The £5.28m fine handed out by the UK regulator to Liberty Mutual last week fired two warning shots across the bows of the insurance sector. Warning one concerned customers: don’t treat them as nothing more than remote sources of income. Warning two was starker: outsource as you see fit, but people who don’t oversee such arrangements properly should expect to be punished.
Now you may think that you’ve heard this before, and you’d be right. Both have been perennial issues for the sector. However the difference this time round is the Senior Managers and Certification Regime. Anyone running delegated authority business should take those two warning seriously. Next time round, the cost of failure won’t just be a fine. It will be a career as well.
High Conduct Risk
Lesson One from the Liberty Mutual fine is that the management of delegated authority (DA) business needs some serious improvements in standards and mindsets. The regulator will see it as an almost de facto high conduct risk.
Why? Because a stand out feature of the regulator’s ruling was the ease with which the insurer passed over their underwriting pen to the third party. It then took the insurer not months but years to understand the third party’s business model.
Is there any other sector that would enter into partnerships with so little understanding of how business was to be sourced, priced and administered? It’s very simple: if you don’t understand how a partner’s business model works, don’t do business with them.
You can see in the regulator’s ruling the extent to which the insurer just trusted the third party. The mindset was that if they’re friends of people we know, then they’ll be good people to do business with. Awkward questions like how business would actually be done were not addressed. And as the book expanded over five years from 40,000 to 1.3 million customers, that mindset of ‘they are good people’ still meant that the promises and obfuscations of the third party were just accepted.
Attitudes to Customers
Lesson Two is that you really do need to care about the customer. It’s easy to just conceptualise them as a revenue stream, but revenue means your firm can pay your salary. That’s why they’re people who deserve fair treatment.
Perhaps the problem is that ‘Treating Customers Fairly’ (TCF) has caused too many firms to label customers as just a ‘compliance thing’. It’s clear in the regulator’s ruling that this was the case with the insurer here.
It’s common across business now to understand more about customers by constructing ‘personas’ of the typical customers who buy your products. This helps to raise sales because you learn more about their needs. Yet insurers seem to have lost this capacity, instead wrapping themselves around with complex supply chains that all often turn out to be too difficult to manage.
It doesn’t have to be like this. Insurers can have a supply chain, but that chain is not the customer – it’s the business partner. They will only pay the insurer if the customer pays . The insurer has to cut through that chain and ‘get into the heads’ of the customers they remain accountable for. Even in cases where the supply chain maintains some sense of ownership of that relationship.
I wrote a paper for the Chartered Insurance Institute a few years, on the ethics of insurance marketing (here’s the link). It directly addresses the need for a ‘voice of the customer’ within insurance firms and how this can be achieved. This is not rocket science – even I do it for my own business. Insurers with great teams of experts have to do likewise.
An Imbalance of Competencies
Lesson Three from the Liberty Mutual fine is that there is an imbalance of competencies within the sector. It may be full of expertly trained professionals, but that can be sometimes a strength, sometimes a weakness for the sector’s reputation.
The danger is that that expertise and training can at times be too narrow. In Liberty Mutual’s case, it lead senior executives to be too hesitant, too stand-off’ish to the ramifications of the arrangements it had entered into with the third party. There was a willingness to bring in the business, but a reluctance to fill in the competency gaps for handling it.
So aspects of the arrangements that they felt uncertain or uncomfortable with were delegated, chiefly to the audit committee. That committee was tasked with overseeing arrangements with the third party, and with updating the firm’s own TCF policy. But hold on – aren’t audit committees meant to provide independent oversight of financial processes and internal controls? It’s not their job to run DA business or update internal policy documentation.
This raises a very obvious question - if the audit committee was kept busy helping to run the company, what impact did this have on them performing their expected function? Is the Financial Reporting Council waiting in the wings, preparing to issue an additional, equally critical report?
I’ve seen evidence of ethics being deemed as not relevant to how claims are handled in the London market. It fuels a mindset that causes senior executives to see business through too narrow a lens. Yet it was problems with claims complaints that lifted the lid on the sorry state of Liberty Mutual’s handling of this business arrangement.
Senior executives may like to be comfortable with what they are familiar with. Yet they also need to be competent at dealing with things that they’re not familiar with. That’s part and parcel of what leadership is about.
Looking after Fraud
Lesson Four from the Liberty Mutual fine involves a strange contradiction. It actually involves two types of trust. The insurer trusted the third party because they were friends of the parent company. That lead to them being hesitant to raise challenges when the right management information was not forthcoming.
At the same time, the third party really did not trust the customer. Three processes seem to have been calibrated to deliver an almost automatic push back to the customer: the claims process, the anti-fraud process, and the complaints process.
Insufficient evidence was requested from claimants, insufficient consideration was given to that evidence, and documented procedures were ignored. Complaints were lost, or automatically upheld ‘for commercial reasons’.
The voice analytics software for flagging cases of suspected fraud was calibrated so as to deliver a high rate of declined claims. Liberty Mutual struggled to find out how that software operated, or how it was being used.
Consumer rights groups could not have hoped for clearer evidence of what they often hear: that insurers deliberately push back in order to avoid paying claims.
Having run personal lines schemes for several years, I personally think claims decisions are often more complex than this. In my opinion, deliberate push back is not as common as is often made out. Yet I have also listened to claims executives talk about push back as an everyday part of their claims strategy.
Here again, I point to an overly narrow set of competencies amongst some insurance executives. And fraud will be undermined because of it. I’ve written only recently about the governance of the fight against fraud being seen as just an insurance thing, with no need to involve outsiders.
Insurance people leading the fight against fraud should see the Liberty Mutual case as a foretelling of a much more impactful event that will emerge over the next three or so years. They need to learn from it now, to ensure that honest customers do not feel let down by the very players who said were covering their backs.
Four Key Steps
There are lots of lessons for all kinds of insurers to learn from the Liberty Mutual fine, but here are four I think need emphasising
- Your delegated authority business needs to be thoroughly reviewed for ethical risks. Those ethical risks need then to be incorporated into a rigorous due diligence progress, at both the heads stage and on-going;
- You need to introduce a ‘voice of the customer’ into your DA management processes and use it in a way that addresses those ethical risks. There then needs to be an evidence trail for how effective this is being done.
- Critical thinking and leadership on ethics needs to form part of the competency frameworks for senior executives. An evidence trail for those competencies being applied needs then to be created.
- Claims philosophies and processes need to be subject to a critical friend review, in order to unearth and address habits that are causing systemic detriment for claimants.
Let’s end with reference to a telling sentence in section 2.6 of the final notice for the Liberty Mutual fine. It refers to how this case might have turned out if the Senior Managers and Certification Regime had been in force at the time. It talks of clearer responsibilities helping to mitigate or avoid many of the failings. What is means is that in future such failings will drop right on the person named on the responsibility map as in charge of such business. I wouldn’t like to be in their shoes.