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Monday, March 9, 2015

Fair Insurance Code Questions & Answers – Part 3

In the previous post, covering FAQ 7, it was stated that an underlying purpose of the Code was to pre-empt any external control on how insurers carried out their business. The point was also made that as far as interpreting insurance policies is 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 )

FAQ 8 is where they excuse themselves from attempting to clarify what is meant by what they say.

FAQ - 8: Why not make insurers list the key information insureds should declare?

This approach has been taken in Australia and is leading to all sorts of problems. There is no evidence that these lists or summaries of policy wordings are helpful to the insured. The difficulty is that it is virtually impossible for an insurer to cover every material fact that an insured may need to disclose. It is also very costly to attempt to tailor every policy in this way. We believe the real answer is to tackle the problem by requiring the response to non-disclosure to be reasonable. This is how the UK have approached the matter

This FAQ contains two separate and important issues which were raised during the Review: lists of the information required by insurers, and summaries of policy wording. Both have been dismissed.

The provision of a list of key information required by an insurer has been dismissed on the grounds that this approach has been taken in Australia and “... is leading to all sorts of problems.” What are these problems? Who has identified the problems? Are they problems for insurers, or for customers? Is it proving too hard for insurers to clearly state what they mean?

Unfortunately these problems are not described, and there is no reference to whatever independent research has been done on the issue. In the absence of documented evidence of “... all sorts of problems.” ICNZ should not expect anyone to accept that this is a genuine issue.

The FAQ addresses this by saying:

The difficulty is that it is virtually impossible for an insurer to cover every material fact that an insured may need to disclose. It is also very costly to attempt to tailor every policy in this way. We believe the real answer is to tackle the problem by requiring the response to non-disclosure to be reasonable. This is how the UK have approached the matter.

There are three parts to this:

  1. It is too hard for an insurer to cover every material fact they need to know when insuring a house, contents, car or travel. If it is too hard for insurers, who have a wealth of experience and teams of insurance specialists available to them, how can it be fair and reasonable to expect customers to do the job for them?

  2. The insurer is motivated to save costs because every policy would need to be tailored to suit the customer's circumstances – in the absence of examples this does not seem credible in the computer age. To save an insurer costs, ICNZ believe it is preferable to put the customer at risk.

  3. ICNZ would much rather take the “ambulance at the bottom of the cliff” approach than make the effort to prevent problems arising. 

Each of the three points, and especially when combined, make financial sense for insurers as both costs and risks are transferred to the customer. Should the customer not anticipate everything the insurer didn't ask for, then it is the customer who will have to go through a lengthy and onerous dispute process to make good a situation the insurer could have avoided. Some customers give up under the pressure, which is a win to the insurer.

In addition to not being specific about the information that is sought, insurers will not be listing key words or expressions either, because of the difficulties presented by the exercise. In this instance ICNZ have the view: “There is no evidence that these lists or summaries of policy wordings are helpful to the insured.”, a view held in contradiction to much of the experience following the Canterbury earthquakes where policy interpretation became key. Once again the customer faces the challenge of being an insurance specialist in the absence of any attempt by the insurer to provide assistance.

In both issues insurers are demonstrating neither fairness nor any level of good faith by failing to openly disclose what information they need, and how the important terms and expressions in their policies are to be interpreted.

FAQ - 9: Who will be on the Code Compliance Committee (CCC)?

No comment at this stage.

FAQ – 10: Why is the Chief Executive of ICNZ on the Committee?

No comment.

FAQ – 11: How will the CCC operate?

Until the detail is available it is difficult to comment. On the basis of the information provided the CCC is not a body that customers can approach if they have problems with the conduct of their insurer. In this regard it is unclear how the the Committee adds value or protection to customers.

Unasked and unanswered are the questions of compensation and transparency. Will the CCC be able to direct compensation be awarded to customers whose complaints have been upheld? Will the CCC operate openly and allow interested parties (complainants, the media) to attend?

FAQ – 12: Why is the Code limited to only consumers and SMEs?

No comment.

FAQ – 13: What did the independent peer reviewer say about the Code?

Hon. David Caygill said the report responds fairly and comprehensively to the submissions the Council received, and that the amended Code is a considerable improvement, particularly with respect to lessons learned from Canterbury.

Mr Caygill is entitled to his view. As far as the Revised Code is concerned we are a long way apart. 

Be that as it may, what the independent peer reviewer (as quoted above) does not say is that the Report, a document that (as far as I know) has not been made public, is quite separate from the Revised Code. The Report is a substantial response to submissions, however important issues mentioned in it don’t make it to the Revised Code. Therefore the concept of there being improvements to the Code has to be tempered by the fact that important issues have not been addressed and substantive change has not occurred.  

The next post will provide a summary, and look to what changes are needed to protect the rights of customers of the insurance industry.

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