General insurance claims handling review
Speech by Alison Hewitt, Head of Department, Retail Firms Division, FSA
Post Magazine claims club meeting, London
17 March 2006
Good afternoon to you all and my thanks to Anthony for inviting me, once again, to speak at a Post Magazine claims event.
In October of last year I gave an overview of claims handling from a regulatory perspective, outlined our expectations of firms when handling the claims of retail consumers, shared with you some of our experiences from supervision and informed you of our future thematic work in this area. I also said that claims handling is the "Moment of Truth" for the insurance industry – an opportunity to fulfil the promise made to customers to pay a valid claim.
Today I'll be communicating our findings from the thematic work under the broad headings of liaison with customers and systems and controls.
I should say at the outset that we are encouraged by the review findings and it seems firms have been able to implement, without undue difficulty, the claims handling requirements in our new rules. We have seen a lot of positive signs that firms are starting to implement Treating Customers Fairly initiatives into their processes and procedures and we would encourage the industry to continue to make efforts to improve best practice particularly in the areas we have identified.
Why a thematic review?
Claims handling is one of the main areas giving rise to complaints from consumers of insurance products. This is perhaps not surprising given that when your customers make a claim they are likely to be in some form of distress and more sensitive to things not going the way they feel they should.
But the implementation of ICOB 7 together with the overarching principle of Treating Customers Fairly gave us a foundation on which to ask industry, for the first time, for information on how it handles the claims of retail consumers and to consider whether they are treating their customers fairly during the process.
As I am sure you are aware, the main purpose of ICOB 7 is to ensure that:
- claims are handled fairly;
- claims are settled promptly;
- customers are provided with information on the claims handling process, and with an explanation of why a claim is rejected or not settled in full, where relevant; and
- insurance intermediaries disclose and manage any conflicts of interest that may exist.
This review covered the first three points. We have separately published material on conflicts of interest in a Dear CEO letter in November 2005.
What we did & universe of firms
In November 2005, 34 firms completed and returned a questionnaire. My thanks to everyone who took the time to complete it.
The cross section of firms included in this survey is representative of the market, containing both large and diversified multinationals, and small, niche players in terms of geography, customer base and product type. The survey focussed on Buildings, Contents, Motor, Travel, Loan and Income Protection products.
We also conducted visits to seven insurers in December and January to ask more detailed questions than we could in the questionnaire.
As well as reviewing firms' compliance with ICOB 7, this thematic work gave us the opportunity to ask questions on fraud prevention, outsourcing and firms' use of MI. Taken together this has also enabled us to reach some conclusions about how far firms' claims handling procedures are compliant with the regulatory duty to treat customers fairly, or TCF as it has become more commonly known.
As I have said, we are encouraged by the findings from this thematic review, which are summarised in a factsheet available from our website today. It seems firms have largely successfully implemented the requirements of ICOB 7.
I will now go on to feed back on the main areas covered in the review, highlighting the key points we found.
Liaison with customers
Service standards and communication with customers
We are interested in firms' service standards as they give us an indication whether claims are being handled fairly, settled promptly and whether customers are being kept informed of the claims handling process.
Positively, firms compared well against the guidance given in ICOB 7 around service standards. The large majority aim to respond to notification of a new claim, deal with customer letters/emails and make payment from the date of settlement each within 5 days. 31 firms reported that they always or nearly always meet their service standards.
Where firms are not meeting their service standards, systems and controls are in place to identify reasons for underperformance and address failure to meet them. Good news so far.
However, we received a low response rate, around 60%, when we asked firms for their service standard for updating customers on the progress of their claim and there was no clear consensus of opinion from those who did respond. It seems that firms often update customers 'as and when required' or 'depending on customer expectations'.
This is all very well, but can you be sure what is required or what customers' expectations are? Whilst a proportionate approach to updating is sensible firms could be more proactive, updating customers periodically rather than on an ad hoc basis. This is particularly important where a claim may take a long time to settle and is part and parcel of managing customer expectations. It may seem obvious to you that a subsidence claim will cover 2 summers and 2 growth periods before it can be settled, but this won't be obvious to a customer whose only other experience of claiming on their household policy was for accidental damage to their TV which was resolved within 10 days.
