General Insurance Code of Practice Overview of the 2008-2009 Financial Year Executive Summary: The Code requires the Financial Ombudsman Service (FOS) to monitor participating companies compliance with the Code s service standards and it does this by: Conducting on-site reviews of each participating company s compliance; and Investigating reports of alleged non-compliance with the Code. It is important to emphasise that participating companies cooperated fully with FOS and welcomed FOS feedback as an opportunity to either rectify or improve existing processes and systems. In an environment where the regulatory burden is high, participating companies have consistently demonstrated a serious and organisation-wide commitment to the Code, together with a willingness to effect significant change. By the end of the reporting period, the Code had been adopted by 140 participating companies throughout Australia. Appendix A contains a list of participating companies as at 30 June 2009. Key outcomes for the 2008-2009 period: The General Insurance industry was significantly impacted by the: o Global Financial Crisis (GFC); o Bushfires; and o Several severe weather events. Consumers lodged 3,583,006 claims and participating companies accepted liability for 98% of these ie 3,503,828 claims. Consumers raised 21,334 internal disputes with participating companies, across commercial and personal lines of insurance business. Participating companies resolved 21,220 internal disputes, with 7,373 internal disputes, or 34.7%, resolved in favour of consumers. Introduction: The Code requires FOS to prepare annual public reports containing aggregate industry data and consolidated analysis on Code compliance. As a consequence, the observations contained in the following report are based on the: Data provided by participating companies throughout Australia, attached at Appendix B; and Outcomes of FOS reviews of participating companies compliance with the Code and investigations of reports of alleged noncompliance attached at Appendix C. 1
Monitoring Code Compliance: Non-compliance outcomes While full details of the type and frequency of non-compliance are noted at Appendix C, the key outcomes are as follows. Overview: There were 539 instances of non-compliance with the Code during the reporting period. While there has been an increase of 45% in established instances of non-compliance, FOS reviewed 24 companies for the first time, and carried out an additional 20 Code reviews and 58 investigations, during this period. Common causes of non-compliance: Matters often involved multiple instances of non-compliance, and the reasons were varied and included: Misunderstanding how a service standard applied to General Insurance operations; Underestimating the time required to implement the service standards; Applying the service standards in practice but failing to document the underlying compliance requirements appropriately or at all; Changes made to processes/systems/documents without the knowledge of compliance personnel; Incorrectly concluding that compliance measures were sufficient; Failing to provide adequate training; and Failing to adhere to established systems and processes. Code compliance reviews: FOS conducted 108 Code compliance reviews and of these: 56 companies 52% - were Code compliant. 24 companies 22% - were reviewed for the first time. 52 companies 48% - failed to comply with various aspects of the Code. Code investigations: FOS investigated 151 matters in response to reports it had received of alleged non-compliance with the Code. Such reports are received from various sources including: FOS Staff; FOS Decision Makers; Affected consumers and businesses; and Community Legal Centres. FOS was satisfied that Code participants complied with the Code in 26 matters and had failed to comply with aspects of the Code in 71 matters. The remaining matters remain under investigation or were closed as they fell outside the scope of the Code. 2
Frequent areas of non-compliance: As noted in Appendix C and Chart A below, there were 20 or more instances of non-compliance in relation to: 1. Section 3.2.3: This section requires a participating company to keep a customer informed of the progress of their claim at least every 20 business days. This requirement speaks for itself. In these instances customers were compelled to contact the participating company to determine the status of their claim. Usually the cause is a failure to diarise the claim file or a failure to adhere to diary dates. 2. Section 3.4.1: This section requires a participating company to conduct claims handling in a timely manner, among other requirements. For example A participating company unnecessarily prolonged the resolution of a claim by failing to organise appropriate medical assessments of a customer as soon as it became apparent that this was necessary. 3. Section 3.6.1: This section requires a participating company to conduct their services in an efficient manner, among other requirements. For example - A participating company discovered it had forgotten to make payment of a significant sum of money to a customer. The failure was due to an oversight on the part of claims staff. 