The plethora of new law and regulation enacted for the financial services sector over the past 50 years could “sink a battleship”; what has it achieved?
This question has been discussed for a number of years. It gained more prominence and seriousness from the Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (click here for extract from Interim Report Volume 1, page 290).
Good and bad practice in the insurance industry stem directly from behaviours; the culture of companies and the consequent behaviour of employees. Law plays a role but can never be the best or final answer.
Last year, the IBCCC (the independent committee that monitors compliance with the Insurance Brokers Code of Practice (the Code) adjusted its focus from simple technical legal compliance with the Code to include and prioritise the examination, understanding and focus on good behaviour and its cultural context. It is now undertaking activities designed to help it understand company culture. The change in focus was discussed in detail in the May 2020 Tip of the Month, which can be accessed at https://insurancebrokerscode.com.au/tip-of-the-month-may-20/.
In 2021-22, the principal focus of the IBCCC will be to promote better compliance through supporting change in behaviours and culture. The IBCCC’s projects for the upcoming year will be specifically aimed at helping Code subscribers understand their culture and its significance, and to enact meaningful changes that will result in improved practice.
As part of its long-term strategy, in 2020 the IBCCC engaged a behavioural scientist to review the 2019 self-reported Code breach data. When viewed through a behavioural science lens, the data revealed behaviours that informed good and poor practices. The findings included useful insights and flagged culture-based issues the IBCCC can address to promote good practice. These findings will help shape the IBCCC’s activities in 2021-22 including it is response to the Code review.
The 2019 breach data revealed some behaviours that contributed to good practice and deserve broad promotion. As single processes and procedures inevitably fail, good behaviour tended to involve having multiple processes and ‘lines of defence’; the ultimate ‘fall-back’ being random reviews and file audits.
Good behaviour was also demonstrated by brokers who endeavoured to understand the root causes of breaches, as did using breaches for learning across an organisation.
The findings also highlighted a number of key behavioural biases that can affect brokers and, unwittingly, lead to poor practices. Understanding and addressing these biases with practical suggestions is likely to be an important factor in the IBCCC’s activities in 2021-22.
The biases, and some of the ways the IBCCC could respond to them, include:
1. THE HUMAN TENDENCY TO SEE LEGAL MINIMUM REQUIREMENTS AS SOMETHING TO AIM FOR.
The advice from our behavioural scientist is that when the law sets a bare minimum for behaviour, this can act as an ‘anchor’. Firms may target the minimum standards, not realising that inevitable policy or procedural failures mean there will be times when they fail to meet them. As a result, the IBCCC is considering reframing the standards, perhaps by providing specific examples of higher ‘good practice’ standards. Brokers would then ‘anchor’ to the higher, aspirational standards, rather than to the legal minimums.
As some brokers might be unsure how to operate beyond the basics, specific behaviours could be highlighted as ‘good practice’, such as:
- a longer internal standard for policy renewals (i.e. 21 or 28 days instead of the legal minimum of 14)
- regular internal training that highlights past breaches and lessons learned
- cancellation in plain language
- actual dollar disclosure of brokerage/commissions
- having multiple procedures in place to catch breaches or potential issues
- random internal audits and client file reviews, and
- using checklists at renewal time or for new customers.
2. THE POWERFUL HUMAN BIAS TOWARDS INERTIA – STICKING TO THE DEFAULT AND ASSUMING EVERYTHING WILL BE OK UNTIL SOMETHING BAD HAPPENS.
Inertia was flagged as a particular issue in the insurance space and, especially, for policy renewals, an area that generated a number of Code breaches.
Clients and brokers can regard renewals as a continuation of the status quo, which ignores the fact that Policy Wordings change, as do client needs and circumstances.
Brokers may need to be especially careful with renewals to ensure inertia does not cause them to miss key points. Where Policy Wordings have changed, for example, these could be noted explicitly in correspondence rather than left for the client to glean from an updated Product Disclosure Statement. Encouraging brokers to be vigilant about inertia could be an important element of promoting good practice.
The ‘curse of knowledge’ can cause brokers familiar with the industry to lose sight of what a layperson might know.
Helping brokers to understand client perspective at every point of the process is vital, whether it be employing plain language to explain Policy terms and conditions or considering what the average person might think is covered by ‘standard cover’ or particular words and expressions.
As well as actively addressing this challenge of focusing on culture and behaviour to achieve good practice, the IBCCC will continue its in-depth exploration of the behaviours that drive both good and poor practices. To this end, our behavioural scientist will be commissioned to review the data currently collected in the 2020 Annual Compliance Statement, which will reflect how subscribers handled the impact of COVID-19 and the natural disasters in 2019-20.
The IBCCC anticipates that the findings from two years of data will provide further, richer insights into the culture of companies and the consequent behaviours of employees.
The broad achievement of Code objectives (for the industry as a whole and individual businesses) requires a broad focus. It is much more than legal compliance, it is about doing whatever it takes to achieve good service.
The IBCCC is very encouraged by the initiatives currently being undertaken by the major firms and cluster groups within the insurance broking industry to strive for the highest standards of behaviour and professionalism within the industry. Whilst industry leaders are responsible for driving any change within their organisation, the IBCCC will seek to support these initiatives by providing useful insights based on analysis of annual compliance statements and breach data working in collaboration with NIBA.