When comparing the data from the latest Financial Ombudsman Service (FOS) General Insurance Code of Practice Overview with that of the previous year, a pattern emerges of systemic failings in some of the fundamental tenets of the code.

Of the four sections of the code that FOS reported as having the highest number of breaches in 2010/11, three of these sections were also among the most frequently breached in 2009/10.

The sections that appear to be causing insurers the most trouble in complying with are:

• Section 3.4.1: The undertaking to “conduct claims-handling in a fair, transparent and timely manner”;
• Section 3.6.1: The undertaking that “our employees and our service-providers will conduct their services in an honest, efficient, fair and transparent manner” when dealing with claims; and
• Section 6.1.1: The undertaking to “conduct complaints-handling in a fair, transparent and timely manner”.

It’s difficult to ignore the common theme of these reports. They indicate that above all else, insurance companies are finding it difficult to resolve claims and complaints about those claims in a way that gives the claimant a fair go.

“Fair” and “transparent” aren’t words that can be easily misinterpreted, while the issue of timeliness in handling complaints has been a major debating point between the industry and the Federal Government over the past year. The discovery of a fallback point for insurers in the event of a major catastrophe was not well received.

FOS says in its report that the overwhelming cause of the breaches in 2010/11, at 49%, was a failure by staff to adhere to processes. In other words, many member companies are simply not following – or are not able to follow – the guidelines in place.

The recent updates to the code announced by the Insurance Council of Australia (ICA) should go some way to addressing these recurring black spots, which are hardly new and should have been upgraded years ago. Consumer demand is continually evolving; the code is not.
 
While the changes have been welcomed, greater investment by insurers in training and processes is needed. However, that’s unlikely during a period of cost-cutting and profit pressure, so it does not automatically follow that staff will be able to adhere to even more stringent terms than before.

The FOS report also indicates that a worryingly large number of insurers were found to be generally non-compliant with the code in 2010/11.

FOS conducted code compliance reviews on the 57 general insurers (excluding Lloyd’s coverholders and third-party administrators) who were signed up to the code for 2010/11.

It found that 15 insurers – or more than a quarter – had procedures, processes or systems in place that did not comply with the code.

Of those, one was a new company, six had been compliant in 2009/10 but had lapsed, and eight continued to be non-compliant from the previous year.

None are named in the report. That’s hardly an incentive for lax companies to get their houses in order, and nor does it serve to promote confidence in the 42 insurers who were compliant.

Non-compliance is worrying at a time when the Government is considering requests to take self-regulation away from the industry by making the code compulsory and giving the Australian Securities and Investments Commission powers to name and shame insurers in breach of the code.

Currently, the code states that the code compliance committee is responsible for monitoring overall compliance “to identify serious or systemic issues with regard to the code or its application”.

But with the pattern of breaches identified by FOS, how effectively is it doing that job?

In addition, the code compliance committee is the authority that has the power to impose sanctions on insurers for ongoing, reoccurring or unrectified breaches of the code, or those which cause considerable consumer detriment.

These sanctions include fixing the breach within a specific timeframe, a compliance audit, and corrective advertising or publishing of non-compliance.

But historically, the committee’s annual report listing any sanctions imposed on insurers has not been publicly released, making it impossible to get a true indication of how compliant each insurer is.

In its latest updates to the code, ICA also agreed to make the committee’s annual reports public from this year – a concession consumer advocates told insuranceNEWS.com.au was “begrudgingly made” and which ICA negotiators “fought tooth and nail” to avoid.

Whenever it is finally released, the committee’s annual report will hopefully (and finally) shed some light on how effective the insurance industry’s leading self-regulatory initiative really is.