The insurance industry is making good progress in its response to tackling fraud

Alison Hewitt, head of department, Retail Firms Division at the UK’s Financial Services Authority (FSA), highlights findings from its recent review of claims handling in general insurance.

The FSA's 2005/06 Business Plan set out our priorities in the retail general insurance market for the year following the implementation of the Insurance Conduct of Business (ICOB) rules. One of these priorities was to conduct a review of claims handling in retail general insurers.

We made claims handling a priority because it is important that it is done in a fair and transparent way. Claims handling is the industry's opportunity to fulfil the promise made to policyholders when insurance is purchased – the promise to pay a valid claim - but it remains an area where customers express dissatisfaction.

The FSA's rules and guidance on claims handling were devised to ensure that claims are handled fairly and settled promptly, that customers are given information on the claims handling process and an explanation for non- or part-payment of their claim and that insurance intermediaries disclose and manage any conflicts of interest that may exist.

A cross section of retail general insurers completed a detailed questionnaire looking at service standards, communication with customers, systems and controls, fraud, training and competence, outsourcing, complaints and the use of management information. We also conducted visits to seven insurers to ask more detailed questions than we could in the questionnaire.

Our aim was to highlight to the industry areas of potential consumer detriment and reach some conclusions about how far firms' claims handling procedures are compliant with the regulatory duty to treat customers fairly, or TCF as it has become more commonly known.

The findings of the review were, for the most part, encouraging. It seems insurers have largely successfully implemented the requirements of ICOB 7 and are starting to implement TCF initiatives into their processes and procedures. However, there are some areas where the industry could do more to treat customers fairly.

Insurers should keep customers reasonably informed about the progress of their claim, explain why a claim is being rejected or accepted in part only and offer to provide the explanation in writing. Keeping customers informed about the claims handling process is particularly important where the claim may take a long time to settle and is part and parcel of managing customer expectations. This and explaining the reasons for non- or part-payment is a simple way to ensure customers feel they are being treated fairly.

Rejected claims can provide firms with useful intelligence about how well their customers are served through the lifetime of a product. It is good TCF practice to consider whether any steps can be taken to mitigate against the issue arising again in future.

Communications should be clear and jargon-free. As we said in December 2005, industry should consider the need to review product disclosure documents, to ensure that customers have clear and understandable information about the products and services being offered. For example, are exclusions highlighted satisfactorily? Are policy conditions unnecessarily complex and difficult to understand? Additionally, are the features of the product clearly and fairly reflected in the marketing material in a way that customers can understand and does the sales process ensure that the product is appropriate for the customer?

Fair and efficient complaint-handling plays a key role in consumer protection. Complaints received should be seen as a valuable indicator of the effectiveness of a firm's systems, pointing to problems in a firm's operations which need to be addressed. The need for regulatory intervention is reduced when the FSA can rely on firms' complaint-handling mechanisms to deal properly with consumers who feel they have not been treated fairly.

Staff should be encouraged to consider complaints positively and it is good practice for complaints to be dealt with by a team independent of the one which generated the complaint, eg. by a dedicated complaints handling team. It is not optimal for any area to deal with its own complaints - this gives rise to potential conflicts of interest which need careful management - and complaints may not be logged or adequately and impartially dealt with.

We consider the number of complaints to be less important than the way in which they are handled and how firms subsequently act. It is important that firms conduct effective root cause analysis of their complaints management information and actively consider how they might improve their processes.

The reduction of financial crime is one of the FSA's statutory objectives. In addition, we aim to help retail consumers achieve a fair deal. A recent Association of British Insurers survey found that fraud on motor, travel and home insurance is estimated to cost the industry around £1 billion every year. Ultimately the cost of such fraud is borne not by insurers but by consumers.

The insurance industry is making good progress in its response to tackling fraud. Initiatives are being set up to spread good practice between firms and the Insurance Fraud Bureau will improve insurers' ability to detect and prevent organised insurance fraud.

We expect insurers to take reasonable care to establish and maintain effective systems and controls for countering the risk that the firm might be used to further financial crime. Insurers should be alive to the threat of internal fraud. Some of the firms in our review think that internal fraud is an impossibility because they are “one big happy family” or because “it just wouldn't happen here”, whereas in reality internal fraud is cited as one of the main threats to firms and is growing fast. Good practice would be to maintain segregation of duties so that claims handlers are not able to register, handle and authorise for payment the same claim.

Any anti-fraud activity should be balanced with the need to treat customers fairly. Some firms adopt an anti-fraud strategy of invoking a “proof of loss” clause, almost as a matter of course. Most people do not have receipts for every item they have ever bought or that has been given to them. Most people do not keep photographs of their valuable items. If production of receipts or photographs is a requirement for a claim to be made then this should be clearly explained to the customer at inception of the policy and not used as a tool to unreasonably reject a claim where there is no clear evidence of fraud.

Outsourcing is increasingly used as a means of both reducing costs and achieving strategic aims and can be a very effective tool in doing so. But it may also affect a firm's exposure to operational risk through reduced control over people, processes and systems used in outsourced activities. We would encourage firms to formalise their systems and controls in this regard through service level agreements and risk management frameworks, focussing on:

●the identification of quantitative and qualitative performance targets to assess the adequacy of service provision to both the firm and its clients
●the evaluation of performance and remedial action and escalation processes for dealing with inadequate performance.

Insurers cannot contract out of their regulatory obligations and should take reasonable care to supervise their outsourced providers. Firms should have proper systems and controls through service level agreements and risk management processes to manage the risk posed to their business by such arrangements.

Overall, most firms we reviewed are handling claims well and we are encouraged by our findings. We would encourage the insurance industry to continue to make efforts to improve best practice particularly in the areas identified.

This Feature item appeared in issue 106 of JTW News - June 2006

Author: Alison Hewitt - Financial Services Authority (FSA)