What’s “the step change” in claims handling compliance?

Yvonne Lam (pictured), special counsel with Clyde & Co, a global law firm with a focus on insurance services, says this is a new phase of the aftermath of the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

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“The Royal Commission showed that you’ve got what the law says and what the compliance requirements are and then there are community expectations on top of that as well,” said Lam.

The special counsel included the reforms around claims handling as part of ASIC’s bid to remedy not just loopholes in the law, but to bring the industry into line with community expectations.

“That is, I would say, the social contract between large organizations and individuals who purchase policies with them,” she said. “So that’s been the step change, that’s been the shift, and I think that’s why it’s been a much larger program of regulatory change this time around.”

Lam said that before the reforms, claims handling wasn’t actually defined as a financial service.

“That meant that one part of an insurance business was actually unregulated under the Corporations Act,” she explained.

Lam said, until the reforms, the “regulatory rigour” around claims was less mature and prescriptive than for other parts of the insurance business and without the same compliance requirements.

Unlike underwriting or distribution services that required an AFS license, Lam said the assumption was that claims handling was covered by protections under the duty of utmost good faith, a legal requirement in insurance contracts.

“That argument was somewhat turned on its head by the Hayne Royal Commission which showed there were issues with the way insurance claims were being handled in terms of timeliness, the responses, and the way claimants were interacting with insurers during the claims process,” said Lam.

She said that was the rationale behind bringing claims under the same regime as the other financial services insurers offer.

Consequently, last year, Australia’s insurers and their third-party service providers needed to become licensed if they were handling claims.

“There are different arrangements under this new model,” she said. “You could have the insurer having the license and potentially authorizing a representative under their license, if the representative themselves couldn’t get the license.”

However, she said the industry preference remains to engage with third party claims handlers who have their own license so any issues that may come up remain the responsibility of the claims handler.

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The new claims regulations, she said, bring obligations to provide financial services efficiently, honestly, and fairly. Firms in the claims space also need to appoint dedicated managers who are responsible for the provision of the claims service to consumers.

She said responsiveness and timeliness are key if insurance companies are to ensure compliance.

“I think the reality is that you can have a whole bunch of documents and policies in place concerning what you’re telling the regulator you will do,” she said. “But it’s not just a tick a box exercise.”

Lam said it is important that personnel are well trained and understand what to do. She gave the example of the technologies that can send alerts to help insurers track the timeliness of responses to current claims.

“You have to make sure you have systems technology in the front end,” she said. “Then you have to make sure your staff are actually trained up and understand what these new obligations mean for them in a day-to-day capacity.”

Staff, she said, need to understand what actions to take when a claims issue is “not quite business as usual” and how to engage senior management or potentially escalate the issue up to the board level so that “the boards can make the decision about whether to report to ASIC”.