Private Investigators and Insurers

Jenée Tibshraeny at interest.co.nz highlights the difference in practice and monitoring between state-owned companies and the private insurance companies when they engage private investigators. See second half of article. Andrew Hooker, a lawyer, and specialist in the insurance area, has called in his articles for the use of private investigators by insurers to be brought into the insurance law reform debate.

Reading through the articles the complaints amount to the assertion that private investigators followed clients being investigated to the meetings with their lawyers. It is suggested that they may have attempted to learn about the content of the meetings. The details are sometimes murky in such cases, especially when the only information we have is a brief news item. But I am not sure exactly what the problem is here. If a private investigator follows someone, then they would follow them everywhere, and might find it hard to specifically exclude following them to the appointments with their lawyer. If they ask questions about what a person has been doing, if they strike someone who is forthcoming - like a nosy neighbour - they may get all the news the neighbour knows, and probably, some that the neigbour will make up too...

I just had a fascinating conversation with Jenée about the issues. I have to admit that even if legal, were I to discover that I had been followed, I would probably feel some outrage, and even feel a bit intimidated. That's a big reputation risk for an insurer - and unlike a state organisation, insurers can lose clients by acting in ways which damage their reputation. That alone is probably an effective brake on overuse of such a tool. On the other hand, people break rules and make unwise choices from time to time. I am also conscious of a current review of privacy legislation, and unsure exactly how that operates in cases such as these. There is scope for this to be worse than it looks, or not as bad as it reads right now.

But if PIs are doing something wrong, why should the use of private investigators be regulated under industry-specific law? If they have an incentive to use certain techniques with one client (an insurer) you can bet they use them with another (say, an employer). Surely, if they require further regulation, they are probably doing that for all their clients, and so this should be dealt with in privacy law.


Proposed Insurance Law Reform

Jenée Tibshraeny has a good article on the proposed insurance law reform. This piece of work has been identified as needed by both the previous and current government (and probably quite a few people in Canterbury over the last few years) and has the potential to increase trust and confidence in insurance provision. As with any law change, it has the potential to get it wrong too - which makes it one to watch, and engage with.  

"Your insurer can decline your claim if it finds you accidentally didn't disclose material info about yourself when taking out the policy. This is fair enough in theory, but in practice catches people out. The govt is to review the laws around this..." Link.


You had one job...

Essentially the Insurance Prudential Supervision Regime says insurers have one job when it comes to disclosing to customers. Jenée Tibshraeny has written this article on interest.co.nz discussing "how a light touch approach to regulating insurers doesn't work while companies consider disclosing key financial information a box ticking rather than a consumer protection exercise"

Of course, insurers have many other jobs besides this: offering great cover, numerous disclosures to consumers under other laws, and making sure that the actual solvency position is managed, not just reported appropriately. Nevertheless, I was surprised to find that the RBNZ report could be, given that this is a relatively simple disclosure, lengthy and fascinating. 


Action on Disclosure Law Promised

Jenée Tibshraeny, Journalist, at interest.co.nz has a good article on promises to update disclosure law

    Jacqui Dean has told interest.co.nz she’d like to “commence work on a significant package of insurance contract law reform in 2018”.

This is likely to add to a relatively busy period for law and regulation for insurers and insurance sales. The Financial Services Legislation Amendment Bill has been getting most of the spotlight, but there is also the review of the Insurance (Prudential Supervision) Act being carried out by the Reserve Bank (update here), and now the promise of insurance contract law reform. 