4. Section 3.10: This section requires a participating company and its service providers to comply with the ACCC & ASIC Debt Collection Guideline: for Collectors and Creditors (DCG), which require them to act fairly and in a considerate manner. For example, participating companies or their service providers commonly failed to comply with DCG 8[b] which stipulates that a collector or creditor should not contact a debtor (including an alleged debtor) directly after they know, or should know, that the debtor is represented. Non-compliance was most often due to a failure to update file records with information about the debtor s representative. As a result, the creditor or collector contacted the debtor directly, rather than their representative. 5. Section 3.12(a): This section requires a participating company and/or its service providers to provide information to a third party about the participating company s complaints handling procedures, when it s unable to reach an agreement with the third party about the repayment of a debt. There were a number of reasons why participating members or their service providers failed to comply with this requirement including: 3
Failure to document processes and procedures underlying this requirement; Failure to provide a third party with information about the complaints handling procedures due to a communication breakdown between a participating member and its service provider; Failure to recognise that a participating member was unable to reach an agreement about repayment of a debt with a third party; and Failure to include a participating member s contact details when providing information about the complaints handling procedures. 6. Section 6.1.1: This section requires a participating company to conduct complaints handling requirements. in a timely manner, among other For example Failure to obtain a customer s consent to an extension of the complaints handling timeframe. Failure to treat a customer s complaint as a dispute. Incorrectly identifying correspondence on its receipt resulting in the correspondence being treated as normal mail rather than a request for internal dispute resolution. Chart A Code Sections with 20 or more Breaches Number of Instances 45 40 35 30 25 20 15 10 5 0 Section 3.2.3 22 21 Section 3.4.1 Section 3.6.1 42 Section 3.10 20 20 Section 3.12(a) Section 6.1.1 34 4
FOS response to non-compliance Once satisfied that a participating company had failed to comply with the Code s service standards, steps were taken to: Identify the cause of each failure. Determine the duration of each failure. Determine whether similar failures had occurred previously. Assess the adequacy of existing compliance arrangements. Determine whether there were any consumers disadvantaged as a result of the failure. Liaise with the participating company to determine the nature of the action required to address the non-compliance. Monitor the participating company s progress to ensure that corrective measures are implemented within agreed timeframes. Provide appropriate training to the participating company s staff, if required. In order to determine whether corrective action implemented by a participating company is adequate, it was asked to: Describe what action was taken. Provide appropriate documentary material relating to the action implemented. For example, by providing extracts from its claims handling manual, its Internal Dispute Resolution register or its training records. Consider and comment on whether non-compliance is isolated or occurring more widely within its business. This is an important step because of: o Issues relating to whether the matter may amount to a significant breach of the Code (as defined). o Whether there are other consumers that may have been disadvantaged by the non-compliance and the need to address this disadvantage. o Whether non-compliance discloses an issue concerning the adequacy of training provided to staff and/or Authorised Representatives, or the procedures employed by Service Providers. If a company concludes that the matter is isolated, then it is expected to explain how it reached that conclusion. Similarly, when a participating company asserts that it has complied with the Code s requirements in response to our enquiries, it is asked to: Explain the basis of its conclusion that it has complied with the Code s requirements. Provide appropriate evidence in support of its conclusions. For example, if a company advises that it has met the claims handling standards, it should provide copies of its file notes and/or telephone logs, together with a chronology of its dealings with the consumer, in support of its conclusion. 5
The Code Data: The Code requires participating companies throughout Australia to provide an annual report to FOS on their compliance with the Code. Participating companies are also required to submit various data to FOS about their products, both commercial and personal, on a class by class basis. The data provided by participating companies and referred to below are detailed in Appendix B and cover: Total new business and renewals in force as at 30 June 2009; Total claims; Total rejected claims; and Internal Dispute Resolution (IDR) outcomes. Further data is provided in various charts throughout this paper. Total New Business & Renewals: Appendix B All Classes of Insurance Business: There were 36,371,082 General Insurance policies in force this year, consisting of 30,972,178 (85%) personal insurance policies, and 5,398,904 (15%) commercial insurance policies. (Note: throughout this paper percentages have been rounded up/down to the nearest whole number where appropriate.) Chart B, below, shows that as a proportion of all new business and renewals during this period: Personal Motor insurance represented 33%; Personal Home insurance represented 31%; and Commercial Business insurance represented 6%. 6
