Consumer Protection Insurance

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ConsumerProtectionInsuranceRodney Lester

primer series on insuranceissue 7, august 2009

www.worldbank.org/nbf

non -bank financial institutions group

global capital markets development department

financial and private sector development vice presidency


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ConsumerProtectionInsuranceRodney Lester

non-bank financial

institutions group

global capital marketsdevelopment department

financial and private sectordevelopment vice presidency

primer series on insuranceissue 7, august 2009

www.worldbank.org/nb


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Consumer Protection Insuranceii

2009 The International Bank or Reconstruction and Development/The World Bank1818 H Street, NWWashington, DC 20433Internet: www.worldbank.org/nbE-mail: [email protected]

All rights reserved.First printing June 2009

This volume is a product o the sta o the International Bank or Reconstruction and Development/The WorldBank. The ndings, interpretations, and conclusions expressed in this paper do not necessarily refect the viewso the Executive Directors o The World Bank or the governments they represent.

The World Bank does not guarantee the accuracy o the data included in this work. The boundaries, colors,denominations, and other in ormation shown on any map in this work do not imply any judgement on thepart o The World Bank concerning the legal status o any territory or the endorsement or acceptance o suchboundaries.

Cover and publication design:James E. QuigleyCover illustration:Imagezoo/Corbis

Author Rodney Lester is a senior advisor at the World Bank with global experience in insurancedevelopment and supervision, and 30 years o experience in the private sector insurance and

und management industries. Be ore joining the World Bank he was a managing Directorin AMP, Australias largest non-bank nancial institution with responsibility or insurancebusinesses in Australia, New Zealand and the UK. During this time he served as Presidento the Insurance Council in Australia. He has also been CEO o a number o medium-sized diversi ed nancial services groups operating in all areas o the insurance and undsmanagement industries and in leasing. At the World Bank, his activities have includedpensions and insurance industry re orm and resolution work, development o private pensionmechanisms, natural disasters unding, corporate governance and microinsurance.

THIS ISSUE

Series editor Rodolfo Wehrhahn is a senior insurance specialist at the World Bank. He joined

the Bank in 2008 a ter 15 years in the private reinsurance and insurance sector and 10 years inacademic research. Be ore joining the World Bank, he served as President o the Federation o the Interamerican Insurance Associations representing the American Council o Li e Insurers.He was board member o the AEGON Insurance and Pension Companies in Mexico, and wasCEO o reinsurance operations or Latin America or Munich Reinsurance and or AEGON.

For questions about this primer, or to request additional copies, please contact: [email protected].

The Primer Serieson Insurance provides a summary overview o how the insurance industryworks, the main challenges o supervision, and key product areas. The series is intended orpolicymakers, governmental o cials, and nancial sector generalists who are involved with theinsurance sector. The monthly primer series, launched in February 2009 by the World BanksInsurance Program, is written in a straight orward, non-technical style to share concepts andlessons about insurance with a broad community o non-specialists.

The Non-Bank Financial Institutions Group in the Global Capital Markets Development Depart-ment aims to promote the healthy development o insurance, housing nance, and pensionmarkets, and to expand access to a broad spectrum o nancial services among the poor. Thesemarkets provide opportunities or household investment and long-term savings, and can bu -

er the poor against the risks o sickness, loss o breadwinner, catastrophic events, and othermis ortunes.


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iii

Contents

Financial markets and the need or consumer protection ....................... 1Issues specifc to retail (B to C) insurance markets .................................. 3Insurance Consumer Protection Assessment Template ........................... 6

Consumer Protection Institutions..........................................................6Consumer Protection Regime ..........................................................6Contracts ..........................................................................................6Codes o Conduct .............................................................................7Other Institutional Arrangements ...................................................9Bundling and ying Clauses ..........................................................10

Disclosure and Sales Practices .............................................................11Formal Disclosure ..........................................................................11Sales Practices ................................................................................12

Roles o Tird Parties .....................................................................15Privacy and Data Protection ................................................................16Confdentiality and Security o Customers In ormation .............16

Dispute Resolution Mechanisms ..........................................................17Internal Dispute Settlement ...........................................................17Formal Dispute Settlement Mechanisms ......................................17

Consumer Advocacy and Financial Literacy ......................................18Insurance account handling .................................................................19Guarantee Schemes and Insolvency ....................................................20

Re erences ..................................................................................................... 21Annex 1Legislative Sources ....................................................................22


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Consumer Protection Insuranceiv

Tables

Table 1: Comparison o retail fnancial services characteristics .........5Table 2: Some codes o conduct .......................................................... 6Table A1: Overview o consumers protection legal in rastructure ..17


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1

ConsumerProtection InsuranceRodney Lester

Financial markets and the need or consumer protection

Each year the global economy adds an estimated 150 million new

consumers o nancial services. Most are in developing countries,where consumer protection and nancial literacy are still in theirin ancy. Protecting the interests o consumers has become an importantcomponent o sound and competitive nancial markets, particularly inthose countries that have moved rom state planning to market econo-mies. Te public in many emerging markets lacks a history o usingsophisticated nancial products. Even in well-developed markets, weak consumer protection and a lack o nancial literacy can render house-holds vulnerable to un air and abusive practices by nancial institu-

tionsas well as nancial rauds and scams operated by intermediaries.At its heart, the need or consumer protection arises rom an imbal-ance o power, in ormation and resourcesbetween consumers and their

nancial service providers, most o en placing consumers at a disad- vantage (although in ormation asymmetries can run in the oppositedirection as well). Consumer protection aims to address this market

ailure. Financial institutions know their products well but individualretail consumers may nd it di cult or costly to obtain su cient in or-mation on their nancial purchases. In addition, complex nancial

products can be di cult to assess, even when all relevant in ormationis disclosed. Imbalances are most likely in cases where:

ransactions are in requent ( or example, when taking a mortgageon a personal residence),


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Consumer Protection Insurance2

Entry or exit costs are low(such as or nancial intermediaries),thus allowing disreputable rms to emerge, or

Te cost or payo to the consumer is postponed or very high . Formany long-term investment products such as li e insurance andpension savings, per ormance cannot be evaluated until many years have elapsed.

