I couldn’t let the news which appeared earlier this week go by without further comment. I am of course referring to the Insurance Council’s recent announcement regarding their new ‘Fair Insurance Code’. (See http://www.icnz.org.nz/new-fair-insurance-code-sets-high-benchmark-for-general-insurance-industry-self-regulation/).
The fair insurance code is “a set of principles that aim to improve the standard of practice and service that member companies provide to their customers.” (http://www.icnz.org.nz/for-consumers/your-rights/fair-insurance-code/). This new code came into effect on the 1st January 2016 and itself purports to be self-regulating i.e. controlled and excised independently of governmental supervision.
“Self Regulation” is a franchise granted by government to some professional bodies to permit them to regulate the activities of their members within certain parameters and guidelines. Engineering, Law and Medicine are typical examples. Provided these professions keep their heads down and operate in a reasonably tranquil fashion, then the government of the day feels that it has no need to step in and manage these professions itself. It’s a very convenient arrangement for government, often justified on the grounds of less cost to the taxpayer, but actually it is a very convenient position for government as even though these professions will often institute government “policy” (as their leaders are always pretty close to government), the government is always ‘one step removed’ from the actual decision. If there is adverse public reaction, then the Government can be seen to ‘step in’ and ‘correct’ the decision.
The insurance industry in New Zealand is such a self-regulating entity. Insurance generally in New Zealand falls under the auspices of the Insurance (Prudential Supervision) Act 2010 and is administered by the Reserve Bank for the purposes of (a) promoting the maintenance of a sound and efficient insurance sector; and (b) promoting public confidence in the insurance sector.
The Act applies to all insurers and includes a licensing system for insurers, based on meeting the Act’s prudential requirements including the prescribed jurisdictions for home/host regulatory recognition and other provisions; reassessment requirements for fit and proper certification; and matters relating to the disclosure of overseas policyholder preference etc. (See http://www.rbnz.govt.nz/regulation_and_supervision/insurers/regulation/)
The ‘consumer protection’ aspect is undertaken by the Financial Markets Authority and the Commerce Commission. (See http://www.rbnz.govt.nz/regulation_and_supervision/insurers/supervision/5045732.pdf).
As we have experienced in Christchurch these past five years, either the industry is exempt from the franchise of self-regulation or what has happened in Christchurch is government policy. Has anyone heard anything from the Financial Markets Authority or Commerce Commission relating to the protection of consumers in the last five years? I certainly have not.
Self-regulation was inspired by a broad-minded trend for economic liberalism and profit maximization, it emerged in the vast majority of developed countries and is alleged to be based on codes of conduct, codes of best practice, governance guidelines and reports. The emphasis is on `freedom, independence & autonomy’ with no or less government/state interference – sometimes a very convenient place for governments to sit.
But no freedom is unrestricted unless controlled by ‘accountability’. We saw where that took us in 2001 – the Enron scandal, which precipitated a chain reaction of scandals and a domino effect – WorldCom, Sunbeam, Waste Management, Xerox, Qwest, Global Crossing, Tyco, Adelphia, Parmalat, and Ahold, AIG. It became obvious that the self-regulatory framework was not sufficient enough to protect companies, investors and/or employees. Mis-goverance by corporates led to the introduction of the ‘too big to fail’ convenience for international banks, who were ‘bailed-out’ with taxpayer money. The effect of mis-governance in any corporation initiates chains of unfortunate events affecting the entire economy. For self-regulation to be effective, it needs to be properly integrated into the overall regulatory framework – that is, it needs to dovetail with the law and the regulator’s policies and include regular direct oversight of the activities of the ‘profession’.
The insurance industry dispute resolution schemes, such as the insurance ombudsman together with codes of conduct such as the Fair Insurance Code, involve a form of regulation where substantial industry-level involvement in the development or implementation of the regulation is involved, and where the regulatory arrangement is adopted and funded by industry.
There are major problems with this model. It is understandable that a government regulatory authority might rely on self-regulatory schemes to cover day-to-day complaints, discipline and industry issues that it may not have the capacity to deal with, but if the self-regulatory scheme is inconsistent with the underlying principles of the overall regulatory framework, or does not operate within the parameters of that framework, then what is the role of the regulator? Why is it that we have not heard sight nor sound of the regulators in New Zealand over the past five years? How many complaints has the Commerce Commission had in relation to insurance issues in Canterbury these past five years? More than a few that I know of.
If the regulator fails to lay down the law, then the fundamental purpose to be served by self-regulation is defeated (or perhaps successfully used by government to operate policy, if one wishes to be cynical) and consumer welfare is compromised usually to the benefit of some corporate. I argue that this is exactly what has taken place in Christchurch.
If self-regulation is to exist effectively, it requires strenuous and active accountability mechanisms. Changing the words of the Fair Insurance Code and ‘setting and forgetting’ is not a viable answer to the problems we have been experiencing. If there is no accountability in place – and it seems there is not, then self-regulation is totally ineffective, unless there is some ulterior motive.
Certainly, self-regulation has the potential to be more flexible and less costly for businesses and consumers than direct government involvement – but my bet is that if you were to ask most insurance affected Cantabrians they would rather pay a bit more in regulation costs than spend five years of their lives fighting for their entitlement under their insurance policies.
What we have experienced is totally ineffective and inefficient regulation, and completely inadequate compliance monitoring and enforcement. Interesting isn’t it that changes to the Fair Insurance Code come after the majority of the insurance profits have been made. The Fair Insurance Code could have been addressed three years ago!
Self-regulation after what we have just been through, lacks any credibility and has destroyed a large degree of public confidence. It certainly shows a lack of effective enforceability. In my opinion it is fair to say that it has become subject to “regulatory capture” in that it only serves the interests of the self-regulator. It is merely a fair-weather regulation not capable of standing up to the real tough times. There remain massive conflicts of interest between the aims of industry members and self-regulatory objectives. But then of course the Government is fully aware of this fact.
For self- regulation to be effective, the New Zealand Insurance Council must be able to harness the common interest and enlist the support and input of other stakeholders such as relevant government agencies and consumer organisations, and manage the self-regulatory scheme transparently. I do not believe we have seen this happen. There should be regular and independent review for efficiency and effectiveness. This has not happened.
Community cynicism regarding both the government and the inability of the insurance industry regulating itself will undoubtedly have led to a distrust of self-regulatory schemes unless it can show itself to operate effectively, transparently and produce confidence amongst consumers. A regulator is required to provide timely intervention where self-regulation is not working. This certainly has not happened in Christchurch.
Codes are not always the most appropriate response to a problem – the Fair Insurance Code has failed Cantabrians. A good regulatory outcome (whether legislated or self-regulated) is dependent upon the Government, industry and consumers being prepared to truly follow the rules and thus adapt the regulatory structure.
I don’t see this as having happened. The Fair Insurance Code remains a nebulous ineffective document. Just another dodgy bit of window dressing by the industry.
Was it just a failure by a regulatory authority, overlooked by a Government department, or it was intentional support of corporates by the government? Government departments don’t ‘overlook’ regulatory failures. Ministers decide what will or won’t be done!