Now that a range of global solvency and prudential standards have been implemented for insurance firms, the International Association of Insurance Supervisors (IAIS) and regulators across the globe are shifting their focus to address the root causes of poor outcomes for insurance customers and increasingly focusing on the insurer conduct and consumer protection agenda.
“We are seeing the IAIS drawing on local expertise and examples of poor conduct from countries such as the UK, Australia and South Africa in a drive to harmonize international standard.” Rob Curtis, Global Insurance Regulatory Lead, Executive Director, KPMG in Australia
At a global level, of the 26 insurance core principles (ICP) initially developed by the IAIS, only one (ICP 19) focuses on conduct of business requirements with the remainder focusing on prudential requirements. However, the IAIS has recently supplemented the ICP by releasing two issues papers in relation to conduct risk, one which applies to all insurers [IAIS issues paper on Conduct of Business Risk and its management, published November 2015] and the other which focuses on conduct risk issues specifically in relation to inclusive insurance.
The causes of poor insurance customer outcomes are broadly split across three areas:
Information asymmetry exists in sales of financial products whereby the provider of a product often has a detailed and in-depth understanding of a product while a consumer is generally less well informed. Global regulators have criticized the sales process and clarity of customer communications as a driver of poor customer outcomes, which can leave customers with products that do not perform as they were led to expect.
Historically, regulatory responses have traditionally sought to address these imbalances by providing prescriptive requirements for disclosure and setting professional standards for sales advisers.
As product design and governance has been identified as a key weakness of firms in multiple jurisdictions some countries have provided their conduct supervisors with additional powers to make interventions and even ban particular products.
Good conduct is not simply about ensuring customer satisfaction but delivering a good outcome for the customer. This goes beyond process and procedure – good conduct aims to deliver value for the customer and the shareholder with a balance of customer outcome and profitability for the firm.
This includes considering the wider culture of the firm since quite often firms use the term culture and conduct interchangeably. Culture is often described as, ‘the way things are done around here’. It is a complex product of a broad range of drivers and includes people, performance, individual beliefs and leadership. It is difficult to ensure good conduct where poor culture exists.
Although it is a global challenge, protecting the consumer remains a national issue with very divergent approaches taken between countries. As a result, insurers have approached conduct in different ways with some firms building an assessment of conduct risk in to their risk framework fully and others identifying conduct as a subset of operational risk.
Conduct risk is driven by multiple factors in a firm’s business model. Firms must address each of the drivers of poor conduct in turn when developing and embedding their conduct risk framework.