A well-designed consumer protection ramework can help reducethe imbalances o power and in ormation between consumers and

nancial institutions.A nancial sector should provide consumers with:

Transparency by providing ull, plain, adequate and comparablein ormation about the prices, terms and conditions (and inherentrisks) o nancial products and services;

Choice by ensuring air, non-coercive and reasonable practicesin the selling o nancial products and services and collection o payments;

Redress by providing inexpensive and speedy mechanisms toaddress complaints and resolve disputes; and

Privacy by ensuing control over access to personal nancialin ormation.

Consumer protection and nancial literacy also promote the e -ciency and transparency o retail nancial markets. Consumers whoare empowered with in ormation and basic rightsand who are awareo their responsibilitiesprovide an important source o marketdiscipline to the nancial sector, encouraging nancial institutions tocompete by o ering better products and services rather than by taking

advantage o poorly in ormed or captive consumers.In addition, consumer protection helps nancial rms in acing thespeci c risks that arise in dealing with retail customers. In its April2008 report, the Joint Forum o the Basel Committee on BankingSupervision, the International Organization o Securities Commissionand the International Association o Insurance Supervisors identi edthree key risks related to possible mis-selling o nancial productsto retail customers. Tey are: (1) legal risk, i success ul lawsuits romcollective action by customers or en orcement actions by supervi-

sory agencies result in obligations to pay nancial compensation ornes; (2) short-term liquidity risk and long-term solvency risk, i retailcustomers are treated un airly and thus shun the nancial institutionand withdraw their business; and (3) contagion risk, i the problemso one nancial institution (or type o nancial product) spread across


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Consumer Protection Insurance 3

the nancial sector. E ective consumer protection can help ensure thatthe actions o nancial rms do not make them subject to criticisms o misselling.

Consumer protection also protects the nancial sector rom the risk o political over-reaction to nancial crises. Te political response tocollapses o parts o the nancial sector may be to over-compensate withheavy regulation. Te impact o too little consumer protection becameevident, or example, during the insurance and superannuation scandalsin the United Kingdom and Australia 1. Te results were a series o costly studies and ar reaching recommendations or regulatory re orm.

Issues specifc to retail (B to C) insurance markets

Consumer products can be broken into three categories: search goods (can be assessed in advance o purchasee.g. a piece o art),experience goods (can be assessed relatively quickly with usee.g. soap powder),credence good (attributes only discovered a er a long delay or uponoccurrence o contingent event or nevere.g. a mutual und).

Insurance clearly ts into the credence good category and the sector

thus relies heavily on the publics trust that it will deliver what it prom-ises. Widely publicized ailure in this regard can dampen the sectorsdevelopment or many years. Given that insurance is a social good withlarge potential positive externalities, ailures are to be avoidedsubjectto the cost bene ts o any market modi ers being properly assessed.

Insurance markets in many emerging and developing countriesnow have rapidly growing consumer components, driven by the intro-duction o compulsory motor and health insurance, links with creditprovision and the growth o micro-insurance technology. Tere are

a number o common undesirable industry practices that emerge inparallel and these can be largely mitigated through a strengthening o consumer rights. Poor practices include unrealistic bene t illustrations,non disclosure o the real costs o products, misleading advertisements,un air claims settlement practices, selling tied to other products orservices (e.g. credit insurance and white goods consumer credit), andnot selling to identi ed needs. Insurance is an industry where agency incentives can be the main driver o what product is sold and howmuch. Further, multi level sales through amily and riends, tying and

bundling (especially i adhesion principles apply under the law), can1 See or example http://www.smh.com.au/news/business/thousands-more-snared-in-

superannuation-scandal/2007/02/15/1171405369454.html. Te relevant industry body has now recommended the phasing out o intermediary commissions on retirementproducts.


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limit a consumers choice and mobility. able 1 illustrates some o thedi erences between insurance and other retail nancial products.

Under an earlier mode, the US introduced price controls on insur-ance a er a spate o ailures during and a er the great depression butthere is a growing consensus in that country that these are not neces-sarily consistent with consumer wel are. Instead a new approach, basedon competition and in ormation theories, has been rapidly evolvingin English speaking common law jurisdictions over the last twodecades. Tis largely refects the impacts o activist media, a numbero high pro le cases such as Equitable in the UK, which have involvedconsumer riendly judicial interpretation, and a history o major ail-ures (Con ederation Li e in Canada, Independent in the UK and HIHin Australia). Te EU has more recently become engaged with thepassage o the Mediation Directive and an ongoing dialogue on how toharmonize the broader consumer protection agenda.

In developing and emerging markets consumer protection tends tobe secondary to sectoral development and prudential oversight, andrefects the usual late development o the retail component o insur-ance markets. In many developing countries the middle class protectthemselves by dealing with reputable international insurers or JVs with

international partners. However the rapid development o microinsur-ance is orcing an earlier consideration o relevant regulation.

Te insurance sector, because o a history o weak regulation andmisuse or taxation and capital trans er purposes, or even direct

raud, has sometimes attracted less than desirable proprietors. Tiscombined with the almost universal requirement as countries developthat certain classes o insurance be mandatory inevitably means theeventual introduction o speci c consumer protection laws and systems(although this sometimes ollows rather than precedes politically sensi-

tive scandals). Te ollowing template was developed or transition anddeveloped markets but the sections on contracts, the role o the courts,disclosure and sales practices have universal application.


