The “Draft Market Conduct Framework” contains an example of a short-term claim to show how the new format, under Twin Peaks, will allow the Regulator to act in a more pre-emptive manner.
The prudential regulator will have ensured that the financial institution has sufficient capital to pay for any claims that it receives, and that it can meet its promises to the customer from a financial soundness perspective (to ensure that it always has sufficient funds to meet its liabilities today and in future).
The market conduct regulator, on the other hand, will generally (and not on each claim) consider whether the terms and conditions of motor vehicle insurance policies are fair and readily understood by the customer before entering into an insurance policy, as well as over the life of the policy. It should therefore be considering questions like:
- What is the claims ratio on the motor car insurance product? If the claims ratio is low, is this because the company has a strong bias to turn down reasonable claims? Has the customer been made sufficiently aware of the limitations of the insurance product, or his or her obligations in respect of the policy (like a duty to report minor accidents even if these are privately repaired and no claim is made?
- Is the insurance for motor cars competing on product or on price? How standardised is the car insurance? Is it easy for the customer to understand any differences from the expected “standard” insurance policy for a car?
- Does the company and [where there is one] broker, continue to service the customer after the product has been purchased or paid for? Does the company automatically adjust the premiums?
- More fundamentally, why is it that only one-third of motor car vehicles are insured? Is the industry providing appropriate and affordable products to the mass retail market? How can the insurance industry increase coverage to all vehicles on the road?
The market conduct regulator will assess from the Ombud for short-insurance whether any regular problems in market conduct can be identified from the Ombud process, and whether companies have the right culture and response to customer complaints received, and whether more regulatory interventions are necessary. In addition, the market conduct regulator will work with other regulators of financial activity, for example the NCR, to examine loan features which have an indirect impact on the cost or take-up of insurance products for motor vehicles. Questions can be asked like:
- Should a loan for a car go beyond four years given that it is a depreciating asset?
- Why should balloon and delayed payments be allowed for a car loan?
The conduct regulator should also work with other non-financial regulators such as the National Consumer Commission and the Competition Commission on the following:
- Why do car manufacturers insist on original parts as a condition to maintain any warranty? Is this a reasonable limitation to impose? Does it not impose undue costs on insurance products?
- Should motor car insurance be made compulsory? If it is, how do we ensure that the industry provides significantly cheaper and standardised “Mzansi” type products?
Lastly, the conduct regulator should set regulatory standards on motor car insurance products (as a combination of principles and rules), and take a risk-based approach to closely monitor the more “risky” providers on a continuous basis, in order to ensure that all contracts are in line with such standards. Where they are not, the contract may be deemed to be illegal; the regulator should respond strongly to compel the institution to take corrective action, penalise the financial institution in breach and offer redress to customers where appropriate to do so.
The impact of TCF on facilitating change is explained in another practical example. Click here to download it.