ICOBS Explained: Demands and Needs, Suitability and Claims Handling

ICOBS is the rulebook for selling and administering non-investment insurance, and two of its requirements are routinely misunderstood. The first is that the demands and needs test applies to every sale, advised or not. The second is that the grounds on which an insurer may reject a claim changed for contracts entered into from 1 August 2017, and a good deal of training material still teaches the older position.

The demands and needs test applies to every sale

Under ICOBS 5.2.2R(1) a firm must, before a contract of insurance is concluded, specify the customer’s demands and needs on the basis of information obtained from the customer. The level of detail should match the complexity of the contract and the type of customer. The statement must be communicated to the customer prior to the conclusion of the contract (ICOBS 5.2.2R(3)), and under ICOBS 5.2.2BR the firm must ensure the proposed contract is consistent with those demands and needs.

ICOBS 5.2.2DR is the rule firms miss: every sale must always be accompanied by a demands and needs test. The guidance at 5.2.2CG puts it beyond doubt — the test applies whether or not advice is given, and whether the policy is sold on its own or alongside other products or services.

So a non-advised, execution-only insurance sale is not exempt. What changes is the format, not the obligation. The guidance at ICOBS 5.2.4G confirms the format of a statement of demands and needs is flexible where no personal recommendation is given, and gives examples: questions on an application form, general product wording, or simply giving the customer a record of the needs discussed.

Advised sales add a suitability duty

Where the customer relies on the firm’s judgement, ICOBS 5.3.1R requires the firm to take reasonable care to ensure the suitability of its advice. For a package of several policies, suitability must be assessed in relation to each policy advised on (ICOBS 5.3.1AG) — a package recommendation is not one recommendation.

For pure protection, the guidance at ICOBS 5.3.2G expects firms to establish the customer’s needs using the information available and seeking more where necessary, check that the policy suits those needs, and — the part most often omitted — inform the customer of any demands and needs that are not met by the contract.

Two further rules police what firms claim about their market coverage. A firm holding itself out as giving a fair analysis, or a fair and personal analysis, must base its advice on an analysis of a sufficiently large number of contracts of insurance on the market (ICOBS 5.3.3R). And where a personal recommendation is made, the firm must provide a personalised explanation of why a particular contract best meets the customer’s demands and needs (ICOBS 5.3.4R), with connected travel insurance excepted.

Eligibility to claim

A newer expectation sits at ICOBS 5.1.1G, framed on the Consumer Duty. Firms should take reasonable steps to ensure a customer only buys a policy under which they are eligible to claim — checking eligibility requirements before the policy is concluded and telling the customer where they are not met, and during the term informing the customer in good time of changes that could affect eligibility.

This closes a familiar consumer harm: policies sold to people who could never have claimed on them. It is guidance rather than a rule, but it is Consumer Duty guidance, which makes it an expectation a supervisor will test against the Duty’s outcomes.

Claims handling: the core duty

ICOBS 8.1.1R requires insurers to handle claims promptly and fairly, provide reasonable guidance to policyholders, not unreasonably reject claims, and settle claims promptly once settlement terms are agreed. Four obligations, each capable of being breached independently.

The rejection rules then split by date. For contracts entered into before 1 August 2017, ICOBS 8.1.2 treats rejection as unreasonable — absent fraud — in certain non-disclosure and misrepresentation cases and for some breaches of warranty or condition.

For contracts from 1 August 2017, the position tracks the Insurance Act 2015. Under ICOBS 8.1.2A, rejection for misrepresentation is generally unreasonable unless it is a qualifying misrepresentation, which ICOBS 8.1.3 defines by reference to whether the insurer would not have entered into the contract at all, or would have done so only on different terms. And under ICOBS 8.1.2B, rejecting a claim for breach of a condition or warranty is unreasonable unless the circumstances of the claim are connected to the breach, unless sections 10 or 11 of the Insurance Act 2015 apply.

