Creating the WOW factor in insurance through informed choice and treating customers fairly
Life insurance should cover all sections of the population even tea workers.
It is more about “customer experience” than the product or the organization’s size. A company which has a very high focus on customer satisfaction will continue to deliver increasing profits and market share, and continue to maintain sustainable growth. The service to customers must be exceptional from inception till termination of the relationship, and thus Insurance firms must conduct themselves with honesty and integrity throughout their relationship with their customers, not just at the point of issuing a policy.
Two recent developments in the insurance industry concerning the market conduct of insurance companies and related conduct risk issues are noteworthy, not only to insurance companies but all retail financial institutions and stakeholders associated with the financial services sector.
The first is the recent development across the Palk Straits where the insurance regulator in India, the Insurance Regulatory and Development Authority of India (IRDA), has informed banks that insurance policies could be sold to bank’s customers only by qualified staff and that the bank would be held accountable for the actions of such staff in the future when dealing with insurance policy matters. What had prompted the IRDA into taking such action were the numerous complaints it had received relating to mis-selling and force selling of certain insurance products to bank customers.
The second was the enlightening speech given by the Deputy Governor of Bank Negara Malaysia (BNM) on October 7 at the Insurance Summit held in Kuala Lumpur, indicating the increasing regulatory focus on conduct issues. Dato’ Muhammad bin Ibrahim has stated “insurers and takaful operators must be fully accountable for the conduct of their intermediaries in ensuring that customers receive proper advice and quality service throughout the duration of the policy. It is important that adequate training is provided and the right remuneration and incentive structure is implemented to promote a committed and professional agency force”.
He further added that “the enforcement measures undertaken signals the Bank’s (BNM’s) low level of tolerance for misconduct. It also serves to remind the industry of the Bank’s expectation for common complaints and grouses against the industry such as delay in claim settlement and mis-selling practices by agents to be completely eliminated or at the very least reduced significantly”.
Following on from this speech, there quickly followed a media release from the BNM to provide clarity regarding its powers to enforce compliance with regulations. It went on to say that the Bank would take enforcement action against parties that have not complied with the rules and regulations issued under these laws. This would include issuance of an order to comply and take steps to mitigate or remedy a breach, the imposition of monetary penalties, making restitution to any person aggrieved by a breach, and extends to public and private reprimands.
In Sri Lanka, it has been reported that the insurance penetration is falling year on year and was a paltry 1.01 in 2014, when the regional average was approximately 4.0. Sri Lanka’s closest neighbour India had an insurance penetration of 4.2 last year, and steps are being taken to increase that further to meet the global average which exceeds 6.0. The lack of awareness amongst the population in Sri Lanka about the importance of insurance has been recognized by the insurance industry leading to several initiatives during the past few years, including the recently launched joint life insurance industry awareness campaign.
Moreover, the Insurance Board of Sri Lanka (IBSL) has noted in Annual Report 2014 that a significant number of policyholder complaints have been received by the Board and that much work is needed in the area of building public confidence in insurance.Continuously sliding insurance penetration does not portray a positive outlook of the health of the insurance industry in Sri Lanka. Industry experts and the regulator have identified the vast opportunity in increasing insurance penetration through the increase in public confidence in insurance and the latter has indicated that public confidence is directly related to conduct of insurance companies. In addition to industry related public awareness campaigns, what else do insurance firms need to do to tread on the path of excellence in market conduct?
The buyer
The public should be given the opportunity to purchase the insurance policy that best suits their own needs and budget. It goes without saying that insurance companies need to design products that meet the needs of all the public. Insurance companies push the products to the public because generally it is said that insurance is not considered as a “must have” but rather a “nice to have”. Apart from motor insurance, other types of insurance are not mandatory in most countries, and therefore the company needs to market insurance products to the public rather than the public seeking the company.
