Cedric Stephens | Putting fair treatment at the heart of insurance

“All firms must be able to show consistently that fair treatment of customers is at the heart of their business model.”

This is the opening statement from a 2015 paper “Fair Treatment of Customers” authored by the United Kingdom’s Financial Conduct Authority, the FCA, which regulates “56,000 financial services firms, including insurance companies, and financial markets.

The UK insurance market is as important to its local counterpart as Rome is to Jamaica’s Catholic Church.

Fair treatment of customers should be “central to the corporate culture” of regulated firms.

This is the first of the six outcomes that the FCA says consumers should expect.

Does the local financial services regulator promote this rule in its regulatory policies? Do the boards of directors and senior management of local insurance companies “show consistently that fair treatment of customers is at the heart of their business models” and believe that the principle of fair treatment of customers is good for business? Is the adoption of the FCA fair-treatment model appropriate for local conditions?

If the answers to these questions are in the affirmative, is it okay to pass on the heavy costs associated with fraudulent motor insurance claims to honest customers in the absence of other strategies to reduce these types of losses?

This article was sparked by two headlines in this newspaper. The first appeared on December 12, 2017, titled “JPS to spend $2 billion in antitheft campaign”. The report said that the planned expenditure “is part of an aggressive antitheft campaign to stem illegal extraction of electricity”.

Last year, the utility estimated that “approximately 180,000 households were illegally receiving electricity and that it would be spending US$52 million over five years to curtail the losses”. Also, that “electricity theft does not only occur in lower socio-economic zones, but has been detected in the affluent, upscale communities and large business operations”.

The second article was published on March 1, 2015. It was about the local insurance industry. The headline was in stark contrast to the first. It read: “Who’s paying for insurance scams? Some insurance companies increase prices to cover false claims”.

The article quoted Insurance Association of Jamaica vice president Peter Levy as saying “anywhere between 15 and 25 per cent of claims are fraudulent” and that “to the extent that fraudulent claims do occur and we are unable to prove them to be fraudulent, we ultimately have to collect premiums to pay for them ... and so it does impact on the ordinary consumers and innocent consumers have to pay.”

Levy also asserted that “a number of companies are taking remedial actions, which includes increasing prices, but also, are being more proactive”.

Unlike JPS, no details were provided about the other strategies, including the use of technology, that were being deployed to combat the problem and reduce the cost on honest customers on a coverage that is mandated by law.

Fraud affects businesses of all types around the world. ‘Insurance fraud is a billion-dollar industry’ was the headline of a piece that I wrote in 2014.

In giving anecdotal information about the scale and complexity of the local problem, I wrote that organisations like the Jamaica Bankers Association (JBA), the Embassy of the United States of America, the Financial Investigations Division of the Ministry of Finance, the Broadcasting Commission, and companies like the Jamaica Public Service Company, and Digicel and LIME (as partners) have, independently of each other, launched initiatives to fight the scourge.
 

LOTTO SCAMMING

The JBA’s counter-fraud head famously described the activities of local fraudsters as “First World”. A US Embassy official is reported to have said that Jamaica topped the list of all the countries in the world in submitting fraudulent documents to obtain visas. Lotto scamming was also mentioned in the same article.

Insurance Company of The West Indies founder and chairman Dennis Lalor is a keen industry observer. Nearly 10 years ago, he estimated that in 2008, fraudulent insurance claims were costing the non-life segment of the industry about $3 billion, or 35 per cent of claims.

More conservative estimates suggest that the total losses suffered by the industry during 2008 to 2012 amounted to $10 billion. The health segment of the life industry paid $13 billion in claims in 2013. If the industry rule of thumb of 15 per cent was used, losses due to fraud in that segment would amount to nearly $2 million.

If the IAJ official is correct, these costs are being unfairly passed on to honest consumers.
What strategies do the insurance industries in other countries implement to combat insurance fraud, and concurrently, to protect the interests of honest consumers? Research suggests that in other jurisdictions like Canada, the United States, the United Kingdom, and France, modern tools and technologies are used reduce the impact of insurance fraud, bring stability to motor insurance premiums and improve the operational efficiency of insurance companies.

Similar tools and technologies are also available in Jamaica. The industry in the UK has spent over £200 million over the last decade to fight insurance fraud. That nation has a robust counter-fraud infrastructure. Yet the value of fraudulent insurance claims uncovered by insurers there in 2013 rose by 18 per cent to £1.3 billion over the figures detected one year earlier.

Over the last 20 years, the industry’s anti-fraud infrastructure has developed “beyond recognition”, but losses are still projected to increase.

The lack of action by local insurers is evidence of market failure. The situation requires intervention by the regulatory authorities. The Government and its agencies will be the major beneficiaries of any such intervention in addition to ordinary folks like you and me.

After all, the state sector’s share of GDP is 30 per cent. Therefore, these entities bear most of the burden of insurance fraud.

The ball is in your court, Mr Finance Minister of the Year.

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com.