INTRODUCTION
1. The Consumer Council is pleased to submit its views on the consultation document issued by the Insurance Authority (IA) on the Review of the Regulatory System for Insurance Intermediaries.
COUNCIL RESPONSE
2. Overall, the Council welcomes the IA's initiatives to review the existing self-regulatory system in the light of operational experience and market developments.
3. According to the complaint statistics in the consultation document, there has been an increasing number of complaints in relation to professional standards and conduct of insurance intermediaries, with the majority of complaints related to insurance agents. Most of the complaints have been about allegations of misrepresentation, mishandling of premiums and forgery. The Council's complaints data base also reflects similar problems in the areas of sales practices and price disputes.
4. The Council's submission is divided into five areas:
- General issues
- Insurance agents
- Insurance brokers
- Problems revealed in the Council's complaint data base
- Issues for further consideration
GENERAL
No background vetting over the fitness and properness (para. 15 of the consultation document)
5. As the IA rightly points out, the Securities and Futures Commission (SFC) carries out background vetting on criminal records and bankruptcy records directly with the relevant authorities. For protection of consumers, the Council suggests that the self-regulatory organizations or the IA should carry out similar background vetting and issue a code of conduct on relevant fitness and properness standards for insurance intermediaries, to ensure an appropriate level of professionalism and protection for consumers.
No proactive action in enforcing compliance (para. 16)
6. With regard to the problem of identification in dealings with the public, the Council suggests that the IA should require insurance companies to issue identification cards to registered or approved persons, and the registration number be printed on the registered or approved persons' business cards. A current example is the case of MPF intermediaries. This would ensure that if the insuring public have any doubts on registered or approved persons they would be able to check with a centralized registration system. The development of a phone and Internet based registration system for public access is also essential.
AGENTS
No legal backing for some self-regulatory codes (para. 17)
7. The Council reiterates its previous stance on giving the industry self-regulatory codes legal backing for effective supervision of insurance intermediaries. The Council also suggests the IA consider whether any other form of disciplinary action should be in place to deter non-compliance.
Deficiencies in self-regulatory codes (para. 18)
8. The Code of Practice for the Administration of Insurance Agents does not specify requirements or good practice in certain major operational areas. For example, there are no requirements on time frame for remittance of premiums to the insurer or prompt notification of claims.
9. To avoid disputes between agents and clients, the Council recommends that the IA should set statutory remittance obligations and notification claim periods by reference to other jurisdictions, local statistics and industry consultation. This would enhance information transparency and thereby provide better protection and certainty to consumers.
Inadequate practical guidance to agents (para. 19)
10. The review found that there is inadequate practical guidance to insurance agents to ensure proper disclosure of relevant information or that adequate explanation on policies has been provided to their clients and that clients have acknowledged receipt of such information. To protect the interests of both parties, the IA suggests that practical guidance in this area should be enhanced.
11. While agreeing with the IA's proposal, the Council suggests that the major terms and conditions of an insurance policy should be given and explained to clients in advance. In many cases, the insurance policy is in small print and barely readable, and no Chinese version is provided to policyholders (also see para. 36-37 of this submission)
No effective measures in addressing problem of poaching of agents (para. 20)
12. There has been poaching of agents and replacement of policies among insurers from time to time. Such practice of policy twisting or replacement may be detrimental to the interests of policyholders. Implementation of the Code of Practice for Life Insurance Replacement by the Insurance Agents Registration Board does not appear to have provided effective measures in addressing this problem.
13. The Council agrees that the twisting of policies by the making of misleading statements, non-disclosure of vital information, or misrepresentations to induce policyholders to replace existing policies is detrimental to the interests of policyholders as they may be likely to experience financial loss or curtailed protection. Complaints arise when insurance agents promise policyholders that their benefits, accrued under the existing policy, can be transplanted to the new policy, without any increase in premium. The Council recommends that the IA should explore means to educate the insuring public of the importance of signing the Consumer Protection Declaration Form (CPD) as this assists policyholders in understanding all the implications of replacing an existing policy.
14. In addition to making consumers aware of the estimated cost of replacing an existing policy by way of signing the CPD, the Council suggests that the form should be made compulsory and for agents to file the completed form with the IA and new insurers. This will thereby become an obligation of the new insurers to ensure compliance.
15. In fact, moving from one insurer to another is not intrinsically wrong, as it is competition. This enhances the best interests of policyholders, if new insurers are acting in good faith by offering better deals and more choice to the clients. Nevertheless, a balance should be struck between encouraging competition in the insurance industry and offering a certain degree of protection to policyholders. However, for competition to function at optimal levels, both buyers and sellers need to be fully informed as to their interests in the transaction, including positive and negative aspects. It is important therefore, that policyholders should be made fully aware and acknowledge the likely implication of replacing their existing policies.
Doubt on credibility and impartiality of the Insurance Agents Registration Board (IARB) (para. 21)
16. In the consultation document, there have been some doubts expressed by insurers on the credibility and impartiality of the IARB in handling matters relating to appointment or discipline agents.
17. The Council notes that there are already detailed clauses specifying the appointment or disciplinary requirements in the Code of Practice for the Administration of Insurance Agents. Also, any person affected by a decision of the IARB has been provided with a channel to appeal to the Appeals Tribunal which is comprised of non-IARB members.