The company has a responsibility therefore to ensure that the marketing communication to the public is clear, simple to understand, accurate, and not misleading. The challenge for the company is to first create awareness, change general public perception, and then follow up with a smorgasbord of suitable products. The task is more onerous in developing countries where there is less disposable income to spend on the so-called perceived “nice to have”
things. Public awareness of the importance of insurance is therefore crucial to the security and wellbeing of the population and the sustainable growth of the insurance industry. Educating the public on the importance of insurance could be effected through initiatives of each individual insurance company, collectively through industry associations, and the regulator.
Another factor is access to the public. However, with commoditization of advanced information and communication technology, this area is no longer a serious challenge to any progressive insurance company. Today basically everyone has a mobile device and a connection to the internet. With the advent of comparative platforms available through several websites and mobile apps, it is now possible for a consumer to compare insurance products across segments, and in some instances customize the cover required online.
It is then up to each individual to consider one’s current position and future expectations and based upon various personal factors, determine whether specific insurance is required or not, and to what extent cover should be taken, and then evaluate which product best suits his or her situation. In taking this decision, it is sometimes necessary for someone with financial services expertise and experience to advise the individual on the best course of action to take.
The seller
Frontline insurance companies are manned by intermediaries known as agents.Their incentive is the commission that the insurance company pays on the successful underwriting by their principal the insurance company. No payment is made by the prospect to the agent.
Insurance agents are the legal agents of the company and therefore cannot be considered strictly as “advisors” to the prospective buyers of a policy, apart from informing the latter of the different choices of policies that a particular company (the Principal) has to offer. Agents are registered with a single insurance company and such appointment is informed to the regulator. It is also mandated by law that all insurance agents are duly qualified under the aegis of the Sri Lanka Insurance Institute (SLII).
Another type of insurance intermediary known as insurance brokers have a different role to play. An insurance broker is defined in Sri Lankan legislation as a person “who functions as an intermediary for the placing of insurance business for or on behalf of an insurer, a policy holder or a proposer for insurance or reinsurance, with an insurer or reinsurer, in expectation of a payment by way of brokerage or a commission”.
The Sri Lanka Insurance Brokers Association (SLIBA) states on their website that their aim is ” to foster a class of insurance intermediaries who are technically competent, professional in their outlook and conduct, which the insuring public can depend on in accessing truly independent and expert insurance services and advice”.
Therefore, insurance brokers are able to provide the public with independent expert advice (with or without a fee) on the best options with regard to covering risks. However, it should be noted that Insurance Brokers also engage individuals to operate as their agents and they too are considered insurance agents and subject to the registration and training mentioned previously.
Although agents must be qualified and registered, an agent can recommend and sell any type of policy to the prospect, whether the cover provided meets the precise needs of the prospect or not. This issue is compounded when the product involves an investment element which introduces an additional layer of product complexity.Treating Customers Fairly: An Opportunity – Not a Cost With consumer protection reforms beginning to take hold across the globe, the C-suite and Boards of Directors are quickly taking notice of how they are being evaluated for their actions (or inaction). Some executives may be anxious or even panicky due to recent headlines surrounding fines relating, ultimately, to the poor treatment of customers. No executive wants to wake up to find their company’s name, let alone their own name, splashed across the morning newspaper headlines.
To help prevent this situation from happening, what can be done to manage and balance corporate behaviour before its time to panic?
It’s really all about managing “conduct risk”
In the financial regulatory domains, the concept of “conduct risk” is an emerging term of art. While conduct risk is being discussed and debated within business circles across the globe, the term itself has no universally agreed upon definition. Perhaps this is because defining what constitutes good conduct or what “good enough governance” entails can be too arbitrary and broad to a financial institution’s various stakeholders. This seems odd, given that the clear focus of these regulatory changes is the “fair treatment of customers.” In other words, “conduct risk” is about mitigating the risk of poor conduct, (behaviour) towards its customers. Even without a consensus on a clear meaning of these terms, there does seem to be some converging agreement on what forms the basis of the conduct risk construct.