Chart B All Classes of Insurance - Total New Business & Renewals (in force as at 30/6/09) Total Motor Total Home Personal Other Classes, 6% Travel - Personal, 9% Total Business, 6% Total Home, 31% Total Motor, 33% Travel -Personal Consumer Credit Total Sickness &/or Accident Total Valuables Pleasurecraft Total Caravan, Mobile Homes &/or Trailers Personal Other Classes Total Business Total Builders Warranty Total Liability Total Commercial Motor Total Farm Contractors All Risks Industrial Special Risks Total Marine 7
Personal Insurance Classes of Business: Chart C, below, shows that as a proportion of all personal insurance new business and renewals during this period: Personal Motor insurance represented 38% %; Personal Home insurance represented 35%; and Personal Consumer Credit insurance represented just 3%. Chart C Personal Classes of Insurance Total New Business & Renewals - In force as at 30/6/09 Personal Other Classes, 7% Consumer Credit, 3% Total Motor, 38% Travel - Personal, 11% Total Home, 35% Total Motor Total Home Travel - Personal Consumer Credit Total Sickness &/or Accident Total Valuables Pleasurecraft Total Caravan, Mobile Homes &/or Trailers Personal Other Classes 8
Commercial Insurance Classes of Business: Chart D, below, shows that as a proportion of all commercial insurance new business and renewals during this period: 52% consisted of Business policies; followed by Liability policies at 27%; and Commercial Motor policies at 22%. Chart D Commercial Other Classes, 7% Total Farm, 11% Commercial Classes of Insurance Total New Business & Renewals - In force as at 30/6/09 Total Business, 52% Total Commercial Motor, 22% Total Liability, 27% Total Business Total Builders Warranty Total Liability Total Commercial Motor Total Farm Contractors All Risks Industrial I Special Risks Total Marine Total Aviation Commercial Other Classes 9
Total New Business & Renewals - Comparison between 2007-2008 and 2008-2009 periods: Chart E, below, shows that the volume of new business and renewals increased by 1% overall during this period compared to 2007-2008. The increase is attributable to increases in some of the commercial classes of insurance, with data being made available to FOS for the first time. The volume of personal insurance fell slightly during this period and has been attributed to the impact of the Global Financial Crisis on retentionn of existing business and growth in new business. Chart E Total New Business & Renewals - All Classes of Insurance Comparison between 2007-2008 and 2008-2009 periods 40,000,000 35,000,000 36,092,906 36,371,082 31,334,975 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 30,972,178 4,757,931 Total New Business & Renewals (in force as at 30/6/08) Total New Business & Renewals (in force as at 30/6/09) 5,398,904 0 Grand Total for Personal & Commercial Total Personal Total Commercial 10
Claims and Rejected Claims Commercial and Personal Insurance Classes: Appendix B Claims - All Classes of Insurance: The General Insurance industry received 3,623,255 claims and rejected liability for 72,833 claims. As a proportion of all claims received 98% of claims were accepted see Chart F below. Claims consisted of 3,020,382 (83%) personal insurance claims; and 602,873 (17%) commercial insurance claims. Chart F Percentage of Claims Accepted/Rejected - All Classes of Insurance 2008-2009 Percentage of Claims Rejected, 2% Percentage of Claims Accepted Percentage of Claims Rejected Percentage of Claims Accepted, 98% 11
Commercial Insurance Classes - General: The General Insurance industry accepted liability for 602,873 commercial claims and as a proportion of commercial claims, more than 99% of Commercial Motor claims, Farm claims and Aviation claims were accepted. Commercial Motor received the largest share of claims at 300,050, followed by 180,476 claims lodged against Business policies. Commercial Insurance Classes - Builders Warranty: FOS reported that for the 2007-2008 period Builders Warranty insurance experienced the highest rate of rejected claims of all classes of business. However, some of the data provided to FOS at that time was subsequently found to be incorrect, which led to a severe distortion of the claims rejected data in particular. Consequently, the result reported for rejected claims in 2008-2009 differs significantly. As a proportion of claims received in this portfolio, builders warranty insurers accepted liability for 93% of claims. Personal Insurance Classes: The General Insurance industry received 3,020,382 personal insurance claims, with 2,952,011, or 98%, reported as accepted. Typically, the largest number of claims arose in the Motor insurance portfolio with 1,573,084 claims, followed by 872,860 claims for Home. Motor and Pleasurecraft experienced the lowest rate of rejected claims at 1% or less, with Consumer Credit the highest at 12%, followed by Travel at 9%. Claims Comparison between 2007-2008 and 2008-2009 periods: Chart G below shows that, compared with the previous period, there has been: a decrease of 1% overall in total insurance claims; a fall of 5% in personal insurance claims; and an increase of 20% in commercial insurance claims. A couple of factors contributed to the fall in personal insurance claim numbers: a number of participating companies notified FOS that some of the data reported during the previous period had been overstated due to the method used to collect data; and the impact of severe weather events was not as extensive for some participating companies as that experienced during the previous reporting period. The significant growth in commercial insurance claims can be attributed to claims data being made available to FOS for the first time. 12
