The first six rounds of hearings in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry are complete, with the much-anticipated Interim Report now available.
With further hearings scheduled for November 2018 in both Sydney and Melbourne, ahead of the final report due on 1 February 2019, we examine the key themes and issues that have come to light for general insurers along with what’s expected as the hearings continue, the possible reform agenda and take-away lessons.
The Royal Commission: an overview
The Royal Commission, established on 14 December 2017, is being held before the Honourable Kenneth Madison Hayne AC QC. Breaches of the General Insurance Code of Practice, poor claims handling, delayed claims and botched repairs are just some of the things that the hearings uncovered – and the media have subsequently shone a light on. While it’s still too early to know what the long-term impact of the findings might be, it’s not too late to take into consideration some key learnings from the hearings and contemplate ways to improve at a company and industry level.
Insurers under scrutiny
Conduct highlighted during the hearings included:
- letting a new website go live which contravened financial services laws in respect of travel insurance products
- significant delays in notifying ASIC and years of delays in rectifying regulatory breaches – during which millions of insurance policies were sold
- promoting the sale of add-on insurance products through car and motorcycle dealerships, with questions raised about the training and oversight of those selling the insurance products and the payment of incentives to the car and motorcycle dealerships
- botching repairs through the use of unqualified builders
- brushing off consumer complaints and concerns
- delaying claims from natural disasters and leaving families in unsafe properties
- offering questionable cash settlement resolution of claims.
Questions around the ethics of the financial and insurance industries are nothing new. However, the results from the Governance Institute’s Ethics Index show that the fallout from the Royal Commission has dragged down the overall score for trust in the ethics of companies. One in two Australians perceive life insurance companies as unethical and the banking, finance and insurance sector received the lowest vote of confidence of all the sectors.
Ethical issues raised during the hearing included the sales and remuneration models of some insurers, including excessive or unnecessary policy cover via third-party distributors, misleading customers and misrepresenting policy terms, poor claims-handling procedures and monitoring of compliance issues.
Some key lessons for insurers involve taking steps to:
- align revenue and remuneration models with client outcomes
- embed high ethical standards in all sales practices
- have proper monitoring processes for any third party distributor sales
- ensure product designs, including clauses within product disclosure statements, are both fair and in customer’s best interest
- have a strong ethics program that incorporates a code of conduct and implement effective training to promote and encourage exemplary behaviour of staff and affiliates.
Breach in compliance
Breaches to compliance processes – often repeated breaches – and delays in rectifying them was another common thread running through the hearings. Breaches commonly occurred in the provision of misleading content or through inadequate complaints processes.
To avoid compliance issues:
- ensure information and disclosure statements in customer-facing content has had appropriate input and approval from legal and compliance teams
- ensure appropriate review processes before customer-facing material is distributed or goes live, particularly for websites
- once a breach is detected, take steps to correct the errors or breaches as soon as possible
- ensure breaches take precedence over other activities and are treated as urgent – ensuring relevant employees and external parties understand the urgency
- act quickly once a complaint has escalated to the Financial Ombudsman Service
- put in place adequate and robust processes for reporting, monitoring and closing breaches and compliance problems
- elevate disputes and complaints to a dispute resolution team rather than trying to deal with them at an operational level
- embed compliance and risk into workplace culture.
Poor claims handling
Delays in handling insurance claims, in particular following natural disasters, poor repair work and refusals to pay out on insurance policies due to complex and ineffective disclosure statements were all areas of concern highlighted during the hearings.
It’s clear that claims processes can be improved. How? Consider these take-aways:
- give thought to the human element of a claim during every decision-making moment, especially where the customer is experiencing vulnerability
- treat claims following catastrophic events as a priority
- have adequate processes for complex claims, such as assigning them to a case manager so the customer has a consistent and single point of contact
- avoid ‘make safe’ repairs that are restricted with internal authority limits that may cause delays to urgent repairs
- ensure the third party service providers who are commissioned to undertake repair works are of an adequate quality level so that high standards of both work and customer service are maintained
- make sure that all information is conveyed effectively.
What’s next for the Royal Commission
The ordeal is not over just yet for insurers.
The Royal Commission has already released policy considerations arising from the insurance public hearings and submissions relating to these policy questions are currently under review. These considerations pose questions that may spell significant changes for the insurance industry:
- Are current regulations regarding life and general insurance enough?
- Should greater penalties for compliance breaches be introduced?
- Are there particular products which simply should not be sold?
- Should the direct sale of insurance via outbound telephone calls be banned?
- Should the sale of add-on insurance by motor dealers be prohibited?
- Would a deferred sales model be appropriate for certain forms of insurance?
- Should ASIC have jurisdiction in respect of the handling and settlement of insurance claims?
Trust in insurers right now may be at an all-time low. The publicity and common themes around unethical behaviour and poor service will clearly affect people’s willingness to trust. However, insurers can take this opportunity to take meaningful steps to ensure their workforce is guided by the right governance and put in place the right people, structures and practices to enable them to operate in a way that is ethical and fair. Regaining trust should be a priority.