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Table 1: Comparison o retail fnancial services characteristics

Comparison of common products

Insurance Mortgages Hardware AutomobilesWholesaleCost

Unknown at timeo sale.

Variable overthe period o the loan.

Known tomanu acturer.

Known tomanu acturer.

Retail Price Speci c pricequotes available.Di cult or thepublic tocomparison shop.

Loan ratespublishedand speci cquotesavailable.

Publiclyadvertised.

Publiclyadvertised.

Limitations Some people

might only beeligible or limitedorms o coverage.

Some people

might onlybe eligibleor higher

interest rateloans.

No limitations. No limitations.

Access Available to all thatmeet underwritingstandards.

Available toall that meetunderwritingstandards.

Available to allwho can a ordcash or credit.

Available to allwho can a ordcash or credit.

Transparency Underwriting stan-dards generallyunavailable to thepublic.

Underwritingstandardsavailable tothe public onrequest.

Prices clearlymarked onitems.

Prices marked,but o tenwilling tonegotiate.

Suitability Consumer gener-ally can only deter-mine suitabilitya ter a claimoccurs.

Consumerhas limitedtime periodto reconsiderdecision.

Can returnto retailer i unsuitablesome warran-ties apply.

Warrantyprovided or aspeci ed timeperiod.

Finalityo theTransaction

An agent canarrange coveragebut an underwritermight decide thatthe person is ineli-gible and cancelthe policy on aprospective basis.

The under-writing deci-sion is madebe ore amortgage isgranted.

The hard-ware itembelongs to theconsumer onceit is purchased,unless it isde ective andreturned at theconsumersoption.

The automo-bile belongs tothe consumeronce it ispurchased,unless alemon lawapplies andreturned at theconsumersoption.

Compulsionto Buy

Some personallines insuranceproducts aremandated.Auto becausegovernmentsrequire.Homeownersbecause lendersrequire.

Have optionto rent or paycash or adwelling.

Optional. Essentialunless publictransit is avail-able. Notcompulsory.

Source: NAIC. Personal Lines Regulatory Framework, September, 2006


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Insurance Consumer Protection Assessment Template

Consumer Protection Institutions

consumer protection regime

Te law should provide or clear rules on consumer protection inthe area o insurance, and there must be adequate institutionalarrangements or implementation and en orcement o consumerprotection rules.

Tere should be speci c provisions in the law, which createan e ective regime or the protection o retail consumerso insurance.

Te rules should prioritize a role or the private sector,including voluntary consumer protection organizations andsel -regulatory organizations.

Good practices demand that insurers o ering retail products andservices are under supervision or consumer protection purposes

because o the essentially opaque nature o insurance contracts (they o er a contingent intangible service delivered sometimes well a er thecontract is entered into), the en orced use o standard contracts (some-times subject to adhesion rules), and the complexity o the relevant law(whether civil code or common law based). Te IAIS Core Principlesand Methodology (ICP 25) expresses this as ollows:

Consumer Protection:Te supervisory authority sets minimum requirements or insurers

and intermediaries in dealing with consumers in its jurisdiction,including oreign insurers selling products on a cross border basis. Terequirements include provision o timely, complete and relevant in orma-tion to consumers both be ore a contract is entered into through the point at which all obligations under a contract have been satis ed.

Contracts

Tere should be a specialized insurance contracts section in thegeneral insurance or contracts law, or ideally a separate InsuranceContracts Act. Tis should speci y the in ormation exchange anddisclosure requirements speci c to the insurance sector, the basic


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rights o insurer and retail policyholder and allow or any asymme-tries o negotiating power or access to in ormation.

Due to its highly specialized nature and very long history insuranceremains largely subject to a separate specialized body o law. In CivilCode countries insurance contracts are almost inevitably covered by a separate section o the Civil Code, which will o en re er to relevantsections elsewhere in that code. Te Civil Code may be supplementedby more speci c sections in the insurance law dealing with supervisory and prudential matters. Some common law countries have separateinsurance contracts laws, and these may supplement a Civil Code inmixed law jurisdictions (e.g the Czech Republic).

Because commercial and industrial insurance usually precedes thedevelopment o consumer (retail) insurance markets, the corpus o theinsurance law in most developing and many transition markets doesnot adequately cover B2C situations and such countries o en even-tually draw on industrial country models. Aside rom speci ying theminimal contents o an insurance contract (ideally di erentiated by the undamental nature o the coveragelong term, liability, property,etc.) good B2C contract regulations should di erentiate between mate-rial and non material non disclosure, speci y clearly when the contract

goes into orce (including cover note situations), when underinsurance justi es the application o average, noti cation requirements when aninsurer wishes to cancel or alter a contract, how contracts will be inter-preted in the event o dispute, minimum requirements regarding useo plain words, type ace etc and what clauses my not be included (e.gwarranty clauses, compulsory arbitration on the insurers terms etc).Te ollowing table summarizes possible approaches:

Eastern European Countries with separate contracts law

Germany, Czech Republic, Austria, Latvia Major other countries with separate insurance contracts law

UK, Australia Major countries with Insurance Contracts section in Insurance

LawChina, India, US, Brazil, Russia, Canada Civil Code/ Law o Obligations onlyItaly, urkey

Codes of Conduct

Tere should be a principles-based Code o Conduct orinsurers that is devised in consultation with the industries and


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consumer protection associations involved, and is monitoredand en orced in the last resort by a statutory agency.

Te statutory Code should be limited to good businessconduct principles. It should be augmented by voluntary codeson matters speci c to the product or channel concerned.

Te operation o voluntary codes should be monitored by astatutory agency, and the Annual Report o that agency shouldcomment on the operation o those codes.

