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Thursday, March 12, 2015

Summarising the Revised Fair Insurance Code and its shortcomings – Part 1

The Fair Insurance Code serves two purposes: operational and political.

Operationally the Code exists to briefly sketch how insurance processes work, to make customers aware that both insurers and they have rights and obligations, and that failure to fulfil the obligations carries penalties. In practice the Code places wide, strict and complicated obligations upon customers and narrow flexible obligations upon insurers.

Politically the Code exists to create the appearance of a fair and robust self-regulating regime. Creating and promoting this appearance is a defence against attempts to regulate the industry and reduce the power and enormous advantages insurers have in their dealings with customers.

Criticising the Code

Finding fault with the Revised Code has attracted the criticisms of being ill-informed and not understanding the 300 year old history of one of the cornerstones of the insurance industry: utmost good faith. At a superficial level these criticisms appear to have validity.

It would, for instance, be unusual for those working with, aligned to, or paid for by the insurance industry to criticise the narrow obligations placed upon insurers. The fact that insurers make only a small contribution to the utmost good faith requirement is the result of minimal and preferential regulation and favourable court decisions over a long period of time. As that is a comfortable and defensible position to be in, those aligned to insurers find nothing wrong with it.

What is ignored by the insurer camp is that the evolution of legislation and case law has created a situation considered draconian by others because of it's one-sidedness. In Britain there are some working to have the utmost good faith provisions removed from insurance, and replaced with something more equitable. That approach may be appropriate here if insurers do not accept the need to contribute more as their part of the utmost good faith requirement.

While ICNZ may be genuinely perplexed at criticisms of a well established and long accepted status quo, that is a narrow and excessively self-serving position to take. Pre-earthquakes, when insurance injustices were fewer, small, and smothered by the complexity and cost of court action there was no evidence of a need for change. The magnitude of the post-earthquake insurance disaster with it’s lack of fairness, honesty, transparency, and appropriate conduct shows there is a need for significant change.

The operational Fair Insurance Code.

Operationally it is a self-serving industry code rooted in commercial and legal conservatism that has evolved as little as possible over time.

This 2015 revision of the Code represents the insurance industry's best effort at improving it's performance and image, after the negative publicity arising from bad to abysmal post-earthquake claims handling. As the posts on this blog have shown the improvements are small, and don't address fundamental problems.

Some procedural changes have been introduced to provide a clearer understanding of what will happen when a claim is made. These changes also add more process and information on how differences and disputes between insurers and customers will be handled, and the consequences for insurers who fail to comply with the Fair Insurance Code.

In practice the changes are small and avoid substantive issues that can be summarised as falling into the categories of fairness, utmost good faith, honesty and insurer conduct.

The Revised Code is significantly deficient in not placing an appropriate range and depth of operational obligations on insurers, and needs much additional work to fix these failings.

Politics and the Fair Insurance Code

Wherever large corporations encounter criticism of their business model they, and their political supporters, lobby strongly for self-regulation rather than have laws passed to enforce appropriate corporate behaviour.

Once self-regulation is allowed it then becomes an exercise in allowing as much latitude as possible to business while conceding minimal rights to the customer. At the same time publicity is generated to create the impression that self-regulation is working well and is as effective as, or even more effective than, government intervention.

This practice is happening now with insurance. The bulk of the Revised Code involves imposing wide ranging obligations on customers while minimising insurer obligations. By calling it fair, and ignoring the widespread post-earthquake failings, insurers hope to be able to carry on business without conceding any of the opportunities they currently have and profit from.

To have a successful Code insurers don’t need one that provides great improvements for customers, they need only have something that their business and political supporters will feel comfortable backing. With this backing they can then avoid legislation to curb their behaviour.

 

In the next post there will be a summary of the Revised Code's failings in the areas of fairness, utmost good faith, honesty and insurer conduct.

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