Why is ICNZ so keen on having a Fair Insurance Code, and prickly over criticism directed at the Code?
At an operational level the Code is a useful means of providing a standard approach to offering, selling and administering insurance. This has benefits to insurers as they want customers to have a feeling of ease and security in buying and keeping insurance. It works quite well, with New Zealand having an extremely high uptake of insurance which, in turn, means significant revenue for insurance companies.
At the political level the Code is one of the means used by insurers as they work to prevent or obstruct legislation to regulate the insurance industry. Unrestrained self-regulation is their on-going goal, and the Code is the part of the public face of how they go about it.
Prior to the earthquakes insurers operated without public scrutiny and there seemed to be no shortcomings (unless you dug deep). Should the fairness and suitability of the Code now be successfully challenged then the future of the current level of self-regulation becomes uncertain, and the preferred form of business-as-usual threatened.
The loud and frequent post-earthquake requests for more legislative change and oversight of the conduct of insurers is the crux of much of what is motivating insurers in this revision of the Code. They fear legislative change will put limits on their freedom to operate in a way that is highly favourable to them.
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FAQ 7 is the industry's response to requests for more legislative oversight of how insurers carry out their business. It is reproduced in full, with comments after each paragraph.
FAQ - 7: Some critics have said that while it’s fine to improve the Code, but what is really needed is legislation. What’s ICNZ’s response?
Clearly, it would be ludicrous to suggest service standards be legislated on for insurers or for that matter any business in New Zealand.
ICNZ's choice of words (service standards) appears to be a careful one. The implication is that calls for legislation solely concern service standards akin to legislating for how tables should be waited upon in a restaurant. What has been called for is legislation to make insurers externally accountable for the integrity and quality of the way they do business.
So, why would it be ludicrous to change the law and require better conduct of insurers?
On Thursday the Minister for Commerce and Consumer Affairs (see yesterday’s blog) showed it wasn't ludicrous, with a proposal to extend the dollar amount of a claim that can be considered by the independent dispute resolution services. Such a change would provide huge relief, as far fewer customers with valuable claims would face the expensive and daunting prospect of taking insurers to the High Court.
A few paragraphs below there is mention by ICNZ of insurance legislation in both Australia and the UK that is mimicked in part by the Revised Code, so how is it ludicrous just in this country to pass laws to protect customers from insurers behaving badly? The Consumer Guarantees Act 1993 has provisions covering services which could be enlarged to include insurance and The Fair Trading Act could include provisions regarding unfair practices.
When the conduct of insurers in the US (e.g. New York Times Hurricane Katrina article here and Hurricane Sandy here), Australia (e.g. Queensland floods here) and New Zealand (Canterbury earthquakes) are taken together there is a clear pattern of “offending” through bad, unfair and sometimes dishonest behaviour. It would seem a matter of some importance to individuals and small businesses in New Zealand that there are clear statutory protections from a pandemic of bad insurance behaviour.
Where there has been most focus on legislation has been what to do about insureds who do not disclose information to insurers which lead to the voiding of the insurance contract. In some instances, it has been argued that insurers have used non-disclosure or irrelevant facts to avoid contracts unreasonably. ICNZ Members are committing to act reasonably when responding to non-disclosures by the insured.
The overseas legislation, not specifically arising from the experience of natural disasters, has been concerned to protect customers who, for honest reasons, were found to have omitted or overlooked information the insurer deemed necessary or material. There have been issues concerning non-disclosure but the wording above is pejorative – insurers have treated a failure to disclose as a wilful act on the part of the customer. This provides a convenient opportunity to reduce or deny the claim by the insurer, who has a strong incentive to pay as little as possible on claims.
In some cases non-disclosure has been the result of a failure to understand what was required or a failure to anticipate what the insurer didn't specifically ask for. The consequence has been a “punishment” out of all proportion to the mistake made. As there is no statement of what constitutes acting reasonably there can be no certainty that current practices will not continue under the guise of being found to be reasonable.
The post-earthquake experience is larger than this and includes the failure of insurers to fulfil their side of the contract. To repeat the list from the pervious post:
- ill informed, poorly and badly behaved staff and agents
- the use of some assessors who were inadequate to the task
- indecisive decision making
- inability of insurers to communicate in a sensitive way
- reluctance of insurers to release information to customers
- reluctance of insurers to comply with dispute processes
What we have done in the Code is to acknowledge changes in UK and Australian law which essentially limit the ability of insurers to avoid contracts altogether and require them to respond reasonably to non-disclosure. The Code picks this up by requiring insurers respond reasonably to non-disclosure, so we effectively move toward the legislative changes elsewhere. The independent Dispute Resolution Schemes and ultimately the Code Compliance Committee become the arbiters of what is reasonable.
This is not good enough. Moving towards is not the same as being there. There can be no certainty that the Dispute Resolution Schemes will be competent to decide what is reasonable – what basis or guidelines will they use, how will they reach their decision, will customers be able to attend the consideration of their case or will it be done behind closed doors?
There is little openness in the way insurance disputes are processed either within the industry or via the Dispute Resolution Schemes – it is all done by people at desks in the absence of the customer. The courts’ system (specifically the Disputes Tribunal) should be the model of participatory dispute resolution even if it is a private sector scheme.
Not all insurers are members of ICNZ so the Code does not apply to them. This would support an argument for legislation. ICNZ does not see any immediate sign of legislation on the horizon, but if it effectively reflected the approach we have taken in the revised Code, we would not object to it.
As ICNZ members write more than 95% of all fire and general insurance policies the Revised Code covers everyone who matters.
ICNZ would not object to legislation if it did no more than what is contained in the Revised Code? This is not a concession. What is required is far more than what is provided for in the Revised Code and fierce opposition can be anticipated.
Non-ICNZ Members aside, in our view a self-regulatory code of conduct administered by independent dispute resolution schemes is just as effective as legislation at regulating whatever standards are set.
This is a view ICNZ is entitled to hold, but not a view that would survive more than cursory investigation. The legislative issue is not just about regulating whatever standards are set, it is also about setting some of the standards as well.
One area where standards need to be set via legislation is that of the content and meaning of the “hard parts” in policies – the fuzzy words such as fairly, honestly, transparently, material (preferably with reference to the Principles of the Privacy Act), and codify the concept of “utmost good faith” as it applies to both parties.
Why? As far as interpreting insurance policies are concerned, insurers are very strong advocates of the Humpty Dumpty Position:
"When I use a word," Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean - neither more nor less."
(Through the Looking Glass – Lewis Carroll )
This form of conduct needs to be stopped, and only legislation will provide the level of integrity and openness needed to ensure that there is clarity and consistency in the operation of insurance policies.
NOTE: There is a statement (end of the third paragraph) “The independent Dispute Resolution Schemes and ultimately the Code Compliance Committee become the arbiters of what is reasonable.” That seems unworkable. The ISO, and most likely the CCC, are bodies that can consider only what is contained in a policy document. Unless the document contains a definition of what is reasonable then are they entitled to create one? As the ISO, and again presumably the CCC, do not have hearings or allow customers to participate in deliberations will this be a process devoid of natural justice?