams are offered rewards for hitting sales targets, can drive conduct risk. Such schemes might encourage staff to sell some products over others. Not all of these products may be suitable for all customers.

How to Reduce Conduct Risk in Your Insurance Firm

All insurance firms should develop a conduct risk strategy outlining the steps they’ll take to make conduct risk less likely, while ensuring they deliver the best possible standards of service to their clients.

A conduct risk strategy might include:

Employee Training – All employees should understand their legal obligations in regard to sensitive data, conflicts of interest, and the management of inside information.
Monitoring and Reporting – Compliance departments could use automated tools to help them identify unethical trades. Anyone in the firm should feel comfortable whistleblowing on unscrupulous activity, and they should feel confident that any alerts they raise will be acted on without any negative consequences.
New Incentives – Instead of setting sales targets, which may encourage mis-selling, staff could be rewarded for more ethical practices – such as their contribution to corporate social responsibility (CSR) activities.

Further Support For Insurers and Insurance Brokers

If you’re thinking of starting up your own insurance firm, or if you’d like to know more about a certain aspect of insurance, you’ll find plenty of guidance and resources on our site:

As an MGA, we offer bespoke insurance software solutions for insurance companies of all sizes. Our software as service (SAAS) can include both tailored brokerage and end-to-end fulfilment solutions.

Head here to learn how our award-winning SAAS helps insurers, brokers, MGAs, agents and program providers.

If you have any questions, or you’d like to discuss your options, you can contact the Tapoly team at info@tapoly.com, call our info line on +44(0)207 846 0180, or use the chat box on our website.