Careful What You Wish For

Sometime ago, Lloyd’s of London Chair Lord Peter Levene said the following about regulation: “We need to move away from a strictly rule-book mentality, avoiding the creation of yet more paperwork and bureaucracy. In its place, we can work with our regulators to develop and require adoption of ethical principles of behaviour.”

Levene’s remarks are relevant in the Canadian context because provincial insurance regulators have hopped onto the bandwagon of a “risk-based” regulatory approach.

One important feature of the provincial drive towards risk-based regulation is the creation of a centralized method of recording customer complaints. This will help give some indication as to which insurers are at a higher risk of engaging in questionable practices with consumers. Regulators can then focus their energies on bringing these companies into line, leaving the good corporate citizens more or less alone.

Of course, companies have to undertake a number of steps to show they are acting responsibly and deserving of being left alone. This includes demonstrating compliance with Standards of Sound Marketplace Practice, which the IBC approved in January 2006. These include five standards for maintaining a positive relationship between insurers and customers:

* Competitive insurance products for customers.

* Informed and transparent sales transactions.

* Competent professional insurance representatives following a specific code of ethics.

* Fair claims handling and settlement.

* Timely, accessible and responsive complaint-handling.

The IBC says it will measure the impact of these standards by January 2007. For their part, insurance regulators are telling the IBC that “measured progress [is] expected on all standards by April 2007.”

One of the IBC’s not-so-subtle messages to the industry is that if Canadian insurance companies dawdle in conforming to the IBC’s practice standards, then provincial regulators may not wish to move towards risk-based regulation after all. Instead, regulators might revert back to an antiquated, bureaucratic “rules-based” regulation that would rain all manner of paperwork down on the industry forever.

So how do insurers prove they are conforming to the standards? Easy, they create “best practice” guidelines. They create internal training programs to tell employees about the standards. They create internal codes of behaviour and make sure all employees are aware of the codes. They change internal disclosure and claims policies to make sure they meet with regulatory standards. They engage in routine self-audits.

In other words, they do a lot of paperwork.

Which gets us back to Lord Levene’s comment: Risk-based regulation may be “more efficient” than rules-based regulation in finding and punishing the industry’s “bad guys,” but forgive our doubts that it will generate less paperwork and bureaucracy for insurance companies.

Don’t get us wrong: risk-based regulation is more insurer-friendly than rules-based regulation. The process for finding at-risk behaviour through a centralized complaints system will quite rightly concentrate the regulators’ attention on the minority of potential “bad guys.” The aim of leaving the “good guys” alone is correct.

But there is some proverbial fine print here. In effect, the regulators will leave the “good guys” alone only if the good guys agree to do some of the regulators’ policing work for them. Grant Swanson of FSCO once said of risk-based regulation: “In essence, the role of the regulator is that of a supervisor, as opposed to the role of the regulator being that of an examiner.”

The role of “examiner” by default will fall to that of the insurer. Now it’s up to the insurers to generate and constantly update the same kind of internal standards, best practices, training programs (i.e. paperwork) that the regulators might impose on them in a rules-based scenario. In effect, the insurers have become their own self-regulators.

How this might result in less bureaucracy and paperwork for the companies is unclear. One virtue is that it appears for the moment that companies will have some say as to how they create and handle their own internal standards (making risk-based regulation, as they say, “more flexible”). But when the rubber hits the road, regulators may soon be asking for “harmonized” best practices – or “minimum standards,” if you will – and then the flexibility of the new system will be as good as lost.

Vigilance is the watchword of the new regulatory regime. Now insurers will discover that constant vigilance requires policies, procedures, standards – in other words, the very bureaucracy they sought to reduce in the risk-based approach.