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" the role of the compliance officer in the south african financial services industry has grown into one of significant importance. financial service providers are increasingly relying on their compliance officers to provide them with guidance and recommendations regarding their regulatory responsibilities "
Gerry Anderson - Deputy Executive Officer, Financial Services Board
30 May 2011
A successful (TCF) implementation should...
Gareth Stokes   (FA News)   Source
A successful Treating Customers Fairly (TCF) implementation should render industry watchdogs obsolete

I’ve been immersed in the short-term insurance world of late. My first assignment was the unveiling of Santam’s new logo along with their “Insurance, good and proper” strap line. There are those who say it’s not ‘good and proper’ English, but what punch market phrase is? Next I attended a media presentation announcing Discovery Insure’s arrival in the domestic personal lines space (let’s hope their distribution force can explain the product in plain English!) And finally I attended a luncheon where I received the latest copy of the Ombudsman for Short-term Insurance (OSTI) 2010 Annual Report. At these functions I’ve listened to complaints about the number of new competitors in the market, concerns over ‘tow and repair’ products masquerading as comprehensive motor cover, and the usual condemnation of the direct insurer ‘no commission’ promise – but by and large the industry remains robust.

Despite the occasional hiccup the majority of local insurers are posting reasonable profit. Ian Kirk, chief executive of Santam, said the strong rand and steep reduction in motor accident frequency had a welcome impact on the group’s bottom line. Underwriting margins were nicely within the group’s 4% to 6% ‘target’ while the payout ratio – percentage of premium paid back to motorists at claims stage – hovered at the 70% mark. He used the Santam ‘brand’ launch to issue a challenge to his competitors to apply ‘good and proper’ to their businesses too. He urged all insurance industry stakeholders to pay more attention to consumer education at advice stage and to avoid ambiguous marketing campaigns. I can’t be certain, but the insurance giant’s brand unveiling had a definite ‘Treating Customers Fairly (TCF)’ feel to it… It’s as if Santam has laid down a challenge to the regulators: Bring your new legislation – we’re already at work implementing it!

The new gatekeepers for the Equity and Fairness principles

The Financial Services Board (FSB) will succeed with its TCF implementation when the principles of fairness and equity currently upheld by the OSTI are successfully taken up at product provider level – and adopted throughout the distribution chain. It makes sense really… Because the idea with TCF is that the consumers’ rights and interests be considered at every stage of the short-term insurers’ (or other financial services providers’) business processes. At product design stage the insurer will have to focus on whether their product is necessary, affordable, ‘fit for purpose’ and transparent. The insurer will then have to make sure the product is distributed appropriately, whether the direct or broker channel is favoured. An important requirement at this stage will be to ensure the consumer understands what the product will and will not do. This is something Kirk refers to as “the promise”. And finally the product (meaning the insurer) will have to perform, by living up to its promise at claims stage.

Judging by the number of complaints landing up at the OSTI, the short-term industry has some way to go along the TCF path. “In 2009 the Office of the Ombudsman experienced, for the first time in its history, a decline in the number of complaints received. This trend continued in 2010 with the total number of complaints received falling marginally over 2009 levels,” observes Ombudsman Brian Martin in his ‘introduction’ to the annual report. The office received 8,778 complaints through 2010 and was able to ‘recover’ R130 million for consumers. Martin says the result was pleasing given the prevailing economic conditions and the pressures experienced by both consumer and insurer through 2009/10. Recessionary conditions led to an alarming number of complaints stemming from non-payment of premium or the confusion created by ‘churn’ from one insurer to another in an attempt to ‘save’ on monthly premium.

Some case studies from the Ombudsman.

The OSTI made three rulings in 2010. “The vast majority of cases received by the office are successfully resolved through a process of mediation and negotiation conducted in an atmosphere of mutual cooperation,” observed Martin. But the office experienced resistance from a number of smaller or niche oriented insurers that favoured highly technical, rigid and legalistic approaches over the principles of Equity and Fairness. The Ombudsman regretted having to make three formal rulings in situations where an amicable settlement could have been reached… A number of complaints case studies were included in the Annual Report. We’ll take a look at three of these cases (not the formal rulings) to get a feel for how the OSTI resolves issues between the complainant and the insurers.

The first case centres on a claim for damages to household items and equipment. A tree had fallen against a power line at the insured’s property. Upon entering his premises the insured heard a loud bang and noticed smoke coming from the television… Soon thereafter the light switches began making ‘banging’ noises and emitting smoke too. “The insurer rejected the claim on the basis that a power surge had occurred and that a power surge was not an insured peril,’ writes the Ombudsman. Indeed – power surge was not an insured peril – but the Ombudsman determined that the proximate cause of the damage was the tree falling against the power line – and falling trees were an insured peril. The Ombudsman requested the insurer to pay which it duly did.

The second case study deals with a frequent claims obstacle – the failure to furnish correct information at policy inception. It would appear the complainant misunderstood the telephone sales agent’s question about his/her previous cover. To the question: “For how long or for how many years did you have uninterrupted comprehensive vehicle insurance for?” the complainant answered: “For the last seven years I never claimed…” After reviewing the transcript the Ombudsman requested that the insurer settle the claim in full, because it was clear from the insured’s answer that the insured had confused the ‘uninterrupted cover’ concept with that of ‘no claims’ period.

A limit to due care and precaution

In the third instance an insurer rejected a claim for a fire-damaged boat. The insured had dropped the boat off at his father for a service and general maintenance. During the service fuel was drained from the boat and left in an uncovered receptacle. At some stage the father attempted a manual ignition test and the fuel caught fire, causing damage to the boat. The insurer rejected the claim on the basis the insured had failed to exercise due care and take the necessary precautions to prevent or minimise the loss. Did they have a ‘case’? The policy wording read as follows: “The insured must display the necessary caution and take all responsible precautions to prevent or minimise any possible loss, damage, death, injuries or liabilities.” The Ombudsman agreed with the insured’s attorney who pointed out that since the father was not an insured on the policy he had no duty of care to the insurer. The insurer conceded that the insured’s father was not on the policy and therefore the rejection reason could not be relied upon… And the claim was paid.

If TCF is properly implemented the complaints listed above should never make it to the OSTI. Insurers would complete thorough investigations into the merits of each case and apply the Fairness and Equity principles up front rather than forcing the ‘underdog’ to take up the struggle. With an average OSTI case resolution taking 225 days you can appreciate the financial strain insurance consumers face as the complaints process plays out!

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