Rules play a vital role in the success of the insurance industry, but what happens when they are taken away? Phil Evans looks at the regulator's principles-based treating customers fairly agenda and explains that, by putting itself in customers' shoes, the industry can dispel the confusion surrounding this issue.
The insurance industry likes rules — in fact it could not function without them. Policy documents are awash with them, in the form of terms and conditions, and pricing is fundamentally rule-based mathematics. There is no doubt they have served the industry well. So when a regulatory regime is introduced based on principles and prescription, it is hardly surprising the industry needs a little time to adjust.
This approach leaves businesses with the conundrum of striking a balance between their customers' needs and their own commercial aspirations. And this line is a tricky one to tread when you consider a firm may only discover it has got it wrong when the Financial Services Authority comes calling. So, if there are no official rules on treating customers fairly, how are firms supposed to know if they are failing to make the grade?
The FSA has issued two key dates relating to its TCF regime: by March 2008 firms must have the appropriate management information or measures in place; and by December 2008 they must demonstrate that they are using these to ensure their customers are receiving fair treatment.
To tackle this need to implement suitable procedures, firms should begin by looking at the issue from the FSA's perspective. The regulator refers to TCF as a philosophy, which, like all philosophies, has some significant guiding principles — in this case the six principles are based, very clearly, around how customers are treated. So the best starting place is to view your business through a consumer's eyes.
Many firms have already embarked on such an exercise and have reached the conclusion they are in pretty good shape. The problem is they need to prove it.
If this all sounds a little too fluffy, look a little deeper. One of the outcomes the FSA is seeking is that the products a firm offers meet the needs of specific consumer groups and are targeted accordingly. This may be relatively simple if your business operates in the affinity sector. It will probably be a straightforward task to demonstrate why the business uses a specific product and how that product meets the needs of a particular affinity group.
But how do you demonstrate the targeting of products in a highly commoditised market, such as motor insurance? How can a business justify the selection of one motor product over another? The FSA says that any advice given must be suitable and take into account the customer's circumstances. So does your firm ask the right questions to prove it follows this principle or does it assume that a proposal form or quotation system does the job? In many circumstances, such mechanisms might provide sufficient information to give the right advice, but has your firm looked at its process closely enough to be sure?
A clear message
Another TCF principle is to ensure consumers are provided with clear information during and after the point of sale. Can your business honestly say it achieves this? For example, have you scrutinised all your policy wordings?
One recently reviewed firm, for example, had a three paragraph description of the term 'unemployed'; exclusions scattered all over the document; and the benefits lost in a sea of terms and conditions. So while your business may have the most robust sales process and your staff may be the best trained in the industry, if the end result is to deliver a policy that is difficult to understand, is your firm really treating customers fairly?
To give a second example, one household name commissioned independent research on the effectiveness of risk factor descriptions in a new product — which sounds eminently sensible and commendable. But there were two flaws in this approach in terms of TCF: firstly it did not involve the document designers and compilers when framing the research, and, secondly, it warned the customers concerned in advance about which documents they would be questioned about — thus making it impossible to gauge the impact of those warnings at the time of purchase.
So, how should firms review their businesses to assess whether they meet the challenges of principles-based regulation? The process is best broken down.
Firstly, firms should ask themselves whether TCF is part of their culture. Boardrooms up and down the country may be shouting 'yes', but can they actually demonstrate it? One firm reviewed had a senior staff member responsible for compiling the management information on the company's performance against its TCF aims, but this individual was not even familiar with those aims. Firms should ask themselves whether people in their organisation have input into the TCF policy; whether they have a TCF committee; and whether everyone understands the firm's TCF policy. Are staff empowered and is their training sufficient and appropriate enough for them to discharge their duties effectively?
Secondly, insurance firms need to be confident that their overall proposition strategies and product ranges meet the needs of their target markets. For example, has your business undertaken sufficient research on target markets to ensure your products are relevant and competitive? And can customer satisfaction levels be monitored to demonstrate this?
Operational processes also need to be assessed to ensure they are sufficiently robust. For example, do IT systems have adequate functionality; how easy is it to see where things are going wrong and act quickly to correct them; do third party suppliers operate within the firm's operational requirements; and are sufficient resources put into handling and learning from complaints?
Customer communications must also be clear and delivered effectively. If your business relies on third party suppliers does their communications delivery meet your own requirements?
Finally, and most importantly, each business must be able to measure all of these things. So there is a need to assess whether management information is appropriate, delivered in a timely fashion, and understood by all that use it. And, crucially, does the business also act upon it?
TCF requires a lot of senior management commitment but it is worth it because there are some major benefits. Firms that can demonstrate good performance in TCF will perform better and receive less scrutiny from the FSA. It should also mean more and happier customers — after all, who doesn't like being treated fairly?
Phil Evans is joint managing director of TCF Index.
- Top 100 Insurtech: Quarter four update
- Charles Taylor bolsters liability team by hiring senior sextet from Vericlaim
- Gallagher Bassett acquires claims management firm
- Roundtable: Is a single customer view taking off in insurance?
- Finch and ICB owner on acquisition trail with sight set on €500m revenue by 2022
- Insurtech diary: Getting stuck into insurance
- Analysis: The mystery of the missing Insurance Fraud Taskforce report