In European legislation, there is no speci c demand or establishingCodes o Conduct in the insurance sector, nor are there provisions thatdemand the cooperation o the industry and consumer protection asso-ciations. Codes are acknowledged by supervisors and statutory consumerbodies in some other jurisdictions, such as Australia and Malaysia.

Table 2: Some codes o conduct

Country Original Title

Australia General Insurance Brokers Code o Practice, General Insur-ance Code o Practice, Financial Planners Code o Ethics andRules o Pro essional Conduct

India Code o Best Practice or Indian Li e insurers Li e Insur-ance Council o India

Malaysia Li e Insurance Association o Malaysia Code o Ethics andConduct (approved by Bank Nagara)

RussiaRussian Association o Motor Insurersvarious codesincluding developing a register o insurance agents andinsurance brokers against whom complaints have beenmade; rules o pro essional conduct entitled Improving thelevel o service in the MTPL market; rules covering the reviewo claims made by victims and the payment o compensation.

South A rica Li e O ces Association Code24 chapters covering a rangeo products and activities

UK ABI Codes includingStatement o Long-term insurancepractice, Mortgage endowment Policy reviews; Statement o Best Practice or Critical insurance Cover, with Pro t Bondsetc

Te exact institutional arrangement depends on legislation ( orinstance whether there is provision or the legal institution o a statu-tory code). In some European legislation, it is remarked that the exis-

tence o codes alone is not su cient or ull compliance (Council o Europe Convention).


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Other Institutional Arrangements

Tere should be a balance between prudential supervision andconsumer protection.

Te judicial system must provide credibility to the en orce-ment o the rules on nancial consumer protection.

Te media and consumer associations ought to play an activerole in promoting nancial consumer protection.

Insurers should be legally responsible or all statements madein marketing and sales materials related to their products.

Where insurers all under the supervision o a body with bothmarket conduct and prudential responsibilities, a balance needs tobe ound. For instance, in the UK, the Financial Services Authority isresponsible or capital requirements and consumer matters. Similarduties are held by the NAIC certi ed state insurance departments inthe US. On site inspectors are required to examine both prudentialand market conduct aspects o their charges. Both the FSA and many state supervisors in the US provide web based support to insuranceconsumers (see or example New Jersey Department o Banking and

Insurance, Division o InsuranceConsumer Protection Serviceshttp://www.nj.gov/dobi/en con.htm). Teoretically it is better toseparate these roles (see or example the Wallis InquiryAustralia)but institutional reality in many countries means that the prudentialsupervisor becomes the de ault recourse or consumers until nancialmarkets have relatively deep penetration into the household sector and

ormal ombudsmen or equivalents are established (e.g. the UK andAustraliasee Australian Financial Ombudsman Service: http://www.

os.org.au/centric/home_page.jsp).

Media and consumer associations o en play a very active role inpromoting consumer nancial protection in most industrial coun-tries. In all European countries, there are consumer associations thatalso deal with nancial services, and an overview is provided by theEuropean Commission. 2 I , as under Article 7 o decision No 20/2004/EC, speci c criteria are ul lled, organization might be even supported

nancially by the Community (this holds or two organizations as o August 2008, ANEC and BEUC).3

Further, the Commission has created several consultative bodies,

such as the Financial Services Consumer Group, a sub-group o already

2 See website: http://ec.europa.eu/consumers/cons_org/associations/index_en.htm3 Bureau Europen des Unions des Consommateurs (BEUC); European Association or

the Co-ordination o Consumer Representation in Standardisation (ANEC).


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existing European Consumer Consultative Group. 4 Tese are perma-nent committees that encompass representatives o consumer organi-zations rom each o the Member States. Tey are particularly asked toensure that consumer interests are properly taken into account in EU

nancial services policy. Worldwide addresses o consumer associationcan be ound on the Consumer International website. 5

Several directives in Europe, hold nancial institutions responsibleor the content o their public announcements. Tese are the Directive

on the Distance Marketing o Financial Services, 2002/65/ECand theDirective on Comparative Advertising, 1997/55/EEC.

Te treatment o wordings in insurance sales material and contractsis most developed in common law countries where case law hassupported the introduction o such concepts as plain meaning interpre-tations (consensus as idem), good aith and air dealing (mala gestio)and bans on warranty clauses that can enable insurers to avoid legiti-mate claims.

Bundling and Tying Clauses

Whenever an insurer contracts with a merchant or credit grantor(including banks and leasing companies) as distribution channel or itscontracts, no bundling (including en orcing adhesion to what is legally a single contract), tying or other exclusionary dealings should take placewithout the consumer being advised and being able to opt out.

Consumer protection can be used to avoid market power abuseby the dominant players. 6 Vertical restraints between companies o di erent industries include anti-competitive tying and bundling. Cross-selling that constitutes bundling or tying can have positive demand and

supply-side e ects, but may also hamper competition and customermobility. Bundling is the sale o two goods together in a bundle. Firmsbundle or several reasons (economies o scope, price discrimination,demand management or leverage o market power into other marketsegments). Bundling o aux insurance products has also been used todisguise the real price o associated credit or goods, particularly in CivilCode countries where the doctrine o adhesion applies.

4 Te website o the sub-group can be ound here: http://ec.europa.eu/internal_market/nservices-retail/ scg/index_en.htm5 Web: http://www.consumersinternational.org/ emplates/Internal.asp?NodeID=975336 Bakker, M. R. and A. Gros (2004). Development o Non-bank Financial Institutions and

Capital Markets in European Union Accession Countries, World Bank Working PaperNo. 28.


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Bundling is not per se anti-competitive, but can reduce competi-tion and limit consumer choice, especially i there is the conditionto purchase good B together with a good A ( or instance, a mortgagecontract together with payment insurance).

