Expectations and regulatory requirements surrounding Conduct Risk are changing. We asked Elizabeth Murphy and David Pelkola of KPMG for their take on what international trends hold for Canadian insurers and brokers.
What do Canadian insurers need to understand about Conduct Risk?
Elizabeth Murphy, KPMG Partner in Financial Risk Management: There are a couple of things that Canadian insurers need to be aware of.
Firstly, that international insurance regulators are enhancing their expectations which respect to how customers are treated. The concept of treating customers fairly means addressing what is a good customer outcome. It is not just enough to use clear, plain language and simple instructions.
Insurers are now expected to consider who they are selling their products to and whether the product meets the needs of that customer. Insurers are also supposed to test products to make sure they can deliver fair outcomes and will deliver as promised.
Secondly, watching out for customers or treating customer fairly as it is referred to in the U.K., can be good business regardless of what the regulatory requirement are.
How can they mitigate those risks? How should they be incorporated into the ORSA process?
Murphy: In order to mitigate conduct, insurers must understand the elements of conduct risk. In generic terms, some conduct risk characteristics include:
- Aggregation of many events, most small tick items, some not;
- High probability;
- A time lag between the misconduct action, the detriment and the resolution;
- Impact of the same monetary loss may be different for different consumers; and
- Potential for multiple risks to accumulate in the same institutions. (continued.)
#pb#
When assessing sources of conduct risk in the organization, insurers should look at the overall business model, including business strategy alignment, product design and governance, claims management, and the use of third party service providers. Other elements to be considered are the culture, sale incentives, and renewal pricing. Do the incentives for sales lead to potential unsuitable customer outcomes? Is renewal pricing fair? On renewal are insurers taking advantage of long-standing, possibly vulnerable, customers?
In order to identify and manage conduct risk, does the insurer have a defined and effective conduct risk framework in place, including the necessary management information? For example, is the information of sufficient granularity to provide insight into and identify issues? Do the metrics actually quantify customer detriment? Does the information allow the misconduct action against a specific policyholder to be considered and assessed against the insurer’s broader policyholder population as to potential similar misconduct actions?
The ORSA process is about identifying, assessing and managing risk, and allocating capital to risks. Similar to other risks, insurers need to determine what their net exposure to conduct risk is and how much capital should be allocated to it. Depending upon the organization’s business, some organizations may include conduct risk as a subset of operational risk, or other risks. Some other organizations may consider conduct risk to be a major risk category on its own.
The CCIR introduced its strategic plan in October. How will this mesh Canadian standards and conduct with international standards? What are the benefits for Canadian insurers?
Murphy: In Canada, the provincial insurance regulators who have responsibility for market conduct have set themselves an objective of developing and implementing a Market Conduct Supervisory Framework. Built that is comprehensive with respect to international standards. However, they also state that they want the framework to be cost effective for CCIR members; and efficient in regard to administrative burden on the regulated industry.
We expect that this means the CCIR and the provincial insurance regulators will try to develop a framework for the Canadian market plan that is relevant to the Canadian market place. (continued.)
#pb#
Every industry must deal with customer complaints. Is there a ‘best practices’ for the insurance industry to put in place when dealing with customer complaints?
David Pelkola, KPMG Director in Financial Risk Management: The best practices for dealing with customer complaints is to establish a conduct management information process that will allow faster capturing and tracking of complaints, deeper root cause analysis of the potential cause of the complaint against the broader policyholder basis, and trending analysis of complaints over time and against the policyholder population rather than complaint as being seen as applicable only to an individual policyholder.
This improved conduct management information process allows complaints to be resolved quicker. Leading institutions are establishing dashboards that can be drilled down by the Board and management as to the reasons for the underlying complaints.
In short, dealing with complaints is moving to be a competitive advantage for leading firms rather than being seen as historically as a burden to resolve.
