Conflicts of interest have been in the ‘insurance news’ a lot recently, chiefly because of the UK regulator’s review of how commercial insurance brokers have been handling them. This may tempt non-broking insurance firms to sit back and think that conflicts of interest (COIs) are a problem just for brokers to sort out. That would be unwise, for COIs exist across the insurance market. Indeed, many of the issues that attract the attention of the Financial Conduct Authority and Financial Ombudsman Service stem from inadequately managed COIs at other stages of a policy’s life cycle.
So when a policy designer was deciding whether to structure a policy add-on as opt-in or opt-out, the tendency for most to go for opt-out was a poorly handled COI. When the wording for a policy turns out to be longer than most classic novels, that is another poorly managed COI. Or when your underwriting assumptions for business coming in through aggregators are pretty significant but hard to spot, then that’s another. And an inbalance between particular items of cover and their limits of liability is.. well, you probably get the point by now.
And it is even wrong to think of brokers and advisers as representing the insurance market’s biggest COI risk. That lies firmly with insurers, when they weigh up the way in which they want to handle claims. It’s a pretty simple equation: the higher the claims outlay, the lower the profits. And with investment income low, that equation is even more to the fore. Unfortunately for claims departments, they also have to deal with the consequences of the risks others within their firm have taken with COIs: for example, the underwriting assumption or the clarity of an extension wording.
So where should claims directors start looking for their conflicts of interest? Here are some clues:
- how has their claims process been designed – understandable or complex?
- how do they first engage with claimants – with a welcome or a fraud warning?
- what steps do they require the claimant to take to validate their claim – count the hoops?
- how experienced are their claims personnel in explaining things and answering questions?
- what is the remit given to suppliers like loss adjusters and how is that monitored?
- what is the overall pace and momentum of the claims settlement?
- how claimants are streamed and categorised – innocent until proved guity or the other way round?
- how the settlement is agreed and then processed – more hoops?
- and wrapped around all of this, the culture emphasised by how the claims team is lead.
I once read about one insurer’s commitment to ‘make its claimants happy’. It’s a nice and simple rallying call, although my own experience of their claims service a few months earlier had been more like perplexing. Their challenge is to develop a good understanding of COIs and apply that to stages of a claim such as the above that frequently leave claimants feeling unhappy and unfairly treated.
Conflicts of interest are not some esoteric concept that only matters to people like myself. The public have a keen eye for them; it’s just that they don’t express what they experience in such terms. Properly handled conflicts of interest form the bedrock of an insurer’s integrity: they deserve much wider, and more proper, attention, in order to build the public’s trust in the market. The starting point for this is in the scope and focus of the firm’s conflicts management process.