Sesión 6 Protección del Consumidor

1. English Sesión 6Protección del Consumidor XXI Asamblea Anual de ASSAL XI Conferencia sobre Regulación y Supervisión de Seguros en América Latina y Seminario de Capacitación IAIS-ASSAL Santiago Chile, 20 de Abril de 2010 Takao Miyamoto, Secretaría de la IAIS

2. Agenda Background Need for Regulation Market Conduct and Prudential Supervision Intermediaries Roles and Types International Framework (ICP) Consumer Protection Typical Problems with Consumers International Framework (ICP) Other Issues 1

3. Scope Consumer Needs Insurance Products What is Market Conduct? Dealing with existing & potential policyholders and beneficiaries in selling & handling of insurance products & services and in providing information to such parties. 2

4. Essence of Consumer Issues Modern society has become more and more complex. Imbalance/Asymmetry between consumers and companies. Information gathering Technical knowledge Analytical ability Negotiation power Potential adverse impacts Companies may take advantage. Consumers may stop/reduce purchase. Vicious spiral for whole industry/economy? 3

5. Rationale for Market Conduct Supervision Problem is more acute for insurance products. Insurance products are difficult to understand and evaluate for consumers. Intangible Prepayment of premiums and future (uncertain?) benefits Complex legal contract (e.g. coverage, pricing, process for filing a claim, cancellation) Contract terms determined by insurance companies Complete laissez-faire policy may not work. Room for public sector involvement to protect consumers. 4

6. Market Conduct & Prudential Supervision Consumer protection (Direct) (Indirect) • Market conduct supervision • Monitoring of insurer - consumer relationship in sales, claim handling etc. • Prudential supervision • Monitoring of financial soundness of insurance companies • Promotion of efficient and stable markets Market conduct and prudential supervision are two sides of the coin. 5

7. Interaction Reputation Supervisory sanctions Hidden liabilities Poor market conduct Damage financial strengths Poor financial strengths Wrong market conduct • Incentive to deceive to improve financial conditions Market conduct and prudential supervision could interact with each other. 6

8. Example - Japan (http://www.fsa.go.jp/) • Large number/amount of inappropriate payments • Lack of governance, systems, expertise etc • Some were intentional to boost profits • Series of supervisory actions • Request for reporting • Issue of administrative orders for business improvement and/or suspension 7

9. Insurance Core Principles (ICP) Provide globally-accepted essential benchmark for regulation and supervision of insurance sector. Provide basis for evaluating insurance legislation, and supervisory systems and procedures. Markets Conduct and Consumers ICP 24 Intermediaries ICP 25 Consumer protection ICP 26 Information Disclosure ICP 27 Fraud 8

10. Agenda Background Need for Regulation Market Conduct and Prudential Supervision Intermediaries Roles and Types International Framework (ICP) Consumer Protection Typical Problems with Consumers International Framework (ICP) Other Issues 9

11. Role of Insurance Intermediary Insurance companies distribute their products in various ways, including direct sales to customers. But more common is through intermediaries. Consumers • Advertising • Sales • Premiums collection • Assistance in accident • Claim payment • Cancellation • Renewal Intermediaries Insurance companies 10

12. Types of Insurance Intermediaries Brokers Represent customers in dealing with insurance companies Independent and not tied to insurance companies Agents Represent insurance companies Conduct business on behalf of insurance companies The relationship of an agent to insurance companies could be exclusive or work with more than one Insurance intermediaries, as well as insurance companies, have to be adequately supervised. 11

13. ICP 24: Intermediaries The supervisory authority sets requirements, directly or through the supervision of insurers, for the conduct of intermediaries. Essential criteria Intermediaries must • be licensed or registered. • have adequate knowledge and good reputation. • have sufficient safeguard in handling client’s money. • disclose their status (e.g. brokers vs. agents) to customers. Supervisors • take corrective actions where necessary. • are able to act against unlicensed/unregistered intermediaries. 12

14. Agenda Background Need for Regulation Market Conduct and Prudential Supervision Intermediaries Roles and Types International Framework (ICP) Consumer Protection Typical Problems with Consumers International Framework (ICP) Other Issues 13

15. Inappropriate Trade Practices (1) Marketing and Sales Use advertising & sales materials and mass-marketing activities that are false or deceptive Induce sales through kickbacks or rebates Sell products through inadequately trained intermediaries Sell consumers more coverage than they need Misrepresent product’s coverage, rates, terms or benefits Fail to provide full and accurate illustrations showing how costs and benefits may change with future changes in interest rates and other variables Make unfair or incomplete comparisons to induce policyholders to replace current policy 14

16. Inappropriate Trade Practices (2) Underwriting Use policy forms that have not been filed with supervisory authority (if required) Use intermediaries who are not properly licensed in respective jurisdiction Rescind policies for insignificant misrepresentations on application Refuse to insure applicants simply because they have been rejected by another insurance company Terminate policy because of submission of claim Discriminate based on judgment not facts 15

17. Inappropriate Trade Practices (3) Claims handling Pay or offer to pay less than reasonable amount Refuse to communicate status or outcome of claim investigation Fail to adopt and follow reasonable guidelines for handling claims and other benefits Misrepresent relevant facts and coverage provisions Compel claimants to sue to get a proper settlement 16

18. ICP 25: Consumer Protection (1) The supervisory authority sets minimum requirements for insurers and intermediaries in dealing with consumers in its jurisdiction, including foreign insurers selling products on a cross-border basis. • The requirements include provision of timely, complete and relevant information to consumers both • before a contract is entered into • through to the point at which all obligations under a contract have been satisfied 17

19. ICP 25: Consumer Protection (2) Essential criteria Insurers and intermediaries must • act with due skill, care and diligence. • have policy, systems and trainings on fair treatment of customers. • seekinformation to assess needs before giving advice or concluding a contract. • provide appropriate and timely information (e.g. risks, benefits) • handle complaints through simple, easily accessible and equitable process. 18

20. Agenda Background Need for Regulation Market Conduct and Prudential Supervision Intermediaries Roles and Types International Framework (ICP) Consumer Protection Typical Problems with Consumers International Framework (ICP) Other Issues 19

21. Other Important Issues Customer information Insurance entities have sensitive private information. Importance of back office operation (vs. interface with customers). Cross border issues Could be more problematic than domestic transactions. Moral hazard Balance between consumer protection and moral hazard. Not to protect everything but to encourage well informed decisions. Customers need to be well educated to protect their interests. 20

22. ICP 25: Consumer Protection (3) Advanced criteria Insurers and intermediaries must • set rules on handling customer information. Supervisors • give information to public about cross border offering and warn customer when necessary. • promote consumers’ understanding. 21

23. Questions and Answers Thank you very much! www.iaisweb.org takao.miyamoto@bis.org 22