Insurers must foster risk management and consumer protection culture

Insurers need to embed a culture of risk management and consumer protection throughout their organizations as customers become more vocal in their preferences and regulators more demanding, those attending a KPMG seminar were told.

“Good market conduct management requires good risk culture,” said Elizabeth Murphy, a partner in the financial risk management department at KPMG.

Murphy told the June seminar that consumer protection has always been a priority of financial regulators. However, they have historically approached consumer protection and risk through compliance, monitoring insurers to determine whether they have followed existing statutory requirements. But recently, regulators around the world have become more proactive, coming up with principles and laws designed to fix potential problems that may occur down the line.

“Consumer protection is not a new concept,” said Murphy. “However, over the past decade we have seen a growing focus on the duty of care to customers. As a result, conduct risk for insurers has been increasing. The two drivers of conduct risk are changes in regulatory and customer expectations.”

Reputational damage

She warned that boards that refuse to learn what goes into conduct risk by not creating a control risk management system may cause both reputational and financial damage to their companies.

From a reputational point of view, the popularity of social media has meant consumers can easily voice their opinions, both positive and negative, on a company’s products, the customer service they’ve received and how they’ve been treated in general. This, said Murphy, points to the need for insurers to develop customer-centric business models to mitigate risks.

She said reputational risk was severely underestimated in 2008 when a number of financial services companies, especially in the United States, went under or found themselves struggling as the result of the recession.

The need to refocus consumer protection and treat customers fairly has taken place around the world. For example, the Organization for Economic Co-operation and Development (OECD) has outlined in its 2011 Consumer Protection Principles that there should be oversight bodies specifically responsible for financial consumer protection.

Closer to home, the Ontario government is undergoing a review of the Financial Services Commission of Ontario (FSCO) and one of its mandates is to specifically refer to the goal of consumer protection and how it is meeting that goal.

“Insurers need to ask themselves whether they have processes in place to identify the risk that its products, services, processes or pricing may pose to its customers” she said. Depending on the answers, companies may determine that their current frameworks aren’t good enough and may have to come up with new solutions to the problems.

More mature companies that take advantage of the new market conduct expectations are building their brands and their competitive advantage.

“Canadian insurers will have to focus much more holistically on their products and services, their impact on customers and how customers actually perceive them. Insurers should not do this only for compliance reasons. We also think it can be a way to differentiate yourself from your competitors.”

Significant fines

On top of hurting a company’s corporate image, dismissing consumer protection can result in some serious cost damages. Regulators in some jurisdictions have already handed out significant fines related to market conduct. For example, a British insurer that failed to take steps to ensure its customers were being treated fairly was handed an £8.3-million fine; one of the top five insurers in the United States was given a fine of US$2 billion and told to repay customers for market conduct and churning activities.

While similar scandals have not occurred in Canada, Canadian companies need to fathom the complexities of these fines.

“There are dozens of cases out there of market conduct fines,” said David Pelkola, director, financial risk management with KPMG. “The regulators are getting more aggressive.”

To aid in the situation, the Canadian Council of Insurance Regulators (CCIR) has a work plan in place for a new framework to help its members improve their compliance with the International Association of Insurance Supervisors’ insurance core principles.

Pelkola said the change in culture has to be translated into actions, not just words. For example, companies that determine that sending customer-related work offshore may find this practice too risky and either move it to another country or discontinue it altogether.

Currently, there is a sense of urgency in some companies to “close” a specific complaint rather than get down to the nitty gritty of why the problem happened in the first place and potentially stop further complaints.

More automated processes, like data analytics, are now taking over to look at bigger audiences that may have the same problem – but, he said, it’s a practice that needs wider consideration.