Insurance law is rarely updated, so why now? The IMF report on Financial Sector Stability identified the insurance market as an area in which there could be improvements in insurance market conduct. Some aspects of that criticism touched on the activities of advisers, but changes to advice law in the new Amendment Bill already have that area covered - requiring adherence to a new Code of Professional Conduct and giving the FMA much more power to manage conflicts of interest. That left insurer's conduct obligations, which were also picked up as an issue in the report. But international reports are rarely so quickly turned into action. We think that local pressures pressures for change are more significant:

  • Conduct has been a big focus for the FMA recently, so officials would have echoed the IMF report's call for better management of market conduct. 
  • Disputes resolution bodies (the ISO and FSCL) have a modest, but persistent, flow of complaints that relate to non-disclosure. There are certainly more that we are unaware of, as some people simply do not complain when their claims are rejected. They have been highlighting the issue of the disclosure law for a long time.
  • There have been a very large number of claims for damage arising from earthquakes and lots of publicity about complaints relating to delays, settlements, and denied claims. So for once insurance law reform may actually be noticed, and desired, by lots of voters.

The example of material non-disclosure in the article relates to a life insurance case, rather than fire and general, where most recent complaints probably arise. A further nuance to the example is that it depends a lot on what kind of application process there was. Most (functionally, all) fully underwritten life products would have asked a question about the back injury, so it would have to be more than an accidental omission, the client would have had to either lie or have forgotten. But when the application is a ‘short form’ or if there are simply no health questions because it is a ‘guaranteed acceptance’ product, it would be easy for clients to make the non-disclosure along the lines suggested in the article.

For most insurers, who are paying these claims, the change to disclosure law will not be an issue. Their parent companies in Australia and the UK are typically already working under these regimes. The low level of complaints (relating to life insurance) indicates that there cannot be really large volumes of claim declines. But the change would still be significant enough to be welcome, because a functioning insurance market relies on confidence, and confidence in claim payment most of all. What the consumer gains in confidence is a direct gain to the industry as well - it will result in more policies being purchased from insurers. Advisers should also reflect that it will reduce their advice risk around non-disclosure complaints. 

Of course, no final judgment can be made until we have the draft law, but this could be good.


Interest.co.nz: Insurance Sales and Claims Data

Jenée Tibshraeny has this excellent piece on the sales of insurance and the willingness of insurers to release claims data. If you are an adviser and easily offended by anyone talking about buying insurance direct then this might not be for you. But that would be a shame, because there is actually a lot of interesting data and quotes from insurers in the piece about claims rates overall and TPD claims in particular. 

The whole interest in the piece has arisen because of the ASIC investigation into claims rates. That was a really useful piece of work. Although some in the Australian media are trying to portray it as more evidence of bad practice among insurers, it is actually a really positive report for the industry. The industry pays lots of claims - typically in 90+% range and upwards. The report also showed the value that Financial Advisers add: clients of advisers got more claims paid than non-advised customers. There was only one blemish, really, and that was TPD. 

TPD has a bad reputation in Australia and New Zealand, but for widely divergent reasons. In Australia insurers don't like it much because the market has become highly litigious and almost everyone who is in work has TPD as a part of their superannuation scheme. So the cover is much more widely held and claimed on than in New Zealand. Here TPD is rarely bought and rarely claimed on. How rarely, we have no idea.

Regular readers will know that I am an advocate for more data. I love data and I think it helps make better decisions. I also think that advisers and customers are not quite the fools they are assumed to be by some commentators: they can use data responsibly. Some won't, of course, but they are probably making all the mistakes they will make right now.

But reluctantly I have to agree that NZ insurers are probably right to be cautious about releasing TPD data. There was a big change in TPD products about five years ago: the addition of 'partial' benefits in TPD. These arose because of negative media reaction when claimants suffered very substantial, and permanent, but not total disabilities, like losing a leg, for example. Mixing up the data from the older contracts with the new is a major risk. So is acting on your own if none of your competitors are going to share their data. This is an area where the action of an industry body or regulator can help a lot. Naomi Ballantyne is quoted as saying that she supports the idea of developing standards for the release of claim data in a recent goodreturns article, but recognises that there are technical challenges. Another challenge is this: if TPD does have a problem, with low claims rates, say, it will never be overcome by keeping it all a secret. It will only be overcome by making better products and being open about the value they deliver.