That connection requirement is the substantive change. A breach unrelated to the loss no longer provides grounds to decline, which reverses the pre-Act position and is the single most important thing for a claims handler to understand.

Motor liability claims run to a clock

ICOBS 8.2 imposes hard deadlines. Each claims representative must handle and settle claims by injured parties and hold sufficient powers to meet those claims in full (ICOBS 8.2.3), with appointments notified to the Motor Insurers’ Information Centre within ten business days (ICOBS 8.2.5).

ICOBS 8.2.6R then sets a three-month deadline from presentation of the claim: within it the insurer must make a reasoned offer of compensation where liability is not contested and damages are quantified, or otherwise provide a reasoned reply. ICOBS 8.2.7R applies equivalent timing where liability is admitted or damages quantified later.

Miss it and ICOBS 8.2.9R requires simple interest at the Bank of England base rate plus 4%. The guidance at 8.2.11G confirms none of this limits the injured party’s right to take legal action against the person who caused the accident.

The employers’ liability register

ICOBS 8.4 carries obligations firms underestimate because they are administrative rather than conduct-facing.

Relevant firms must produce an employers’ liability register complying with ICOBS 8.4.4R(2) and Annex 1, and make it and its supporting documents available either on the firm’s website or through a qualifying tracing office (ICOBS 8.4.7R). The register must be updated no less frequently than once every three months (ICOBS 8.4.11R(2)(c)).

Two annual deliverables fall due by 31 August each year, covering the period from 1 April to 31 March: a director’s certificate (ICOBS 8.4.7AR) and a limited assurance auditor’s report (ICOBS 8.4.7BR). “Materially compliant” is defined numerically — at least 99% of relevant policies with no inaccuracy that would affect a search outcome.

On searches, ICOBS 8.4.14R requires firms with actual or potential liability to take reasonable steps to conduct effective searches on a valid request for a historical policy, and ICOBS 8.4.16R sets response times: one month for requests from a qualifying tracing office, two months otherwise.

Where the competence risk sits

ICOBS puts judgement in the hands of front-line staff at three points. A salesperson must identify demands and needs and confirm the contract is consistent with them, on every sale. An adviser must assess suitability per policy and disclose unmet needs. A claims handler must decide whether a misrepresentation qualifies, and whether a breach of condition is connected to the circumstances of the claim — a legal test applied under pressure, on contracts that may predate or postdate August 2017.

None of that is served by product training. It requires knowledge of the rules and the Insurance Act, and it has to be evidenced. The same pattern runs through ICOBS 6B pricing, where compliance depends on a documented methodology rather than a single calculation. Our CPD course library covers the conduct, governance and audit foundations these roles rely on.

Frequently asked questions

Does a non-advised insurance sale need a demands and needs statement?

Yes. ICOBS 5.2.2DR requires every sale to be accompanied by a demands and needs test, and the guidance confirms it applies whether or not advice is given. Only the format is flexible where no personal recommendation is made.

Can an insurer reject a claim for a breach of policy condition?

For contracts from 1 August 2017, only where the circumstances of the claim are connected to the breach, unless sections 10 or 11 of the Insurance Act 2015 apply. An unconnected breach does not provide reasonable grounds to reject.

What is the deadline for a motor liability offer?

Three months from presentation of the claim, under ICOBS 8.2.6R, for a reasoned offer where liability is uncontested and damages quantified, or a reasoned reply otherwise. Failure attracts simple interest at base rate plus 4%.

How often must the employers’ liability register be updated?

No less frequently than once every three months, with a director’s certificate and a limited assurance auditor’s report both due by 31 August each year for the period 1 April to 31 March.

What does a fair analysis claim commit a firm to?

Under ICOBS 5.3.3R, basing advice on an analysis of a sufficiently large number of contracts of insurance available on the market. A firm that cannot demonstrate that breadth should not describe its service in those terms.