Rising Conduct Risk for Insurers – Bane or Boon?

Conduct is the underlying basis for a credence industry like insurance, where utmost good faith is a foundational principle. Initially the onus of proper conduct was on the insured, because knowledge of the risk was in their hands. It was important to ensure that the pool created by all those insured, was not creamed off by a few unscrupulous insureds. So, insurance law in the old days was seen to overprotect the insurer. This was appropriate in the 1906 era, when the Marine Insurance Act of UK (1906), held that it was the duty of the insured to disclose material facts in such a way that the insured needed to second guess what a hypothetical “prudent underwriter” would want to know. So, if the underwriter accepting the risk was willing to accept the risk with what was disclosed, it was open to an insurer to invoke the law and prove that a “prudent underwriter” would have needed more disclosures, and strive to have the claim repudiated.

In today’s environment the plate has turned. Insurers are held duty bound to ascertain the facts and protect the insured in case of a covered loss. It is now a ‘seller beware’ environment duly evolved by law, regulation and the courts. It is essential that insurers ensure that fair terms and fair treatment is given to the insured at all times.

There are two central duties for insurers which generate the key risks for insurers – solvency risk and conduct risk. Solvency risk is a quantitative measure and is not easy in an era of hyper competition and poor insurer discipline. However, it is more easily understood by insurers. The real elephant in the room is conduct, which is qualitative. The duty of fair conduct affects all insureds. The two risks are so compelling that in certain jurisdictions there are two distinct regulators for the two risks. In UK there is the Prudential Regulatory Authority (PRA) for the financial risk and Financial Conduct Authority (FCA) for the conduct issues. In Australia there is Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

The intention of the focus on conduct is to drive customer good in many ways to ensure that insurance which is a public good is made affordable and accessible to all, and that there is speed and satisfaction in claim settlements and effective grievance redressal. It is a fond hope that this will speed universalisation of economic protection. Therefore, it is critical to see how is conduct regulated (Regulator) or self-regulated (GI Council) or overseen by the Board (Insurer) as part of their corporate governance duties?

In a case the NCDRC stated the following: “It appears that the Complainant has offended the officers of the Insurance Company by writing various letters for settlement of the claim at the earliest. …As the insured failed to accept the suggested amount of Rs.1 Crore, the Insurance Company repudiated the claim as a whole. That stand also cannot be justified. In such cases the whole purpose of protection against the peril by taking insurance policy is frustrated. We hope that the Insurance Company would strictly follow the regulations framed by the Insurance Regulatory and Development Authority (Protection of Policy Holders Interest) Regulations, 2002 (then, now 2017), so that unjustified actions and delays can be avoided.” The Supreme Court to where the case went on appeal said the following: "the almost identical amounts, barring a few rupees, arrived at by the Insurance Company (could be done as he was the third surveyor) and (here the SC named the surveyor) speak volumes of the exercise carried out by the latter on a wholly cursory investigation which has quite aptly been described as "tailor-made".”

Such actions indicate that poor conduct levels could be quite prevalent, and there could be thousands of such instances across our policies. In Health insurance, for instance, there are allegations that using the ratio of room charges to sum insured allowed, claims are cut down for all other costs in the same ratio. In catastrophe claims such as those of Hud-hud cyclone (2014) claims are reported still pending despite court orders to ensure rapid settlement of such claims. Surveyors and insurers strangely claim that they are saving money for the exchequer when they cut down claims, and that they have judicial powers in the matters of claims and so on. The old culture of customer beware needs to change to ‘seller-beware’, so that insurance penetration may move at a rapid pace arising from real goodwill to insurance protection.