In the UK, the Association of British Insurers has had success in boosting market confidence in products through claims reporting. For them it wasn't about boosting direct over advice, it was about boosting all forms of sales through improved consumer confidence. That looks like a good goal to me. 

 


Car Insurance: Claims Routinely Declined for Breaking the Road Rules

Jenée Tibshraeny has this excellent article on insurance claims declined by car insurers because the driver made mistakes: they took one drink too many, they were restricted drivers, but did not have a properly qualified person with them, and so on. I should make it clear that I am not in favour of drink-driving. I think that people should observe their licence conditions, but I do not think that these should be blanket reasons for declining insurance claims, although blatant, knowing cases, should probably remain excluded.

The fact is, most accidents on the road involve some breach of the law: going too fast, not paying enough attention, failure to give way to the right... you can continue to add to the list. But, at least for now, we pay them. Why? Because we assume that the driver still wishes to avoid the insured contingency - so these are accidental lapses - and financial consequences of an accidental lapse are exactly what the customer is interested in getting insured.

Read the whole article and ask yourself how much worse it would be if the insurance policies had been life insurance, with an unlawful acts exclusion. Link. Fortunately such policies are not common, but several are sold by major brands to thousands of consumers every year in New Zealand.


Multi-disciplinary Advice Firms

One of the possible outcomes of the proposed changes to the Financial Advisers Act is an increase in average business size. In an article by Jenée Tibshraeny at interest.co.nz quotes Richard Klipin contemplating the rise of multi-disciplinary advice businesses. 

The proposed changes make this more likely through a number of mechanisms. While a lot of attention is focused on the licensing of the Financial Advice Business, "...licensing would be required at the firm level (for the avoidance of doubt, a sole-trader is considered a firm) " - p.62 this is not the main issue. If there were no difference in either cost or requirements for registering as a sole trader then there would be no real drive to form advice businesses.

But I think Richard Klipin is right, and there will be a strong drive.

That push is mainly provided through increasing the requirements on RFAs. One part of Coase's theory of the firm holds that as fixed costs rise then average business size rises. Another argues that if larger organisations can reduce error rates then they are more attractive. Both those factors could explain increasing scale in financial advice businesses.

Will such factors increase? The FMA fee for registration is only a small factor. The requirement for, say, increased education is a much bigger contribution to the new cost model. Even bigger than that are the business changes required to provide detailed compliant personalised advice in an efficient way. That usually requires good information technology, regularly updated and maintained. That fixed cost will push many advisers to contemplate participation in the kinds of advice businesses Klipin mentions in the article. In addition, larger organisations with good processes for ensuring compliant advice will have smaller error rates and may apply lessons learned more quickly to more advisers. 

Theoretical models are buttressed by current experience. Several commenters are already pointing out the similarity between the FAA review proposals and the existing Australian regime. That approach led to larger businesses in Australia. In New Zealand the current FAA has already led to larger businesses - consolidation has been ongoing across the insurance sector. To some extent cost sharing has explained the rise of our broker groups, and recently professional associations are joining the movement. 


Conflicting Views of AFA Data

In their review of AFA data goodreturns focused on the share of new AFAs that banks have picked up over the last two years. Banks gathered the largest share of these new recruits: of 202 new AFAs 59 are now working in banks.

On the other hand, at Investment News NZ, David Chaplin highlights the net position and points out that after taking into account staff losses (and ignoring the recent acquisition of JB Were by NAB) the numbers of AFAs employed by banks has barely budged.

Both reports are worth a read. However, as my statistics adviser points out, it is hard to make reliable predictions from small numbers: and all the numbers are small. The gains, the losses, even the movements between employers look lower than for many other sectors of the economy. It feels to me like we do not have a fast-changing AFA market. We have a smallish, slow, and sticky market for the services of AFAs. I hope that it grows.