Non- or part-payment of a claim continues to be an area where customers express dissatisfaction. This largely stems from firms not providing customers with clear, jargon-free information about why their claim has been rejected or not settled in full.
Firms report that they explain the reasons for this but customers are not always offered the choice of receiving the reason for rejection or part-payment in writing. On one visit we found one claims area of a firm complying with this rule with another claims area completely unaware that the rule exists. It is important that customers are given the choice of receiving this information in writing. Reasons for repudiation may be too complex or lengthy to adequately give over the phone. Customers are unlikely to feel that they have been treated fairly if you are not prepared to offer this information in writing.
Keeping customers informed during the claims handling process and clearly explaining the reasons for rejection is a simple way to make customers feel that they are being treated fairly and prevent complaints being made.
We asked what the most common reason for the rejection of a claim was since 1 January 2005. 19 firms reported that the most common reason was the claim being outside scope of cover.
We are surprised by the response to this question. Why are your customers claiming for things not covered by their policy?
I refer back to our review of general insurance disclosure documentation last December, in which we highlighted the need for you to consider a review of your product disclosure documents, to ensure that customers have clear and understandable information about the products and services being offered. For example, have exclusions been highlighted satisfactorily; are policy conditions unnecessarily complex and difficult to understand? Additionally, are the features of the product clearly and fairly reflected in the marketing material in a way that customers can understand and does the sales process ensure that the product is appropriate for the customer?
We accept that some claims are fraudulently made (on which more later). We also accept that there are sensible things customers can do to protect their own best interests when purchasing insurance products. Over time, we hope to see more customers effectively using the material they have been given to inform their purchasing decisions, which will lead to greater consumer understanding of the nature of the cover purchased and fewer erroneous claims being made.
Rejected claims can provide firms with useful intelligence about how well their customers are served through the lifetime of a product. It is good TCF practice to consider whether any steps can be taken to mitigate against the issue arising again in future.
Complaints
Fair and efficient complaint-handling plays a key role in consumer protection, as mistakes happen in even the best run firms. Complaints received should be seen as a valuable indicator of the effectiveness of a firm's systems, pointing to problems in a firm's operations which need to be addressed. The need for regulatory intervention is reduced when we can rely on firms' complaint-handling mechanisms to deal properly with consumers who feel they have not been treated fairly.
Most of the firms we saw have a dedicated complaints handling team. There is the potential, where firms do not have a dedicated team, that complaints are not logged and may not be adequately and impartially dealt with. It is not optimal for any area to deal with its own complaints and gives rise to potential conflicts of interest which need careful management.
We visited one firm which has recently introduced a dedicated complaints handling team and subsequently seen the number of complaints increase. This is not because the firm has become any poorer in its dealings with customers, but because all staff have been encouraged to consider complaints positively and more expressions of dissatisfaction are being recorded as a complaint. Interestingly, although the number of complaints has increased the average time taken to deal with them by the dedicated team has decreased.
We have said in the past that more efficient ways of handling complaints may mean that complaints go up in the short term. This is not necessarily a bad thing and might indicate that a firm is treating its customers more fairly. Under TCF, the number of complaints is less important than the way in which they are handled by firms and how they then subsequently act. It is important that firms conduct effective root cause analysis of their complaints MI and actively consider how they might improve their processes.
Systems and controls
A recurrent comment from firms was that ICOB 7 has made them formalise and document some of the things already being done which had been a beneficial exercise for them in thinking through whether they do, in fact, treat their customers fairly.
Staff
Many firms put their staff through a formal, claims specific induction programme, with a higher number giving their new recruits a mentor and access to a technical specialist. This suggests that for some firms an ad hoc, 'pick it up as you go along' approach may prevail. In these cases, it may be more difficult for a firm to demonstrate the competency of their staff if asked to do so. Whilst mentors or buddies are valuable training tools, the mentor will have his own job to do and may not be able to devote sufficient time to give the new joiner a proper grounding in insurance and product knowledge. One firm described this as "building foundations on sand."
