Insurers Outsourcing Premium Finance Need to Consider the Risks
Insurers seeking to outsource their regulatory requirements on premium finance could simply be jumping out of the frying pan and into the fire.
Financial Conduct Authority has taken direct aim at insurance premium finance this year. This is not surprising as previous efforts, such as “Dear CEO” letters have not achieved the desired outcomes consistently. It is natural and right that the regulator should seek to ensure that regulated consumer loans in insurance meet the required standards in retail lending more generally.
The Role of Technology and In-House Adaptation:
In today’s world of Software as a Service (SaaS) solutions, insurers have all the tools they need at a low cost to adapt existing journeys and solutions. They just need to know where to find them. Earlier this year, Deloitte provided a useful guide to the regulatory requirements in insurance, many of which can be solved without outsourcing the full process https://lnkd.in/e_4ma5hF.
The Potential Pitfalls of Outsourcing:
Insurers unable or unwilling to adapt their existing journeys and services are being tempted to view outsourcing as the solution. Some in the hope that a specialist lender must be compliant. Even if this isn’t wishful thinking, there is no guarantee these firms would be any more compliant or cost-efficient, than other services, especially if “normal” retail credit finance isn’t one of their core strengths.
Outsourcing also introduces significant supply chain risk. A direct read-across from the discretionary commissions case in motor finance poses an existential threat to some premium finance providers. The potential remediation in motor finance has notably impaired the value of some highly diversified businesses. Imagine the impact on mono-line lenders. Until the motor finance case and its implications for insurance are settled, it is simply impossible for insurers to assess the financial risk exposure of some lenders.
In Conclusion: Whilst outsourcing might seem like a quick fix to regulatory challenges and may sometimes offer an appropriate solution, it comes with significant risks that could outweigh the benefits. Insurers should assess carefully the potential to leverage modern technology solutions to adapt their existing services and ensure compliance alongside any outsource review. By doing so, they could maintain greater control over their operations and mitigate the potential risks associated with outsourcing.
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