Accurately classifying your customers now could mean big savings later, says David Goodley

Perhaps the most immediate issue arising for brokers as they prepare for FSA regulation is the need to classify their customers. The simple GISC approach of differentiating between private and non-private customers, covering all general insurance business regardless of source, type, size and location, will no longer be appropriate for many brokers.

Classification will determine the application (or otherwise) of FSA regulation as a whole and of FSA rules individually to certain types of business. Taking advantage of some exemptions, and of the lighter touch regulation available for certain types of commercial business, is likely to prove beneficial to many firms.

Classification of customers and their business may be determined by whether they are:

  • Private or commercial
  • Inside or outside the EEA
  • Direct or wholesale
  • Insurance or reinsurance
  • Commercial large risks or commercial non-large risks (large risks are as defined in the EU First Life Directive)
  • It may also be necessary to identify whether the business is eligible for the Financial Ombudsman Service and the Financial Services Compensation Scheme, and to identify situations where a commercial customer purchases insurance for the benefit of employees.

    As well as for the purposes of identifying which rules apply to what business, some of this information might also be important for the calculation of regulatory fees and levies, and for regulatory reporting.

    Firms should consider undertaking this work immediately. If classification forms part of the renewal/new business process for risks commencing after 14 January 2004, it will help brokers to know how to deal (for example) with claims that arise after 15 January 2005. This will generally be preferable to dealing with the exercise as a separate task requiring dedicated resources.

    It may not be necessary to provide for every permutation, because brokers may in the event voluntarily comply with certain rules for the sake of consistency in business processes.

    However, it is easier to disregard any surplus information than to go back later and research something that was missed.

    Marsh is currently developing software that will identify the correct classification by asking brokers to answer a short series of questions about each customer. The idea is that the resultant classification and the answers given by the broker will be retained on customer files to show how the classification decision was made in each case.

  • David Goodley is compliance manager at Marsh