Last Updated on  03 December 2004

Insurance: A Code of Business Conduct to ensure High Standards

This paper broadly sums up the main objectives of the draft Code of Business Conduct for Insurers and Intermediaries issued for public consultation (CP 011004) by the Financial Services Commission (FSC) on 8 November 2004.

Protecting Consumer Interests and ultimate Consumer Responsibilty

Internal Complaints Handling Process

Balancing Costs and Consumer Benefits

The draft Code of Business Conduct sets standards of market practices for insurers and insurance intermediaries in relation to the sale of insurance contracts. The Code aims to ensure that high standards of financial soundness and business conduct are adhered to by all insurers and intermediaries under the supervision of the FSC. In essence, it reflects what the FSC considers are minimum standards of good business practice and ethical behaviour on behalf of its licensees.

Protecting Consumer Interests and ultimate Consumer Responsibility

The draft Code’s core principles relate to the various aspects of insurance companies’ relationship with their customers. Under the over-arching themes of due regard to consumer interests and the fair treatment of consumers, standards have been developed that require service providers to act conscientiously, honestly and with diligence in handling insurance business; to ensure that consumers are properly informed and that their claims and complaints are handled effectively.

Underpinning the due diligence principle, requirements are that businesses and sales representatives ensure that prospective policyholders are not exposed to inappropriate risks during marketing and sales processes. The Commission urges service providers to maintain the balance between their marketing and sales strategy and providing consumers with products that effectively match their personal circumstance.

Overall, the Code takes the form of responsibility requirements for businesses, but it also brings forth the concept of ultimate consumer responsibility.

Reckoning the needs prospective policyholders may have for advice, the Code requires that such advice be fair, reliable and impartial so that the former are not misled, whether inadvertently or otherwise, into purchasing insurance products inappropriate to their personal requirement and financial capability.

The provision is supported by suitability requirements that require service providers to furnish evidence as to why a product has been proposed or recommended. Their responsibility in that regard extends to the identification of customers’ needs through a fact-finding exercise to gauge the relative suitability of the product to the clients’ needs.

Similarly, consumers have the duty to provide accurate information about themselves. “The appropriateness of advice prospective policyholders receive can only be based on accurate information they provide,” says Iqbal Rajahbalee.

The principle of full disclosure is indeed a binding responsibility and a regulatory tool for the FSC to ensure consumer interests are adequately safeguarded.

Starting from the licensing processes that require “Principal applicants” –that is, insurance companies – to disclose fully their financial standing, the concept is pursued further in the Code, which makes it a duty for service providers to ensure that prospective policyholders are properly informed about the product they have in mind to purchase.

Compulsory information material to be handed to customers may take the form of hard copy documents detailing product features, risk and reward characteristics as well as cost implications. These would now have to demarcate between premiums, administrative charges and commissions. Service providers are also required to supplement product feature documents with oral explanation of the terms and legal implications of the contractual agreement and to stress to prospective customers the possible consequences of omissions and lies on the validity of their contractual agreement.

“Providing consumers with both oral and written information is no duplication of efforts,” stresses the FSC’s Chief Executive. “There is an important need for policyholders to be properly informed and this is particularly relevant to investment products where risks are borne by the policyholder, for example investment-linked insurance products”.

“What we ask is to enable a consumer to determine whether an insurance product is appropriate to his needs. Our emphasis on product disclosure orally and in writing caters for the needs of the less experienced consumers or those with low levels of literacy or sophistication who, like all other consumers, ultimately have to take responsibility for their decisions,” states Iqbal Rajahbalee, adding: “That’s also why we require that service providers make no attempt to influence the decisions of customers although they may assist the latter in arriving at a decision by providing full information.”