Most of you also include service standards as part of staff objectives. This can be a positive measure of how customers are treated. However, these service standards should not encourage staff to concentrate solely on the volume of cases handled at the expense of quality. We see good industry practice where service standards relate to qualitative as well as quantitative measures.
Fraud detection and prevention
The reduction of financial crime is one of the FSA's statutory objectives. In addition, we aim to help retail consumers achieve a fair deal. A recent ABI survey found that fraud on motor, travel and home insurance is estimated to cost the industry around £1bn every year. Ultimately the cost of such fraud is borne not by insurers but by consumers.
Overall, we have seen good progress from the insurance industry in its response to tackling fraud. Initiatives are being set up to spread good practice between firms and the Insurance Fraud Bureau, due to start operating this year, will improve insurers' ability to detect and prevent organised insurance fraud.
Encouragingly, the majority of firms reported that they share data relating to fraud with other insurers in the same market and use data-mining software, voice stress analysis or cognitive interviewing techniques in their attempts to identify potential fraud. The majority of firms have also increased their anti-fraud activity and spend and of those firms that increased their anti-fraud activity in the past year, 65% recorded an increase in the amount of fraud detected.
A small number of firms surveyed (7) have no counter-fraud strategy and this was not confined to the smaller firms in our sample. We will be going back to those firms.
Some firms seem to consider themselves immune to fraud, either because of the profession of their customer base, or because the firm has a longstanding relationship with the policyholder and their families. Other firms think that internal fraud is an impossibility because they are 'one big happy family' or because 'it just wouldn't happen here', whereas in reality internal fraud is cited as one of the main threats to firms and is growing fast. We expect firms to take reasonable care to establish and maintain effective systems and controls for countering the risk that the firm might be used to further financial crime. In claims units good practice would be to maintain segregation of duties so that claims handlers are not able to register, handle and authorise for payment the same claim.
A more detailed FSA review of firms' high level management of fraud risk can be found on our website in a publication of the same name and we would encourage firms to continue to actively tackle fraud wherever they find it.
However, any anti-fraud activity must be balanced with the need to treat customers fairly. Some firms adopt an anti-fraud strategy of invoking a 'proof of loss' clause, almost as a matter of course. Most people do not have receipts for every item they have ever bought or that has been given to them. Most people do not keep photographs of their valuable items. If production of receipts or photographs is a requirement for a claim to be made then this should be clearly explained to the customer at inception of the policy and not used as a tool to unreasonably reject a claim where there is no clear evidence of fraud.
Sometimes insurers will pay a claim but will not offer to renew a policy, again where fraud is suspected but not proven. This is a valid contractual right that you as insurers have but an option that needs to be weighed against the knowledge that it will be very difficult, if not impossible, for the customer to obtain insurance cover again.
Outsourcing
Outsourcing is increasingly used as a means of both reducing costs and achieving strategic aims and can be a very effective tool in doing so. But it may also affect a firm's exposure to operational risk through reduced control over people, processes and systems used in outsourced activities. It is worth emphasising that an insurer cannot contract out of its regulatory obligations and should take reasonable care to supervise the discharge of outsourcing functions.
Many customer complaints stem from poor service received from outsourced service providers. From our review it seems that some firms only look at their outsourcers when something has gone wrong, by which time customers may already have been disadvantaged.
From our review, 32 firms employ a third party to handle their claims but not all of these have a formal reselection process and conduct regular audits. 20 firms have changed outsourcer/supplier in the last 3 years as a result of their failure to meet key service standards - so problems are being identified, but we would encourage firms to formalise their systems and controls in this regard through service level agreements and risk management frameworks, focussing on:
- the identification of quantitative and qualitative performance targets to assess the adequacy of service provision to both the firm and its clients; and
- the evaluation of performance and remedial action and escalation processes for dealing with inadequate performance.
Formal reselection should keep outsourced service providers on their toes, driving competition and ultimately a better service to the customer and return to the insurer.
Conclusion
Overall, most firms we reviewed are handling claims well, and we are encouraged by our findings. We will feed back findings to firms who took part in the review and continue to monitor claims handling performance in the industry through routine supervision work.
Thank you.