Positive e ects on the demand side exist, when the price o bundled/tied services is lower or consumers than or unbundled goods and i convenience is increased. Supply-side e ects may result rom reducedcosts o providing bundled services. Bundling, however, can increasepricing complexity and reduce market transparencythus competitivestrategies o rms do have implications or consumer protection.

Bundling urther has the potential to render price comparisonsimpossible. wo criteria are important: (i.) the limitation o consumerchoice, (ii.) whether other competitors are hindered. In the EuropeanUnion, bundling and tying practices in competition policy re er to Art.81 and Art. 82 o the EC reaty.

Bundling and tying that limits consumer choice is widespread inmarkets with weak competition en orcement and should there ore beone o the components to be evaluated when conducting diagnostics o consumer protection.

Disclosure and Sales Practices

Formal Disclosure

Insurers should ensure their advertising and sales materialsand procedures do not mislead customers. Regulatory limits

should be placed on investment returns used in li e insurance value projections. Insurers should be legally responsible or all statements made

in marketing and sales materials they produce related to theirproducts.

All marketing and sales materials should be easily readableand understandable by the general public.

A key- acts document should be attached to all sales andcontractual documents, disclosing the key actors o the insur-

ance product or services in large print.

Common Law countries again have more scope to deal with theenormous range o potential transaction types that can arise underproperty, liability (tort) and credit related insurance arrangements.


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Civil code countries tend to rely on speci c sections o their CivilCodes or separate Contracts Law (Law o Obligations) and sometimeson strict regulatory/ supervisory oversight o transaction and salesmaterial. Tus courts in common law countries are able to bring allrelevant material, including sales documents, to bear in arriving at a judgment. Tis in turn eventually a ects the regulatory environment,while supporting an innovative and competitive market.

Te key acts (and eatures i intermediary and product are di er-entiated) requirements are most developed in the UK and refect thepolitical response to a number o very public scandals, including Equi-table (see http://www.moneymadeclear. sa.gov.uk/home.html). Key

acts documents are also known as initial disclosure documents orIDDs. In other countries (e.g. Australia) standardized B2C insurancecontracts are established by law, with the right o derogation providedthat this is ully disclosed. Some states in the US speci cally ban certainwordings (such as warranty clauses) that would enable an insurer toavoid an otherwise legitimate claim. Some US states also lead the way in applying air dealing concepts.

Sales Practices

All insurance intermediaries should be licensed and proo o licensing should be readily available to the general public,including through the internet.

Sales personnel and intermediaries selling and advising oninsurance contracts should have su cient quali cations,depending on the complexities o the products they sell.

Educational requirements or intermediaries selling long term

savings and investment insurance products should be speci-ed, or at least approved, by the Regulator or Supervisor. Te sales intermediary or o cer should be required to obtain

su cient in ormation about the consumer to ensure an appro-priate product is o ered. Formal act nds should be speci ed

or long term savings and investment products and they shouldbe retained and be available or inspection or at least 7 years.

Insurers should be held responsible or product related in or-mation provided to consumers by their agents (i.e. those inter-

mediaries acting or the insurer). Te consumer should be made aware o whether the interme-

diary selling them an insurance contract (known as a policy)is acting or them or or the insurer (i.e. in the latter case they have an agency agreement with the insurer).


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I the intermediary is a broker (i.e. acting on behal o theconsumer) then the consumer should be advised at the timeo initial contact with the intermediary i commission will bepaid by the underwriting insurer. Te consumer should havethe right to require disclosure o commission paid to an inter-mediary or long term savings contracts. Te consumer shouldalways be advised o the amount o commission paid on singlepremium investment contracts.

An intermediary should not be allowed to identically ll broking and agency roles or a given general class o insurance (i.e. li eand disability, health, general insurance, credit insurance).

Tere must be a reasonable cooling-o period associated withany traditional investment or long term li e savings contract,afer the policy in ormation is delivered, to deal with possiblehigh pressure selling and mis-selling.

Sanctions, including meaning ul nes and, in the case o inter-mediaries, loss o license, should apply or breach o any o theabove provisions.

Te main sources o guidance on insurance sales practices in the

EU are the consolidated li e insurance directive (Ch 4 and AnnexIII), the numerous directives covering non li e insurance and motorinsurance and the Mediation Directive. Annex III o the Li e Direc-tive in particular requires that li e insurance consumers are advisedo recourse mechanisms at the time o sale. Some EU members suchas the UK have disclosure and sales practices that are substantially stronger than those o the Li e and mediation Directives, includingrequiring that ull records (sometimes including recordings) o salestransactions are maintained.

Tere also exist the Directive on the Distance Marketing o Finan-cial Services, 2002/65/ECand the Directive on Comparative Advertising,1997/55/EE and the Directive 2005/29/EC on Un air Commercial Prac-tices, which set out misleading practices (Art. 6, 7) with 23 examplesin the Annex and aggressive practices (Art. 8, 9) with 8 examples. InArt. 10 it is explicitly stated that un air commercial practices may becontrolled through codes o conduct. Further, there can be recourse toout-o -court settlement, but the latter shall not be seen as equivalent to judicial or administrative recourse.

Outside the EU and its a liates the main sources o regulation areagain the common law industrial countries, and the US, and Australiaparticular, although there appear to be issues in the US or orce placedinsurance (i.e. where a lending institution is the policyholder andbene ciary and passes on the cost to its customer). Canada has relied


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to a greater extent on widely publicized and accessible industry codeso ethics and a long established consumer inquiries center (see http://www.insurance-canada.ca/index.php).

Cooling o periods (also known as ree look periods) are seenprimarily as a consumer protection mechanism but it has been arguedthat they are also economically e cient 7.

