The General Insurance Code of Practice 2014 comes into effect on 1 July 2015. The new Code is the result of an independent review involving consultation with industry, customer groups, government, regulators and other stakeholders.
The Code is normally reviewed and revised every three years to ensure that it remains a living document that is quickly able to respond to changes in the market, products and customer needs. In 2012, the triennial review was brought forward and Ian Enright was selected as the independent reviewer.
With the end of the transitional period for the adoption of 2014 Code fast approaching, we talk to Ian about the review and some of the key issues that were identified and addressed in the new Code.
Why was the review brought forward?
The main impetus for the decision by the Insurance Council of Australia (ICA) Board to bring the review forward was to address concerns about the insurance industry's response to the impact of the 2010-12 natural disasters on the Australian community. There had been three summers in a row of unusually high levels of loss, damage and distress. These factors had highlighted the important role played by insurance companies in helping our communities to recover.
The speed and scale of legal and regulatory changes affecting the industry were also important factors.
What were some of the key issues highlighted by the review?
Code governance emerged as an important issue. Through the consultation process, we were given two very distinct narratives about how effectively allegations of breach of the Code had been dealt with and sanctions applied.
On the one hand, insurers felt that industry enthusiasm for the Code meant that they worked very well with the Code Compliance Committee (CCC) and with FOS (Financial Ombudsman Service) to ensure early detection and resolution of issues. And that where issues couldn't be resolved—there was still a very effective mechanism for the CCC to work with the insurer to understand and rectify the problem. Customers on the other hand, pointed to the fact that in its 20 year history only one sanction had been imposed under the Code, to support their view that the Code's model of self-regulation was not working effectively.
Another significant issue was how the industry had responded to claims following the natural disasters of 2010-12 and whether that response could be improved through changes to the Code.
Financial hardship was also rated as an important issue. Through the review process we discovered that, due to financial difficulties, many Australians had trouble maintaining their insurance policies and needed special arrangements to assist them at claim time.
How have these issues been addressed in the 2014 Code?
Overall, the Code governance arrangements have been made more independent and transparent. The CCC has been replaced by the Code Governance Body (CGB), which is an independent body made up of a consumer representative, an industry representative and an independent chair.
The CGB's powers are clearer and wider (it is now also involved in education and training and policy matters), and there is better coordination between the CGB and the FOS throughout the compliance monitoring and enforcement process.
Further, the Natural Disaster Declaration Guideline was incorporated as one of the Code guidelines. This is an important instrument to trigger the natural disaster provisions of the Code. The Code has also been amended to include a Natural Disaster Customer Response Guideline.
A new Financial Hardship Guideline was also adopted. This details a financial hardship assessment and notification process, as well as measures for assistance and mitigation.
The claims provisions are clearer and tighter and provide a more specific timetable.
And lastly, but importantly, the Code is now in plain language so that it is more understandable and accessible for customers.
Do you think more sanctions will be enforced under the Code's new governance structure?
History will tell its own story, but the evidence before the review was that there was quite a lot of activity around the monitoring compliance of the Code and a very high degree of self-reporting by the insurers. I would expect that to continue and indeed be higher if anything. With the CGB playing a greater role in how the audits and the monitoring is conducted, I think FOS and the CGB will be better able to see any instances of non-compliance.
But would I expect more sanctions in the future? That's very hard to say. I would be surprised if there were, simply because with the increased transparency and independence of the CGB, I think issues will be effectively dealt with before they move through to the ultimate sanction stage.
Do you think the Code may become mandatory in the future?
No, I think the industry and possibly other financial services industries will probably move in the other direction. Government regulation doesn't have a particularly good track record and is extremely expensive and resource intensive. Historically and even in modern times faulty regulation has had quite serious consequences. There's also now a greater realisation about how effective these voluntary codes of practice can be where you have a coherent, responsible industry that has customer service at its heart.
Consequently, I think we'll see more codes of practice covering wider ranges of regulation around the customer relationship. In light of the emerging concerns about the commission fees that life insurers offer financial planners, my prediction is that the life insurance industry will likely be the next to adopt a self-regulating code.