The Code establishes fine but clear lines of demarcation between service providers’ responsibility and consumers’ responsibility. Despite the fact that Principals are to endorse responsibility for the actions of agents and representatives acting on their behalf, adequately observed disclosure provisions and suitability requirements could provide the insurer with a safe harbour in the event of a dispute. “The informed customer holds responsibility for his choice and cannot claim ignorance in the event of a dispute,” says the FSC’s Chief Executive

However, the Code puts the onus on firms to ensure that consumers are educated during the sales process and made aware of their contractual obligations of truthful disclosure.

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Internal Complaints Handling Process

Another major issue addressed within the framework of the Code is the setting up of internal complaints handling processes within firms, incorporating standards set by the FSC.

A large number of companies do not have a complaints handling system and simply respond to complaints in an ad hoc fashion as they are received. Where such services are offered, there is often misunderstanding of the principles that should underpin effective complaints handling which inevitably limits its usefulness both to the client and the insurance company.

Currently, the FSC handles around 250 individual commercial complaints a year in the insurance sector alone. “This has a significant impact on our workload and resources, and creates unnecessary delays for consumers,” insists Iqbal Rajahbalee. “Most of these complaints relating to commercial disagreement or consumer dissatisfaction would be better dealt with by the company without our intervention.”

The FSC wants to ensure that consumers’ legitimate problems are resolved quickly and effectively through internal complaints mechanisms. Upon implementation of the Code, the option to seek FSC intervention will apply only after consumers have contacted the insurer and failed to obtain redress.

Where the FSC cannot intervene and consumers feel aggrieved, they may have the option in the future to take the matter to external dispute resolution schemes or arbitration panels. This is an area which the Commission believes businesses will do well to consider for expeditious resolutions of disputes.

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Balancing Costs and Consumer Benefits

The FSC’s Code of Business Conduct places new responsibilities on insurance professionals that could involve additional costs. To what extend will the industry support the Commission’s initiatives leaves expectations.

“We are expecting reticence on some issues,” says the Chief Executive of the FSC. “But I am confident that interested parties will find the wisdom to go forward. Our approach is clear and pragmatic. The Code deals with essential factors of risks. We have focused on areas where we anticipate that failures in market discipline would be detrimental to policyholders’ interests and market confidence. I firmly believe the costs should justify the benefits.”

Consumer interests and market confidence are especially important in the light of anticipated new developments and growing consumer needs for insurance products. This sector is expected to improve its performance against the GDP, which stood at 20.7% last year.

“There is real opportunity to be grasped in the insurance sector,” asserts Iqbal Rajahbalee. “But risks will also be higher as insurance products get more complex. We would like our licensees to operate to best standards of practice in the interests of consumers. Consumers who feel confident using the system will generate more demands.”

Questioned as to enforceability of the Code, the FSC’s Chief Executive indicates that the Code “would not have the force of law and breaches will not constitute offences. But the Code will have set standards for assessing the quality of the insurance company”

As a matter of fact, it is yet to be decided as to whether the Code will have civil enforceability, or whether the Commission should consider making laws or use its regulatory powers when breaches cause consumer detriment. The issue will be thrashed out at a workshop with stakeholders, involving both the industry and consumer organisations, which will follow the end of the consultation process in January next year. The workshop will be organised to develop practice notes to clarify the implementation of some provisions. The finalised code will be published in the form of a handbook.

The Code of conduct for insurers and intermediaries is based on ethics and good corporate governance. The FSC is of the expectation that senior management will own these standards and make them part of the culture and behaviour of their organisation

“We would like senior management to incorporate customer interests and the fair treatment of customers into their firm corporate strategy and to implement mechanisms to maintain an oversight of the way these principles are implemented,” asserts Iqbal Rajahbalee.

“Both consumers and insurance companies stand to gain from good corporate practice. Consumers who are treated fairly and who are empowered to assess what they want may generate more demands for products. Businesses will achieve long-term commercial benefits from enhanced consumer confidence. This is a fact. But the impact of the Code will go wider than this in its overall effect on insurance firms’ reputation and standing with their own customers and within the wider business community”.

The draft Code can be downloaded from the FSC website by clicking here.

Consumer Publications

Financial Services Commission

02 December 2004

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