Te right o withdrawal is enshrined in the Art 6 o the DistanceMarketing o Financial Services Directive. According to the provi-sions, the consumer has the right to withdraw rom a contract withoutpenalty and without giving any reasons. Te periods vary with productand are longer or insurance contracts and pension products. Teperiod o withdrawal typically begins with the conclusion o thecontract and typically is in the range o two weeks(14 calendar days asstated in the a orementioned directive). Te EU Li e Insurance Consol-idated Directive speci es a cooling o period o between 14 and 30days a er the contract has been concluded.

Cooling o periods are not uncommon or long term insuranceproducts (i.e. li e insurance) in other industrial countries and someemerging markets such as Singapore and cover a relatively wide rangeo insurance products in others such as Australia: (see http://www.asic.

gov.au/ do/ do.ns /byheadline/Cooling+o +rights?openDocument).ypically they are longer than or securities (including investment

linked li e contracts) because o the onerous early termination penaltiesthat apply to many traditional li e insurance savings contracts. In othercountries or instance Japan certain products such as variable annuitieshave cooling o periods incorporated into their products design.

Te UK FSA has pioneered know your customer KYC concepts inthe insurance sector (see or example http://www. sa.gov.uk/pubs/cp/cp06_19.pd Ch14). It de nes KYC (in the consumer protection as

opposed to the money laundering sense) as ollows:Know your customer. When advising customers, KYC is also known as act nding. It re ers to obtaining su cient in ormation about a custom-ers personal and nancial situation be ore giving the advice.

KYC standards in the money laundering sense must be imple-mented by the national supervisory authorities, whereby nancial insti-tutions have di erent degrees o reedom to design their own customeracceptance policies. Te key elements o the policy as it relates to theinsurance sector can be ound in IAIS ICP No. 28Anti Money Laun-

dering, Combating the Financing o errorism, which speci cally

7 Rekaiti, P. and Van den Bergh, R. Cooling-O Periods in the Consumer Laws o the ECMember States. A Comparative Law and Economics Approach, Journal o ConsumerPolicy, Nov. 2004


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acknowledges the role o FA F. In practice, and despite the huge inter-national nancial fows the insurance sector generates (part o whichis known to involve unds trans er), this sector has been relatively untouched by the AML/ CF community.

Roles of Third Parties

Te regulator or supervisor ought to publish annual publicreports on the development, health, strength and penetrationo the insurance sector either as a special report or as part o the disclosure and accountability requirements under the law governing it.

Insurers should be required to provide their nancial in orma-tion to enable the general public to orm an opinion as to the

nancial viability o the institution. I credible claims paying ability ratings are not available the

Regulator or Supervisor should periodically publish su cientin ormation on each insurer or an in ormed commentator orintermediary to orm a view o the insurers relative nancial

strength.

IAIS Core Principle No. 26 (In ormation, Disclosure and ranspar-ency towards the Market) covers disclosure and is summarized as ollows:

Te supervisory authority requires insurers to disclose relevant in or-mation on a timely basis in order to give stakeholders a clear view o their business activities and nancial position and to acilitate the under-standing o the risks to which they are exposed.

Virtually every country requires insurers to publish their annual

accounts (or more o en summaries thereo ) in the print media at leastannually. In most industrial and emerging markets the leading insurersalready have web sites that include their product o erings and periodicpublic accounts, including annual reports. Un ortunately, accountingand actuarial standards are still not at international levels in the majority o emerging and developing countries. In industrial countries the relevant IFRS remains mired in controversy, particularly in accounting orthe air value o liabilities. Regardless o context a high degree o sophis-tication is required to interpret the nancial in ormation provided. As a

all back some countries (e.g. Pakistan) require that claims paying ability is rated or all insurers although the relevant rules do not always speci y that international rating agencies should be employed.

More detailed technical data is available in some industrial coun-tries, most notably the US, although in other countries (e.g. Australia)


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certain in ormation such as claims run o triangles have been with-drawn under industry pressure.

Privacy and Data ProtectionConfidentiality and Security of Customers Information

Financial institutions customers have a right to expect that theirnancial transactions are kept con dential. Te law ought to requirenancial institutions to ensure that they protect the con dentiality

and security o personal data, against any anticipated threats orhazards to the security or integrity o such in ormation, and againstunauthorized access.

Te con dentiality o personally identi able in ormation, that is any in ormation about an identi ed or identi able individual, is protectedunder several international statutes, such as the Guidelines governing the protection o privacy and trans-border fows o personal data (Art.2 Scope o Guidelines); theUN Guidelines concerning computerized personal data les adopted by the General Assembly on 14 December 1990 (Sect. A, minimum guarantees that should be provided in

national legislations);Further, important statutes are the Directive on the Protection o

Individuals with regard to the Processing o Personal Data, 1995/46/EC(Chapter 1, Art. 1-3) as well as the Convention or the protection o individuals with regard to automatic processing o personal data (E SNo.108, the 28 January 1981, Chapter. 1 General Provisions) and inthe APEC Privacy Framework (Part ii, Scope).

echnical security is also demanded under the above guidelinesand directives, a more detailed guideline on such security has been

provided by the OECD Guidelines or the Security o In ormationSystems and Networks: owards a Culture o Security.In the U.S., the Federal rade Commission established guidelines in

orm o a document entitled Sa eguarding Customers Personal In or-mation: A Requirement or Financial Institutions Financial In ormationSa eguards Rule (2002) which obligates nancial institutions to holdcustomer in ormation secure and con dential. 8

Te use o medical and genetic (biometric) in ormation or theacceptance/ decline and rating o li e related risks is now a major area

o debate, but is not within the scope o this best practice note.

