IAIS calls for greater policyholder protection

MANILA, Philippines - Adequate regulation and supervision enhance policyholder protection. That is the ultimate objective of insurance supervision and regulation, according to the International Association of Insurance Supervisors (IAIS).

The IAIS is to the insurance industry, as the Bank for International Settlement (BIS) is to the banking industry. Its membership includes insurance regulators and supervisors from over 190 jurisdictions in some 140 countries. More than 130 organizations and individuals representing professional associations, insurance and reinsurance companies, international financial institutions, consultants and other professionals are observers.

Two features of insurance are important to understand.

First, insurance entails a transfer of risk from client to insurer (for example the risk of falling ill and needing medication, or the risk of death of the provider in the family).

Second, as a policyholder you pay now and the insurer will “deliver” later (known as the inverse production cycle). These features are often not well understood which is why there is a need to actively promote the benefits of insurance and also to ensure that the legitimate claims of policyholders are met promptly.

Insurance is a complex business and the solidity of an insurer can sometimes be unclear. For example, while an insurer is still paying claims it can already be insolvent and unable to meet its commitments in the long-run, making supervisory intervention necessary.

If regulation and supervision are adequate, consumers will be protected, their claims honored and they can recover better from (financial) setbacks and, in emerging markets and developing economies, work toward an escape from poverty.

There is a Dutch saying that trust arrives on foot and leaves on horseback. It means that it takes considerable time to build up trust but it takes just one negative incident to make it disappear.

More than the loss of money, the failure of an insurer may cause loss of trust in the entire insurance industry, causing a big part of the population to turn away from insurance and therefore lose an important financial opportunity to manage risks and protect assets.

This loss of trust can also occur if a policyholder has a different expectation of his or her insurance cover.

This means that the knowledge and understanding (financial literacy) of the policyholder should be sufficient.

Also, the policyholder should be treated fairly by the insurer. This means that the information and advice provided by the insurer should be complete, correct and suitable for the needs of that specific customer.

Claims settlement should be arranged quickly and on fair terms without misusing the small print in the policy. Each of these highlights the reason for adequate regulation and supervision.

The IAIS published its revised Insurance Core Principles (ICPs) in October 2011. It provides a framework with the essential elements that must be present in a supervisory regime to promote a financially sound insurance sector and create an adequate level of policyholder protection.

The ICPs cover various issues including licensing, corporate governance, capital adequacy, risk management, investment, reporting, supervisory powers of intervention, market conduct and winding up of insurers.

The ICPs apply to insurance supervision in all jurisdictions regardless of the level of development of the insurance markets and the type of insurance products or services being supervised.

At the same time, they recognize that supervisors need to adjust certain supervisory requirements and actions in accordance with the nature, scale and complexity of risks posed by individual insurers (the “proportionality principle”).