Beware the marriage of banking and insurance

Question: Some insurance companies are owned and/or controlled by entities that run banks and other financial services providers. Some banks also own insurance companies. Loans are often tied or ‘married’ to the products of one insurer. Consumers do not have the freedom to shop around. Aren’t cases like these manifestly unfair? Who is looking after the interests of consumers? – Reader

INSURANCE HELPLINE: Buttonwood is the pseudonym of a journalist. He spent over 30 years writing on finance for the English news magazine The Economist. That publication has been around since 1843. According to Wikipedia, it is “respected as one of the most competent and subtle Western periodicals on public affairs” and “was a major source of financial and economic information for Karl Marx in the formulation of socialist theory”.

In one of his farewell blogs, Buttonwood wrote that “time has only increased my cynicism” about the banking industry. This writer empathises with him. He admits scepticism even when banks and insurers operate independently of each other. Consumers should be doubly suspicious when they start behaving like married folks.

Abby Hartley, aged 41, fell ill in Bali in August. She battled her illness for more than a month before she died, according to a report in good returns.co.nz. “Her travel insurer would not pay because she had not disclosed a pre-existing condition.”

Insurance and Financial Services Ombudsman in New Zealand Karen Stevens’ office said that “the case was a reminder to clients to make sure they understood the terms of their insurance policy”.

An associate professor and a lecturer of the finance department in the Auckland University of Technology analysed a similar travel policy. They found that

It contained over 18,000 words. People read, on average, 300 words per minute. To read the policy from back to front would take nearly 60 minutes.

The policy was very close to unreadable using widely applied readability metrics. It had fog index of 17.36. The maximum was 18.

It would require “nearly 14 years of education, and a completed undergraduate degree, to understand it”.

Consumer-unfriendly insurance contracts plus consumer-unfriendly loan agreements have the potential to create toxic outcomes. This is true in situations where the fair treatment of customers is not at the heart of the insurers’ business models. Most persons would agree with this statement.

My column, “Finally, insurance reform with upsides for consumers”, published on September 9, summarised some of the improvements that can be expected when the new version of the insurance regulator’s market-conduct guidelines come into effect. The changes, which are long overdue, would go some way to addressing your concerns.

Financial Services Commission’s Executive Director Everton McFarlane, in his response to the article, focused on the leaves and not the forest. It would have been preferable had he explored what improvements in outcomes consumers could expect and an estimated implementation date.

In order not to breach protocol, I will reproduce a few of the guidelines that the International Association of Insurance Supervisors (IAIS), to which Jamaica belongs, has published for supervisors like the FSC to use in prescribing how insurance companies and intermediaries should treat their customers:

19.02 Fair treatment of customers encompasses achieving outcomes such as:

developing, marketing and selling products in a way that pays due regard to the interests and needs of customers;

providing customers with information before, during and after the point of sale that is accurate, clear, and not misleading;

minimising the risk of sales which are not appropriate to customers’ interests and needs;

ensuring that any advice given is of a high quality;

dealing with customer claims, complaints and disputes in a fair and timely manner; and

protecting the privacy of information obtained from customers.

Insurers and intermediaries should:

19.1 Act with due skill, care and diligence when dealing with customers;

19.2 Establish and implement policies and procedures on the fair treatment of customers as an integral part of their business culture;

19.3 Avoid or properly manage any potential conflicts of interest;

19.4 Have arrangements in place in dealing with each other to ensure the fair treatment of customers;

19.5 Account for the interests of different types of consumers when developing and distributing insurance products;

19.6 promote products and services in a manner that is clear, fair and not misleading;

19.7 provide timely, clear and adequate pre-contractual and contractual information to customers.