8 Te document can be downloaded rom the F Cs website: http://www. c.gov/opa/2002/05/bussa eguards.pd


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Dispute Resolution Mechanisms

Internal Dispute Settlement

Insurers must provide an internal avenue or claim anddispute resolution to policyholders.

Insurers should designate employees to handle retail policy-holder complaints.

Te insurer must in orm its customers o the internal proce-dures on dispute resolution.

Te regulator or supervisor must provide oversight on whetherinsurers comply with their internal procedures on consumerprotection rules.

Insurers ought to have written policies in place or dispute settle-ment. A written policy should hold the insurer liable or the announcedpolicy. Tis policy should o er contact points or the consumer that areaccessible during business hours without undue waiting times, state inplain language the main steps o customer dispute resolution, provide

rm, reasonable time lines, guarantee the airness in handling the

customer dispute, states the coordination with any ombudsman and/orsupervisory authority, explain in plain language the consumers rightsin the process. Consumer dispute settlement should not lead to unrea-sonable costs in terms o time and money or the consumer.

Te EU Li e Directive requires that policyholders are advised o their right o recourse; however speci c provisions o this type areuncommon in insurance law. Consumer protection law sometimesdoes provide or noti cation o rights, although insurance transactionsmay be excluded in certain circumstances (e.g. the latest version o the

Croatian Consumer Protection Law).

Formal Dispute Settlement Mechanisms

A system should be in place that allows consumers to seek a ordable and e cient third-party recourse in the event they cannot resolve an issue with the non-bank credit institution,which could be an ombudsman or tribunal.

Te role o an ombudsman or equivalent institution vis--visconsumer complaints must be in place and made known tothe public.

Ombudsmans impartiality and independence rom theappointing authority and industry must also be assured.


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Te en orcement mechanism o the decisions o theombudsman or equivalent institution and binding nature o the decision on banks must be in place and publicized.

Few customers have the knowledge to realize that their rightshave been in ringed and even i they become aware o this, they typi-cally have ew avenues to pursue their claims. Tus insurers should bemandated to have an internal dispute resolution or complaint handlingmechanism, which provides a rst level dispute resolution mechanism.Unless there are voluntary consumer protection associations that havethe resources and skills to assist customers with their complaints orlegal actions against insurers, consumers do not have many venues toseek redress. Te absence o small claims court, as is the case in many countries, prevents an a ordable means or the average customer tobring action against sellers, service providers and corporations. Tus,it is not surprising that a specialist insurance Ombudsman or insur-ance claims and inquiries service (sometimes as part o an omnibusOmbudsman service as in the UK) is increasingly regarded as a unda-mental requirement or sound consumer protection.

It can be di cult or an Ombudsman to e ectively mediate and

ameliorate the problems aced by policyholders without clear codeso insurance practice and standardized contracts. One o the mostadvanced integrated systems is now to be ound in Australia, wherean SRO based insurance inquiries and complaints resolution systemhas evolved into a ully fedged nancial sector ombudsman (http://www. os.org.au/centric/home_page.jsp ).

Consumer Advocacy and Financial Literacy

Policymakers, industry and advocates should understand thenancial capability o various market segments, particularly

those most vulnerable to abuse. Consumers, especially the most vulnerable, should have access

to su cient resources to enable them to understand nancialproducts and services available to them.

Te role and impact o media cannot be overstated. However, there

is o en weak coordination and cooperation between the media andregulators and/or industry associations with the relevant in ormationto educate consumers.


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Industry associations in more developed markets should provide acentralized inquiries service that is well publicized, knowledgeable andeasily accessible.

Insurance account handling

Te customer should receive periodic statements o the valueo their policy in the case o insurance savings and investmentcontracts. For traditional savings contracts this should beat least yearly, however more requent statements should beproduced or investment linked contracts.

Customers should have a means to dispute the accuracy o thetransactions recorded in the statement within a stipulated period.

Insurers should be required to disclose the cash value o atraditional savings or investment contract upon demandand within a reasonable time. In addition a table showing projected cash values should be provided at the time o delivery o the initial contract and at the time o any subse-quent adjustments.

Customers should be provided with renewal notices at least 30days be ore the renewal date or non li e policies. I an insurerdoes not wish to renew a contract it should provide at least 30days notice.

Claims should not be deniable or adjustable i non disclosure isdiscovered at the time o the claim but is immaterial to the prox-imate cause o the claim. In such cases the claim may be adjusted

or any premium short all or inability to recover reinsurance. Insurers should have the right to cancel a policy at any time

(other than afer a claim has occurredsee above) i materialnon disclosure can be established.

Insurance law rarely deals with customer account handling in any detailpartly refecting the huge variation in insurance arrangementsthat are possible. Te EU Li e Directive does require that policyholdersare advised o bonus developments, but this does not appear to meanthat individual policyholders are regularly advised o the cash value o their contracts. Te heavy selling costs associated with traditional li e

insurance products o en means that a contract has no value or someyears and there are strong incentives or the li e insurance sector toresist cash value disclosure or the rst 5 or more years a contract is in

orce. As markets develop insurers tend to unbundle the pure risk and


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savings/ investment components o long term contracts and disclosurestandards o en improve.

Guarantee Schemes and Insolvency

With the exception o schemes covering mandatory insurances, guar-antee schemes are not to be encouraged or insurance because o the opaque nature o the industry and the scope or moral hazard. I such schemes are desired or political economy purposes they mustbe accomplished by strong governance and supervision regimes.

Nominal de endant arrangements should be in place or manda-tory insurances such as motor third party liability insurance.

Assets covering li e insurance mathematical reserves and invest-ment contract policy liabilities should be segregated or at the very leastearmarked, and long term policyholders should have pre erential accessto such assets in the event o a winding up.