According to a recent survey of financial institutions sponsored by Thomson Reuters Accelus group, conduct risk encompasses the broad categories of – An organization’s culture: Corporate governance: Conflicts of interest and Reputation.Other international bodies groups such as the Organization for Economic Co-operation and Development and the Financial Stability Board take a more focused view and relate the concept of conduct risk to a principle-based framework grounded on the fair treatment of customers, i.e. consumer protection, and consumer confidence.
Whatever approach to defining conduct risk might fit an organization’s risk management structure, now is the time for firms to start a dialogue to get a jump start on understanding how this new phenomenon of conduct risk may affect the organization.Top-level discussions should include topics such as customer treatment policies, incentive structures, product design, and sales processes. When implemented without the customer in mind, all of these can lead to poor consumer outcomes. It is time for top level management to begin seriously exploring these topics.
On the global stage, the majority of firms have begun to address these key issues. Firms in Europe and Australasia have done the most, whilst firms in the Middle East have more to do. Specifically, the 2013 Thomson Reuters Accelus survey showed that approximately 50 per cent of firms in Europe and Asia had reviewed sales processes in the previous year, yet none of firms surveyed in the Middle East had done so. However, even with this progress in Asia and Europe, there is still a long way to go – for the last three years, the Edelman Global Trust survey has shown that financial services (including insurance), are amongst the least trusted organisations across all global markets.
Much thought leadership in this area is currently coming out of the UK.
Specifically, the Financial Conduct Authority (FCA), which regulates firms and financial advisers in order to protect consumers, refers to conduct risk in the context of “consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products.”
The FCA approach for assessing conduct risk is tied to the organization’s objectives. By looking closely at the drivers of conduct risk, organizations can evaluate how different factors or scenarios (i.e. combinations of factors) impact the financial services market and its participants.While operational components of sales practices, accountability, remuneration, and overall culture are all part of the conduct risk equation, viewing these components individually without considering scenario implications to a firm’s strategy is simply short-sighted from a regulatory perspective.
According to Chris Perry, the managing director of Risk for the Thomson Reuters study, “good conduct is good business. The cost of poor conduct is high; not just in terms of enforcement actions, but also in long lasting reputational damage and the wider erosion in trust this creates.”
It could well be said that the opposite is true as well: the benefit of good conduct is high, not just in terms of reduced enforcement actions…but also in the reputational advantage and the wider restoration of customer trust that it creates. Intuitively, it makes sense that if a firm has a reputation for good conduct, i.e. being seen as trustworthy by its customers, this can only affect the bottom line in a positive way – increased rates of persistency, higher levels of customer advocacy. This is difficult to argue against. Thus, corporate integrity and trust take centre stage in the assessment of how firms behave.
In fact, there is now a growing body of evidence that demonstrates the increasing correlation between trustworthiness and superior financial performance. Over the past decade, a series of qualitative and quantitative studies have built a strong case for senior business leaders to place building trust among stakeholders high on their priority list. While none of these studies are perfect, over the next decade their results will be increasingly difficult to ignore.
In Sri Lanka, the IBSL has clearly articulated in its annual report that an area of focus for the coming years will be the introduction of principles on market conduct in line with the Insurance Core Principles (ICP’s), since it is envisaged that the successful implementation of these principles on market conduct would enhance public confidence in the industry.
By whatever method a firm chooses to assess, measure and monitor the risk of poor conduct, it’s probably about time that top level management familiarized themselves with the evolving concept of conduct risk and how it relates to the fair treatment of customers. How these concepts may affect ongoing operations into an organization’s future will become more and more prominent very soon. Should organizations choose not to participate in conduct risk discussions, they may be missing the next step in supervisory scrutiny and regulatory evolution.
(Mr. Gunawardhana is Founder & Principal Consultant, Global Business Counselling Singapore & Sri Lanka and former Director General, Insurance Board of Sri Lanka. Mr. Rosling is Founder and Director of TCF Consulting Ltd, UK)