Insurers' outsourcing obsession can turn a bad dream into a nightmare

Outlook

A consumer can buy a home insurance policy from one company, while another does the underwriting and a third might be called in to handle claims management (Rex)

Businesses, especially insurers, are fond of awards ceremonies and mutual back slapping. Might I suggest that the trade titles that generally run such events consider a new category? One that recognises just how awful this industry can be. It takes a fair degree of skill to plumb the depths to which parts of the industry will occasionally sink – as anyone who cares to peruse the latest “thematic review” by the City watchdog will see.

OK, you’d be hard pushed to recognise a scandal from the title "Delegated Authority: Outsourcing in the General Insurance Market". But armed with a quadruple shot of espresso I decided to see what the Financial Conduct Authority had been investigating – which was the way a consumer can buy, say, a home insurance policy from one company, while another does the underwriting and a third might be called in to handle claims management.

It’s not hard to guess what happens when things go wrong in that situation: "Not my problem guv’nor. You need to call the other lot." People only need to contact their insurers when they’re faced with a sticky situation. The industry’s outsourcing mania can turn a bad dream into an absolute nightmare. Even complaining can sometimes seem like an exercise in quantum mechanics. Who do you contact?

A conspiracy theorist might well think that is the intention of such arrangements. But, having had the misfortune of covering this industry for a number of years, that stretches credibility. Cock-up and incompetence are much the more likely explanations. Plus bad, bad practice. What other description is there for the way insurers hand sales, underwriting, even product design, to others.

It speaks volumes that at Lloyd’s of London – that’s the modern, professionally run, and supposedly safe Lloyd’s of London – 30 per cent of the premium income in 2013 came through firms that did just that for syndicates. How would you feel as an investor in one of them if something were to go wrong, only for the broker who did all the work to say "oops" before wandering off and leaving you and your fellow investors to pick up the tab?

Why has the watchdog taken so long to look at this? After all, issues with insurers' outsourcing have surfaced periodically over the years. Still, better late than never. As for the new award I mentioned, perhaps the industry could simply outsource the judging to the FCA. We’ll get the results when the fines start rolling in.