Implementing recommendation 4.8 of the Royal Commission

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We understand that the sins of a few can taint the good deeds of the majority.  As a claims manager working for the world’s key insurance market – Lloyd’s of London – we have seen compliance obligations increases exponentially over the last 10 years, primarily due to a small number of outliers.

We mention this not because we are necessarily against regulation, but more because the premise for this legislation appears to be based on an assumption that the exclusion for claims handling had an effect of claims managers not ‘being obliged to act efficiently, honestly and fairly….”. We think for every example of poor  conduct highlighted in the Royal Commission , you can likely find 99 or more cases where there has been good will and good faith exercised.  That is not to say we shouldn’t try and eliminate these poor examples of claims handling, but that the various Codes and market forces did combine to provide a largely successful incentive to provide good faith claim dealing.

Having been through a wave of compliance with Lloyd’s of London – where the objective was very similar to what we are looking at with the new regulations – in essence, to increase the quality and consistency of claims handling  – what did we learn and what could be some of the issues with the new regulation?

Our experience

Good compliance processes doesn’t necessarily mean good claims handling.  You can create all the glossy brochures on your processes, and create a perception of quality, but the reality is that customer outcomes and satisfaction should be the key drivers of questions of quality claims management, but they often get lost in the focus on compliance with quantitative measures. Good claim management is not an easy thing to achieve; you need a strong culture, driven by a purpose to do things well, with the right structure, people, training, systems and caseloads. They are complex pieces of a jigsaw and if one element is out the system can break down.

The issue is that regulation and compliance can focus on elements that aren’t part of the equation that delivers the best claim management – examples being a focus on quantitative measures (that often can be gamed) as opposed to qualitative measures.  They may improve processes but unless the processes that are improved are linked to improvements in outcomes, you may not get the better customer experience you are after.   Regulation often can create unintended consequences –  which don’t always serve the purpose and objectives of the legislation.     

So what elements of the new regulation may cause issues or unintended consequences?   

We don’t fear the requirement of licensing, but we do feel it may create a disproportionate burden on smaller businesses. In creating this burden, barriers to entry are created, and smaller innovative businesses are marginalised.  While we are big enough now to shoulder the burden, our understanding is that smaller, private businesses have proportionately higher compliance burden than bigger businesses, which to us seems unfair.  Do you want to discourage smaller operators and innovative entrepreneurial businesses from getting in to this space? 

In addition, we think the current landscape is such that some of the exemptions may create unintended consequences that deviate from your objectives. You may not be aware, but several law firms actively pursue what we consider to be claim management work. Either through a separate division or company, or as part of their offering to insurers.

Our objectives as a business are to minimise litigation and disputes. We understand that isn’t always possible, and that a certain level of complaints, disputes and litigation is inevitable, even with the best will in the world.  In those cases of litigation – it is usually less than 5% of our casualty cases – we work in a close partnership with our panel law firms. They advise us and our clients and manage the procedural steps and often assist us with negotiation and strategy on the claim. We think this is the best working model to minimise disputes and achieve the goals of the regulation. Law firms that provide claim services have an inherent conflict – if we agree that minimising litigation is a legitimate goal   – as they often benefit if cases are litigated.   

As framed, the width of the exemption to lawyers may, we feel, encourage unintended consequences that cut across the objectives of the regulation. 

If we agree that the best model for managing claims is for the claim manager to be accountable for decisions and service delivery, and that lawyers are an important resource in advising insurers in specific cases to add expertise and make the right decisions, then regulations should encourage that model. Thus we agree it is fair to exempt lawyers from the regulations when providing advice to insurers (currently 766G  -2, a and b, and to some extent, c).    

However, should the exemption be extended for services that are of their nature claim management activities, the unintended consequence could be that in difficult or disputed cases, claims are handed over to lawyers (in house or external) to manage so that exemptions provide a shield from accountability. In addition, claim management firms with legal arms can simply transfer cases to the legal side when there are difficult decisions or negotiations. Or, if insurers don’t want to be accountable for difficult decisions that are effectively claim management decisions, they create an internal law firm or send to a law firm to manage.

There can also be other unintended consequences. Clearly, regulation like this seeks to raise the bar in terms of quality of claim staff and their training. If the regulations encourage delegating the difficult decisions to lawyers with immunity, a number of problems occur; you are elevating lawyers when they only manage a small percentage of claims and shouldn’t be the key service deliverer for claims and in that process you are encouraging dumbing down the clam function by having a legal arm that does the hard stuff.    

It is our view that if you want to regulate claims conduct, and the objective is to promote fair dealing, activities of lawyers that go beyond providing advice and extend to claim management activities as defined – should not be exempted. If law firms wish to undertake the activities described in section 766G 1 then are they not engaging in a claims handling and settling service? 

And if they are doing this, should they not be subject to the same regulations as the claim managers?  This will encourage fair dealing, accountability and a focus on quality claims staff and training.     

A closing word

For way too long the insurance industry has turned to the legal fraternity as key spokespeople on all manner of claim issues.  Yet they only see a small percentage of what really happens at the insurance coalface. They are an essential part of the landscape, and when in an effective partnership with an insurance claim team, can add expertise and real value when it matters.  They are also a great training resource for young claims professionals.    What should be encouraged, and here is the opportunity with the regulations, is for there to be a valuable partnership between lawyers and claims managers –   but the foremost goal should be that claim managers are elevated in importance by virtue of the legislation – so we get higher quality claim staff, better training and a better customer experience – and not diminished by allowing exemptions to lawyers for functions that are common to claims and the legal fraternity.