Recent reports from the Australian Securities & Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) foreshadow increased scrutiny of insurers and insurance industry practices. The next few years will see a significant regulatory and cultural challenge for insurers as they strive to meet the regulators' expectations, compete effectively and deliver to their stakeholders. They will need to innovate and adapt, with a comprehensive understanding of the evolving regulatory landscape and a considered approach to engaging with ASIC and APRA.
The increased regulatory focus on insurance
Both regulators have made it clear that insurers should be prepared to contend with heightened scrutiny.
At the end of August 2016, ASIC published its Corporate Plan 2016-17, which highlighted its key goals in regulating the financial services and insurance industries, with an increased focus on insurance. It followed it up with two reports (Report 492 on add-on insurance, and Report 498 on life insurance claims handing).
ASIC has also been given a significant boost to its total funding, including funding specifically dedicated to regulation of insurers or specific insurance products. Judging from the three reports, ASIC will be using this increased funding to drive reform of the insurance industry's practices through a combination of surveillance and enforcement.
At the same time, APRA released an Information Paper on Risk Culture. It stated that APRA intends to refine and sharpen its approach to assessing risk culture. It reflected on the prudential risk of poor risk culture, recalling the collapse of HIH and the role that culture played in the demise of that insurer. APRA also noted the importance of collaboration between itself and ASIC, especially in the context of surveillance of regulated institutions.
Key areas for adaptation: policyholder expectations, proactive review and claims handling
A key objective of ASIC is to ensure that insurers meet policyholder expectations. In assessing this, ASIC will scrutinise insurance products, the manner by which they are sold, and whether they meet consumers' expectations when claims are made.
ASIC has published its view of "what good looks like" (ASIC's Corporate Plan 2016-17, page 36). Its expectations will effectively require insurers to proactively review their products and practices, and subsequently, to address issues. Importantly, when consumers have potentially suffered loss as a result of poor conduct, ASIC expects full compensation to be made available to each consumer.
In tandem with this, ASIC is pushing for legislative change to subject insurance claims handling to the same rigour and standards as the provision of "financial services" (from which insurance claims handling is presently excluded).
The shift to fairness as the touchstone for insurance
A significant shift for ASIC is its desire to achieve fair outcomes for customers. This is aligned with overseas developments, particularly the approach of its UK counterpart, the Financial Conduct Authority. The FCA has been emphasising fairness in, for example, its handling of the payment protection insurance saga and reports such as the Thematic Review of the "Fair treatment of long-standing customers in the life insurance sector", released in March 2016.
How will this new emphasis upon fairness play out? Invariably, the question of fairness in insurance is tested in claims handling. This is an area that is outside of the scope of the Corporations Act ‒ a position which ASIC wants reformed. ASIC has nevertheless assessed claims handling in the life insurance industry and emphasises that "reasonable consumer or community expectation" is a factor to be considered even when a claim can be denied on the basis that it is not covered. Of course, achieving a fair outcome in an individual case may not always be fair to the broader group of policyholders, reinsurers and stakeholders.
Challenges for insurers adapting to heightened regulator scrutiny: taking the whole of business perspective
To adapt to this outcomes-based regulatory push, insurers will need to improve their organisational ability to:
- understand clearly their customers' expectations and develop their products to meet the needs of customers (even when sales are being conducted in accordance with a 'no advice' model that does not permit taking into account the personal circumstances of the customer);
- control their advertising to ensure that the message is clear and consistent with their product offering;
- engage with reinsurers regarding claims issues that potentially fall outside policy wording;
- provide guidance to staff in relation to:
- sales, for which staff must understand the precise message to be delivered in relation to what the product offers; and
- claims, for which staff should be guided on managing disciplined claims handling and seeking to achieve a fair outcome for customers,
while at the same ensuring that staff are incentivised appropriately within balanced remuneration structures; and
- handle claims in accordance with industry codes of practice and feed back into the underwriting and sales areas lessons learned from the handling of claims.
These suggestions are easy to articulate, but difficult to implement. Insurance underwriters must evaluate risk and impose policy restrictions in according with sound pricing. There is no one-size-fits-all product that will meet everyone's expectations on every occasion. Insurers must then apply their policy terms and conditions if they are to manage their risk in a prudentially responsible manner.
There is also an overarching imperative to act in accordance with the duty of utmost good faith under the Insurance Contracts Act 1984 (Cth) and efficiently, honestly and fairly as a licensee under the Corporations Act 2001 (Cth).
Finally, the ability of an organisation to collaborate and operate in accordance with commercial objectives and risk appetite will depend on its culture. The target state for risk culture is sometimes simply described, but hard to obtain.
Insurers must address issues proactively with ASIC and APRA
The focus on enhanced organisational effectiveness and controls may identify issues, possibly even systemic breaches. When these arise, our experience is that organisations are best served by a proactive approach to engaging with ASIC and APRA. An independent audit undertaken by lawyers, or overseen by lawyers, can be a cost-effective strategy suited to the systematic identification of issues in the absence of (or, indeed, in anticipation of) regulatory enforcement action.
With respect to alleged loss by consumers, the use of an in-house remediation program, while complex to orchestrate, provides a sound basis on which insurers and other financial institutions can engage with ASIC and APRA. It also has a number of advantages. For example, a remediation program can mitigate potential customer losses and litigation risk. Second, an organisation led remediation brings within the control of the insurer the design, scope and ambit of any remediation program.
Lesson for insurers: get on the front foot by reviewing whole of business operations
Insurers must do more than expect heightened scrutiny from their regulators ‒ they must actively enhance their operations and risk culture. To that end, insurers should consider a review of their products, policies and practices, with a view to ensuring compliance with the broader regulatory framework in light of ASIC's underlying expectation of "fairness", its guidelines and view of "what good looks like", its recent criticisms and its stated focus and goals.
Crucially, insurers would be well advised to seek independent guidance, from an early stage, to implement appropriate reforms and establish in-house remediation processes where appropriate.