An online court could fix life insurance industry

Tuesday, 17 September 2019

OPINION: After regulators took another shot at life insurers not prioritising the interests of policyholders, Minister of Commerce Kris Faafoi confirmed banks and insurers would face more regulation.

'We know the wider financial services sector – including both banks and insurers – hasn’t been putting customer interests top of mind,' Faafoi said.

'Sales incentives are a big part of the problem. Incentives play a useful role in some cases and we don’t want to remove them entirely. But when insurers sell financial products and services, the focus needs to be on the customer and not just on profit.

“We plan to introduce a regime where banks and insurers are primarily focused on their customers.'

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But what should that regime look like?

POSITIVE DUTIES

It's certain to contain positive duties, including to give priority to the interests of policyholders. Some financial services operators, like financial advisers, already face such duties.

Once these duties were in place the Financial Markets Authority, which is the logical regulator of insurance and bank conduct, would be able to demand evidence of, for example, how an insurer handles complaints, or treat of policyholders at claims time.

I consider insurance is all about enabling people to deal with a crisis, which means people need claims dealt with in a timely fashion.

I would favour hard time limits insurers had to meet on deciding claims, and also on dealing with complaints, which I know can be dragged out into months.

I would also favour an obligation for an insurer to inform a policyholder, if they have reason to believe a claim could be made.

ONLINE INSURANCE COURT

Insurers have bigger lawyers and more money than their policyholders. They can fight a claim very effectively, if they choose, and draw it out in the courts for years.

This is why people are afraid of insurers, and find it hard to trust them.

The higher courts are fundamentally broken for civil litigation except for the biggest cases. To be involved in suing someone, or being sued, is for the ordinary man or woman a form of cruel and unnatural punishment extended over years.

The fix, for me, is to create an online insurance court that deals with all but the most complex cases on written submissions, with the judges allowed to 'fact find' if they need more information.

The decisions would be published, and names of insurers and individuals would not be removed.

Rulings would be appealable, as with any other court, but an efficient online court would get that first decision in a timely manner.

'It's clear that progress has been slow and not as far-reaching as required. Some providers have started work to identify the customer and conduct issues they face, others have not provided any detail on this,' said Financial Markets Authority chief executive Rob Everett.

Responsive justice creates responsive insurers, and surfaces problems fast.

An online money court is no longer a novelty overseas. We need one here, but it will not, I am 100 per cent certain, be part of Faafoi's plan.

LITIGATION PREMIUM

It is unacceptable that someone can make an insurance claim can be fought by their insurer all the way to the highest court in the land.

If there is a serious risk (and there is) that a policyholder has to take a legal challenge against a non-paying insurer, then part of each premium on each policy needs to cover litigation risk so there's money available to pay the lawyers.

Clearly, an insurer could not be expected to provide insurance to pay to sue it, so it would have to be in the form of a levy collected by insurers with premiums, and paid to a third party to provide the cover.

LET THERE BE LIGHT

We've been hampered for years with a lack of transparency from life insurers.

We've put duties of fuller disclosure on some industries like money lenders, who have to put all their contracts and pricing on their websites, or in their shop windows.

We need to know more about the proportion of claims made to insurers which are turned down, and the reasons for the declines.

Insurers do not have to publish their ratios of claims to premiums on their different policies, which would give us, the public some insight into which are providing the worst value.

This matters because some insurance sales models put a lot of emphasis on the quick-sell, with the 'underwriting ' (the checking by the insurer as to whether policyholders failed to tell the insurer something important when they got their policy) coming when they make a claim.

Insurers with high decline rates, if forced to publish them, would have an incentive to make their sales processes work better for buyers.

Think all insurers are the same? Think again. A review done by regulators in Australia in 2017 found 90 per cent of claims were paid in the first instance, and just 4 per cent of life insurance claims were declined.

But it also found 16 per cent of total and permanent disability insurance claims, and 14 per cent of trauma insurance claims were declined. Three disability insurers had decline rates of 37 per cent, 25 per cent and 24 per cent. For trauma, one had 31 per cent, another 25 per cent and another 21 per cent.