Smoke Signals

“We need to move away from a strictly rule-book mentality, avoiding the creation of yet more paperwork and bureaucracy. In its place, we can work with our regulators to develop and require adoption of ethical principles of behaviour.

In the end, this kind of collaborative approach may be more helpful than an onslaught of new rules. Rules generate loopholes, and loopholes lead to malfeasance. But if introducing more rules won’t work, developing principles of behaviour just might, especially if backed by clear guidance to minimize compliance costs.”

– Lloyd’s of London Chair Lord Peter Levene

Canada’s property and casualty insurance industry has the opportunity right now to improve dramatically how it is regulated and how the public perceives it. Insurance Bureau of Canada (IBC)’s board directors took the first step on Jan.10, 2006, when it approved the Standards of Sound Marketplace Practice (see sidebar on Page 64) for voluntary adoption by insurers. If we can achieve widespread adoption of the standards, I believe it will mark a significant stage in the evolution of our industry.

CULTURE SHIFT

In recent years, the insurance industry in Canada and around the world has undergone a cultural shift. We moved away from the old ways of thinking and operating and began to think a lot more about the consumers we serve, and about the society and culture in which we serve them.

Consumers and regulators want to see transparency in our business. They want to see fairness in our underwriting and claims handling. They want to see consistency in availability, affordability and accessibility of insurance. Unfortunately, we have not always met these expectations.

The sound marketplace standards represent a promise to meet these expectations at all times. They are a promise to put consumers at the heart of what we do. It is in the best interest of everyone – consumers, regulators and the industry – for insurers to adopt them.

IBC’s Regulatory Balance Steering Committee created the Standards of Sound Marketplace Practice. The committee’s mandate includes the advancement of risk-based regulation. This would replace the traditional, rules-based regulation that currently prevails in Canada.

To get a sense of the difference between risk-based and rule-based regulation, imagine you had to locate a fire in the wilderness. You could walk around the woods looking for flames, or you could fly a plane over the forest and find the smoke. Most people would agree the plane is a far more efficient approach – especially if you don’t even know for certain there is a fire.

The traditional rules-based approach is like poking around the woods hunting for flames that may not exist. The newer, risk-based approach maintains a bird’s-eye view of the landscape; this allows for a clearer indication of trouble and therefore gives regulators a better sense of where to swoop in should their presence be required. The risk-based approach is more efficient, more focused and less disruptive.

Insurers and regulators increasingly agree that rules-based regulation is onerous, costly and ineffective. It’s a one-size-fits-all approach that makes poor use of scarce regulatory resources.

Conversely, a risk-based approach is flexible and efficient. It uses indicators such as complaint data (smoke, if you will) to identify companies that might be engaging in questionable market conduct. Regulators can then focus on those companies identified as high-risk.

Risk-based regulation is gaining momentum around the world. In Canada, we have risk-based regulation at the federal level, where the Office of the Superintendent of Financial Institutions monitors insurer solvency. But provincial regulators, who monitor market conduct, are still almost exclusively rules-based in their approach.

The wheels of change are in motion, however. Provincial regulators have recognized the evolving outlook within our industry and the value of risk-based regulation; this is reflected in their updated regulatory models. The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) have stated that they endorse a regulatory model “focused on outcomes rather than prescriptive rules and regulations.” CCIR is working jointly with the industry to develop a risk-based, market conduct supervisory model to improve public policy outcomes. A key component of the new approach is the Standards of Sound Marketplace Practice.

STANDARDS AND RESPONSIBILITY

The relationship between the regulators and regulated is maturing. On the one hand, regulators have shown flexibility in considering a regulatory approach that is efficient and less disruptive to the insurance industry as a whole. In return, however, the regulated are expected to show greater responsibility. This is where the standards come in.

Precedents for risk-based regulation exist around the world. For example, the insurance industries in Australia and New Zealand have moved towards risk-based regulation. Similar moves have been made in other economic sectors, such as the petro-chemical industry. Codes of conduct and standards of practice are common features of risk-based supervisory regimes. The adoption of such standards allows market conduct regulators to increase their level of trust in the internal corporate governance infrastructure already in place within an industry.

In New Zealand, the industry’s trade association, the Insurance Council of New Zealand, administers the Fair Insurance Code. The code aims to improve standards of practice and requires companies to acknowledge complaints promptly, investigate through a neutral person, and inform consumers of the decision within two months.

In Australia, the General Insurance Code of Practice was first introduced in 1995. The industry will soon unveil a new voluntary code containing standards for dealing with customers, including settling claims in specific time periods and providing clearer information about policies. The new code follows more than a year of consultations; it was developed to go beyond current regulation. Members of the Insurance Council of Australia, representing 90% of the general insurance market, are required to adopt the new code. Each company will implement the standards in a way most appropriate to its business.

It is important to note that when the industry hasn’t acted, regulators have. Industries that have not adopted methods of self-regulation typically find themselves more regulated than those that have.

SELF-AUDITS

Self-audits are a key component of a risk-based regulatory model, and are an important tool for both regulators and insurers. They improve regulator understanding of issues and help to identify weak players. From the insurance company’s perspective, self-audits can help insurers quickly identify and correct problems. In turn, this helps to reduce complaints, contribute to retention and attraction of new business, strengthen management and build competitive advantage.

CONCLUSION

A global trend is at work. It includes a move from the regulation of transactions to supervision of the system as a whole. Detailed, rules-based regulations are moving towards a different approach of supervision based on principles. Regulation is focusing not on reacting to crises, but rather proactively addressing issues before they become headlines. Insurers can facilitate this movement in Canada by adopting the Standards of Sound Marketplace Practice.

To build trust, one must be trustworthy. Setting standards and being accountable are important first steps.

STANDARD #1: Competitive products that meet customers’ needs.

Purpose: Consumers benefit from innovation and competition among insurers to provide viable insurance products and services that meet unique needs of consumers.

STANDARD #2: Informed and transparent sales transactions.

Purpose: Consumers are empowered and understand what they are purchasing, how the product will meet their needs and, in the case of policy renewal, understand the factors that may be giving rise to any material change in premium or coverage levels.

STANDARD #3: Competent and professional insurance representatives who follow a specified code of ethics

Purpose: All representatives of the insurance industry behave ethically and honestly with the public.

STANDARD #4: Fair claims handling and settlement.

Purpose: Claims are dealt with in a timely manner, evaluated consistently in accordance with policy provisions, in a spirit of balance and fairness.

STANDARD #5: Timely, accessible and responsive complaint handling.

Purpose: Insurance consumers have confidence that their queries or complaints will be dealt with in a fair, timely, accessible and responsive manner.