Cedric Stephens | Finally, insurance reform with upsides for consumers
The Financial Services Commission (FSC) - the government agency that regulates non-bank entities insurance, pension funds, and securities - is in the process of making important changes in the way it supervises the insurance sector.
It is switching from solvency supervision to market-conduct supervision.
Solvency regulation ensures, among other things, that companies have a minimum amount of capital to meet their liabilities. The aim is to prevent them from suddenly going bust and creating problems for consumers and the financial system.
Market-conduct regulation places emphasis on how companies operate. The focus is on outcomes. Its premise is that "customers' best interests are at the heart of everything" insurers and other participants, like agents and brokers, do.
The FSC is to the companies it supervises what the Bank of Jamaica is to banks and credit unions. The FSC performs similar functions to what the Offices of Utilities Regulation does in relation to water, electricity, telephone, and broadband service providers.
Three things signal the about-turn in how the FSC will operate in the future: recent leadership and top management changes; regular exchanges between that agency's employees and the public that are not limited to the handling of complaints; and public consultations about the nature of the guidelines that should apply to the $75 billion industry.
The latter two have the potential to improve public perceptions about the commission; promote better understanding about the products and services that insurers offer; raise consumers' expectations about the quality of service the industry delivers - even if some companies will have to be dragged kicking and screaming into the 21st century; and help to reduce some of the biases and suspicions that some persons have about the industry.
This column first appeared in 1997. It has a longer history than the FSC.
The FSC was formed to replace the Office of the Superintendent of Insurance, which was a division of the Ministry of Finance. The commission was the subject of many articles. None of them was positive. For example, between March 21, 2010, and December 17, 2017, there were 20 articles where negative inferences could be drawn.
This column is taking no credit for influencing changes in regulatory thinking. Instead, it applauds the commission's decision to alter the original guidelines and align them with current regulatory best practices.
Some of the key parts of the FSC's revised market-conduct guidelines that will benefit insurance consumers are summarised below. Market conduct refers to "all strategies, policies, activities, systems, practices, and measures that are executed or performed by insurance companies and intermediaries in the ordinary course of business, both before a contract is entered into and through to the point at which all obligations under the contract have been satisfied and that customers are treated fairly. Fair treatment of customers should be at the heart of the business model."
The guidelines seek to "establish specific standards for insurance companies and intermediaries in conducting insurance business with customers, and by extension, policyholders". They fall under several headings.
Integrity and Fair Dealing - Insurers and intermediaries should:
- Implement recruitment policies that ensure the employment of persons of the highest calibre;
- Develop charters setting out the standards of service to be delivered to policyholders;
- Implement systems to regularly monitor the quality of service being delivered.
Care, Skill, and Diligence:
- Conduct business activities with due care, skill, and diligence, ensuring that policyholders are adequately informed and given full explanations of the nature and effect of all provisions in insurance policies;
- Directors and senior officers consider the interests of policyholders while discharging their duties;
- Develop, execute, and maintain appropriate and up-to-date employee training policies, procedures, and training manuals that are approved by the board of directors;
- Conduct training sessions at appropriate intervals to educate sales representatives, agents, and brokers about the nature and characteristics of all their products; and
- Ensure that sales representatives are trained and equipped to adequately advise customers on the features and characteristics of all insurance policies.
- Maintain a claims procedures manual for internal use, and at least one employee should be responsible for ensuring that it is maintained and revised when necessary. The manual must include procedures for the management of an influx claims caused by natural disasters;
- Ensure that employees in the claims department are competent and are qualified to process all claims effectively. Companies must foster and conduct ongoing internal and external training;
- Claim-settlement procedures should be clearly identified and outlined in the insurance policy and should be appropriately communicated to the policyholder;
- Provide the policyholder with a claim form and the information necessary to report a claim within a reasonable period, in order to satisfy the limit in the policy contract, to ensure that the claims-reporting process proceeds as smoothly as possible;
- Ensure that the claims department is as accessible as possible to the claimant. If an intermediary is the initial contact for claimants, claims should be sent to the insurer within five business days;
- Inform the unrepresented claimants of their rights and duties when the claimants are not policyholders and take steps to ensure that these claimants are treated fairly.
Compliance - Compliance with the guidelines will be determined by the commission when it performs on-site examinations and also when it investigates policyholders' complaints lodged with the commission. On-site examinations may include::
- The insurer's/intermediary's policies and procedures for compliance with the guidelines;
- The sufficiency and adequacy of the information given to consumers;
- The record of complaints, including the frequency and nature, and the timing and resolution of the matters raised in the complaints;
- The policies and procedures on claims handling and settlement as well as the actual experience in implementation.
Kudos are due to FSC management. When BOJ's 'navel string' is finally severed from the Ministry of Finance & the Public Service, and it becomes free to formulate and implement monetary policy, it is hoped that other regulatory bodies like the FSC will also gain independence.
When the FSC was created in 2001, in the wake of the financial sector meltdown, the policymakers, in their wisdom, decided to keep the commission under their wing. That decision wasn't necessarily in the best interests of consumers.
Finally, this column is dedicated to Yvonne Blenman. She served for a very short period as superintendent of insurance. She was a very strong advocate for market conduct regulation more than 20 years ago.
- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: email@example.com