Non li e insurance is typically subjected to normal commercial windup rules in the event o insurer insolvency, and the subsequent claimssettlement process is usually handled by guarantee unds or specialist

run o companies. Policyholders normally arrange new coverage withthe remaining solvent insurers in the market concerned. Howevermost countries do have claims guarantee arrangements or manda-tory consumer classes such as motor third party insurance. Tese coverclaims that cannot be settled due to insurer bankruptcy or because theguilty driver/ vehicle cannot be identi ed (i.e. the guarantee und actsas nominal de endant).

Li e insurance is also o en deemed to require supplementary arrangements because it can represent a signi cant asset or the indi-

vidual or household and may also serve as loan collateral. In this casethe usual protection is primarily a orded through separation o li e andnon li e insurers and strong prudential oversight. However compos-ites (insurers writing both li e and non li e) have been grand athered innumerous countries and special additional arrangements are requiredin this situation. Tis may range rom the relatively weak EU direc-tive (Directive 2001/17/EC Reorganisation and winding-up o insur-ance undertakings), which requires that the assets covering de ned li einsurance liabilities are earmarked, to the requirement that completely

separate statutory unds are maintained, as in South A rica, Pakistanand Australia. In addition li e policyholders normally rank very high interms o creditor priority. Most countries also either speci y investmentlimits or the assets covering li e insurance mathematical reserves or,


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where risk based supervision already operates, require that capital allo-cated refects the risk characteristics o the asset port olio.

Re erences

Good Practices or Consumer Protection and Financial Literacy inEurope and Central Asia:

A Diagnostic ool, World Bank Consultative Document, August 2008Canadian SenateReport o the Standing Committee on Banking

rade and CommerceConsumer Protection in the FinancialSectorTe Un nished Agenda, June 2006

Had eld, G. et al, In ormation Based Principles or RethinkingConsumer Protection Policy, Journal o Consumer Policy, 1998.

Herring, R. and Santomero, M. What is Optimal Financial Regulation?Te Wharton School, May 1999.

US National Association o Insurance Commissioners (NAIC)Personal Lines regulatory FrameworkSeptember, 2006

Monti, Te Law o Insurance Contracts in the Peoples Republic o China: A Comparative Analysis o Peoples Rights, Global Jurists

opics, Volume 1, Edition 3, 2001UK FSARe orming Conduct o Business regulation, Oct 2006UK Parliamentary and Health Services Ombudsman- Equitable Li e: A

Decade o Regulatory Failure, July 2008Submissions by the Australian Law Re orm Commission to the Depart-

ment o reasury Review o the Insurance Contracts Act 1984 (Cth)arr, A. Insurance Law and the Consumer, Bond University Law

Review, Vol 1., 1989


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Annex 1Legislative Sources

Table A1: Overview o consumers protection legal in rastructure

Institution Directive, Implemented Laws, Guidelines, Studies

European Union EU: Directive 77/92/EEC, Insurance agents andbrokers and Directive 2002/92/EC on insurancemediation

EU: Directive 2002/83/EC on Li e Insurance Ch4 andAnnex III

EU: Directives on Non Li e Insurance and MotorInsurance

EU: Directive 2001/17/EC Reorganisation andwinding-up o insurance undertakings

EC Green Paper on Retail Financial Services in theEU: Com (2007) 226 Final

European Commission Recommendation on theprinciples applicable to the bodies responsible or outo court settlement o consumer disputes (98/257/EC) and on the principles or out o court bodiesinvolved in the consensual resolution o out o courtdisputes (2001/310/EC).

Insurance Contract Law Review papers o theEnglish and Scottish Law Commissions: http://www.scotlawcom.gov.uk/downloads/cp_insurance.pd

The Project GroupRestatement o EuropeanInsurance Contract Law submission to theEuropean CommissionDra t Common Frame o Re erence (CFR): Insurance Contract: http://www.restatement.in o/

Insurance Contracts Law o Latvia, Sept 1998 asamended

The Insurance Contract Act Czech Republic,December 2003 and Act on Insurance Intermediariesand Loss Adjusters Czech Republic, December 2003

Directive Concerning Processing PersonalData and Protection o Privacy in the ElectronicCommunication Sector, 2002/58/EC


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Directive on Protection o Consumers in Respect o Distance Contracts, 1997/7/EEC

Directive on the Distance Marketing o FinancialServices, 2002/65/EC

Directive on Comparative Advertising, 1997/55/EEC

European Commission Recommendation on theprinciples applicable to the bodies responsible or outo court settlement o consumer disputes (98/257/EC) and on the principles or out o court bodiesinvolved in the consensual resolution o out o courtdisputes (2001/310/EC).

Policy statement: Nature and consequences o pyramid activities in li e and accident insurance:Commission on Financial Services and Insurance, 30May 1997

Council o Europe Convention or the protection o individuals withregard to automatic processing o personal data(ETS No.108, the 28 January 1981, Entry into orce:1.10.1985) and Explanatory Report

International Association o Insurance Supervisors

Insurance Core Principle No. 25 ConsumerProtection

Guidance Paper No. 4 on Public Disclosure byInsurers, 2002

United Nations UN Guidelines concerning computerized personaldata les adopted by the General Assembly on 14December 1990

OECD OECD: Good Practices or Enhanced Risk Awarenessand Education in Insurance Issues: 2008

OECD Guidelines or Good Practices or InsuranceClaims Management: November 2004

Guidelines governing the protection o privacy andtrans-border fows o personal data

APEC APEC Privacy Framework

Other leading jurisdictions Australian Insurance Contracts Act, 1984

US National Association o Insurance CommissionersMarket Conduct Model State Law

Alberta, CanadaFair Practices Regulation underInsurance Act128/ 2001


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Documents

Consumer Protection Insurance