Chart G Total Claims - All Classes of Insurance Comparison between 2007-2008 and 2008-2009 periods 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 3,675,105 3,623,255 3,172,539 3,020,382 502,566 Grand Total for Personal & Commercial Total Personal Total Commercial 602,873 Total Claims (2008) Total Claims (2009) 13
Rejected Claims Comparison between 2007-2008 and 2008-2009 periods: There has been a 7% decrease in rejected claims overall with a 2% fall in rejected claims for personal insurance, and a fall of 50% in rejected claims within commercial insurance see Chart H below. The significant fall in the number of rejected commercial claims can be attributed to two factors: (i) the adjustment in builders warranty data, referred to above; and (ii) the inability of a participating company to provide accurate rejected claims dataa during this reporting period. The fall in the number of rejected personal claims can also be attributed to the inability of a participating company to provide accurate rejected claims data. Chart H Total Rejected Claims - All Classes of Insurance Comparison between 2007-2008 and 2008-2009 periods 78,306 69,433 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Grand Total for Personal & Commercial 72,833 Total Personal 68,371 8,873 4,462 Total Commercial Total Rejected Claims Comparison Total Rejected Claims (2008) Total Rejected Claims Comparison Total Rejected Claims (2009) 14
Internal Dispute Resolution (IDR) Data: Appendix B Introduction: Section 6 of the Code details standards of service for the handling of complaints and disputes both internally ie through Internal Dispute Resolution (IDR), and externally throughh External Dispute Resolution (EDR). The Code requires a participating company to make available to customers information about its complaints handling procedures when a claim is denied or in response to a complaint and/or dispute about any product or service provided by the General Insurance industry. The Code also equires a participating company to respond to a complaint and a dispute respectively within 15 business days, and to notify customerss of available EDR options at the conclusion of the IDR process. FOS has jurisdiction to deal with General Insurance disputes that fall within its Terms of Reference. For further information about FOS go to www.fos.org..au. IDR Outcomes - General: The General Insurance industry received 21,447 disputes during this period and resolved 21,320 disputes by 30 June 2009. As seen in Chart I below, 94% of all disputes were related to personal classes of insurance. Chart I Total Number of Disputes - All Classes of Insurance 2008-2009 Total Commercial, 6% Total Personal Total Commercial Total Personal, 94% 15
7,388 disputes, or 35% of resolved disputes, were finalised in favour of customers (including third parties), while 13,932 disputes or 65% of resolved disputes, were finalised in favour of participating companies. See Chart J below. Chart J Percentage of Disputes Finalised in Favour of Code Member/Customer All Classes of Insurance: 2008-2009 Percentage Finalised in Favour of Customer, 35% Percentage Finalised in Favour of Code Member Percentage Finalised in Favour of Customer Percentage Finalised in Favour of Code Member, 65% 16
Total Disputes - Comparison between 2007-2008 and 2008-2009 periods: Chart K below compares disputes in 2007-2008 with disputes in 2008-2009. There was a 13% increase overall during 2008-2009, compared to the previous period. Personal insurance disputes increased 13% compared to the previous period, while there was an 18% increase in commercial insurance disputes. Most of the increase in commercial disputes can be attributed to data being made available to FOS for the first time. However, bushfires and severe weather events in 2008-2009 led to large claim events, including some flow on from severe weather events experienced in 2007-2008, which had a major impact on dispute numbers overall. Another contributing factor has been the Global Financial Crisis. The increase in personal insurance disputes was mirrored by an increase in the number of disputes received and resolved by FOS. In its Annual Review for 2008-2009, FOS reported it had received 5,780 general/domestic and small business/farm insurance disputes, a 34% increase, with 2,400 of these disputes resolved by FOS, 17% more than during the previous period. The FOS 2008-2009 Annual Review is available from www.fos.org.au. Chart K Total Disputes - All Classes of Insurance Comparison between 2007-2008 and 2008-2009 periods 25,000 20,000 18,978 21,447 17,973 20,258 15,000 10,000 5,000 1,005 1,189 Total No. of Disputes (2008) Total No. of Disputes (2009) 0 Grand Total for Personal & Commercial Total Personal Total Commercial 17