Consumer trust and confidence in insurance is a critical goal insurers and regulators share. The question is, how should the two engage to best achieve that?
A deep understanding of the sector is essential for effective regulation and supervision. Looking ahead, having mutual high levels of trust and confidence between regulators and the regulated underpins the need for honest and efficient dialogue and collaborative understanding to tackle some of the big challenges that lie ahead, like climate risks. The necessity of this approach is underscored by the acknowledged limited supervisory insurance resources and the increasing supervisory remit.
To guide this, we need settings and expectations to be clear and well signalled. It’s also worth reflecting on existing guidance, such as the Treasury guidance on Government expectations of good regulatory practice. Regulatory systems are to be proportionate, fair, and equitable in the way they treat regulated entities. So, how might that play out when assessing whether a sector meets expectations?
Regulator expectations must be set out in ways that are easy to find, navigate, and clear and easy to understand. This also means providing accessible, timely information and support to help regulated parties understand and meet their regulatory obligations.
This would suggest that when regulated parties provide information about what they are doing or have done, there is clear and timely feedback on where shortcomings exist, why this is the case and what needs to change. This requires constructive dialogue.
The recent Conduct and Culture Update of 42 Fire and General Insurers (the majority of whom were health insurers, a life insurer, several professional body captives and small, mono-line insurers, but included 16 ICNZ members) was a snapshot of the situation two years ago. The results, and the way they were portrayed by the regulator, stung.
It was a regulatory rough up. I suspect this was justified because the findings identified some regulated entities that had barely started on the journey of meeting clear expectations set out by the Australian Royal Commission and the FMA/RBNZ review of banks and life insurers.
It was judged that a strong message was required to ensure the sector was compliant and ready for the legal obligations coming into effect under the Conduct of Financial Institutions legislation from 2023. ICNZ members are certainly committed to that and have been making progress to that end.
To what extent though was the update proportionate, fair and equitable to the sector? Certainly, the way the media reported the findings were anything but, and risked undermining trust and confidence in the sector at a time when insurers were proving their worth and delivering on the claims promise, responding to multiple large-scale natural disasters across the country. Could there have been a better approach?
In the report it was unsurprising that given entities were classified as either ‘sufficiently meeting expectations’, the benchmark for which was meeting expectations, or ‘deficient’ or ‘inadequate’, that most would fall into the latter two categories. With only two of 42 entities satisfying expectations without regard to the proportion of the market they accounted for, it looked that the entire market was broken.
Had the results been reported on a balanced scale, for instance, in terms of meeting expectations – met all, most, some, or few, or none - then the headlines would have been different. Not a reason for any complacency or obscuration, but rather a reassurance for general insurance consumers that they were in good hands.
Remember entities had been told to provide the information they reported to their boards by October 2019. Accordingly, while a few advised what they had done in the period since the request, despite not specifically being asked to do so, what was generally reported on was a two-year out-of-date snapshot.
Nor was any specific feedback given to insurers on the information they had provided, which could have prompted them to update the regulator about their progress since the initial request. Although that may have delayed the release of the update, it would have meant the information that was published more fairly reflect today’s position.
Additionally, when the update was released, the letters insurers received did not explain why they had not met expectations. On the positive side, workshops with the regulator will hopefully provide a better understanding of how to meet expectations.
I recall as the country first moved into a prolonged lockdown from March 2020 the speed with which insurers stepped up to help their customers before regulators asked the question, showing how ICNZ members knew what the right thing to do was.
Regulating well requires good judgement and constructive relationships. Sometimes it calls for a heavy hand for those that require it. At all times, it should involve honest dialogue, a fair approach, and no surprises.