18. In light of this, the Council raises the following issues for consideration of the IA:
- To examine the structure of the IARB to find out whether there are inherent structural defects, if so, they should be corrected;
- To consider any other measures for ensuring impartiality, for instance, blotting out names of insurance insurers and agents, so that IARB members can only judge a matter by the content of the complaint.
- To examine the independence of the IARB secretariat.
No representation of general insurance agents (para. 22)
19. There is a lack of representation for general insurance agents in the IARB. To ensure a balanced representation of views, the Council supports the inclusion of a representative from general insurance agents in the IARB.
INSURANCE BROKERS
No independent representation and potential conflict of interests (para. 23)
20. There is no independent representation in the governing committees of the Hong Kong Confederation of Insurance Brokers Association (CIB) and the Professional Insurance Brokers Association (PIBA) as all these members come from broker companies. Potential conflict of interests arise between committee members of the CIB and the PIBA and their respective broker members because they would be competitors of each other.
21. Given that the Government relies heavily on industry bodies to assume self-regulatory functions, their effectiveness and efficiency would be important for pursuing the interests of the economy. To enhance credibility and impartiality of the respective executive committees, the Council recommends that an independent chairman and independent members, including a consumer representative, should be appointed to represent the interests of the wider public.
22. In relation to complaints made against the self regulatory bodies alleging anti-competitive conduct, the Council reiterates its preferred option of having a comprehensive competition law in Hong Kong to deal with such matters; for example, unfair refusals to admit membership. In the absence of a competition law, the self regulatory bodies should institute their own competition complaints handling mechanisms, and rules to examine any complaints. The Council is willing to assist in the development of appropriate rules and mechanisms.
No proactive action in ensuring compliance (para. 24)
23. The CIB and the PIBA do not take proactive action such as on-site inspection to ensure compliance of their broker members with relevant requirements. In fact, as the committee members and other members are competitors, it would be difficult for them to perform their monitoring functions effectively. It would also be difficult for the CIB and the PIBA to impose requirements on their members to disclose sensitive business information for compliance checks.
24. Once again, the independence of the self-regulatory bodies come into play. Apart from appointing independent chairman and independent members to the executive committees, the Council suggests that an independent inspector should be introduced for conducting investigation and handling sensitive business information. The IA may consider taking up this role.
Inconsistencies in compliance (para. 25)
25. As the two broker bodies are not affiliated with each other, the review found that there are inconsistencies in ensuring compliance with the minimum requirements by the respective broker members of the CIB and the PIBA. To ensure a level playing field, the Council suggests that qualification requirements should be standardised by the IA as part of the fit and proper criteria.
Lack of market transparency (para. 26)
26. At present, only scant statistical information on brokers' business is available to the IA. Financial and other business information on insurance brokers is kept in the hands of the two broker bodies. The lack of transparency in the insurance broking industry may undermine the healthy development of the industry.
27. To address the lack of market transparency, the Council suggests that the IA be granted power to demand regular returns, such as business volume and financial data from the CIB and PIBA on brokers' activities, earnings etc. This would allow the IA to effectively monitor the insurance broking business.
Inadequate secretarial support (para. 27)
28. The consultation document revealed that there is inadequate secretarial support in the CIB and the PIBA for making prompt responses in respect of their member matters.
29. The inadequacy of secretarial support once again raises doubts on the efficiency and effectiveness of the self-regulatory bodies in performing self-regulatory functions, particularly in handling complaints and disciplinary matters in respect of broker members to enforce compliance. Consideration may need to be taken as to whether a single and direct supervisory model would be a more effective regulatory system, in terms of consistency and effectiveness. An alternative is to set up one independent secretariat serving all three self-regulatory bodies, i.e. IARB, CIB and PIBA. Nevertheless, the Council recommends that, in the short term, the Government should make sufficient resources to the broker bodies in order to carry out their self-regulatory functions.
Lack of sanction power to the IA (para. 28)
30. Limited power is available to the IA in respect of unethical conduct of broker members. At present, the IA cannot direct broker bodies to take disciplinary action against their members even if considered necessary.
31. This demonstrates the need for the IA to be granted with power to direct broker bodies to take disciplinary power directly against persons who are not fit and proper. This is in line with the direct power that the IA has for insurance agents. The Council suggests a similar power be granted to the IA.
Relatively loose minimum requirements (para. 29-31)
32. In the review, a survey was conducted on the regulatory systems for insurance intermediaries in various jurisdictions. The survey found that the existing regulation on brokers is relatively less stringent in Hong Kong.
33. The Council is in support of applying more stringent controls to protect the interests of the insuring public. For example, the proposals on increasing the capital and net asset requirements; gearing up the level of deductible to the new level of minimum capital and net assets requirements; specifying the area of coverage on Professional Indemnity Insurance; and imposing credit period and notification period on brokers by reference to those required in other places. Nevertheless, a balance may need to be struck between protecting the public interest and the competition aspect, as increasing capital requirements could act as a barrier to entry.
34. The Council proposes that a phase-in approach or a transition period should be allowed for insurance brokers to adapt to the proposed amendments (except for the credit period and notification period). This recognises the fact that some smaller brokers may not satisfy the new requirements.
PROBLEMS REVEALED IN THE CONSUMER COUNCIL'S COMPLAINT DATA BASE
35. The Council's data base of complaints [1] reflects a similar range of problems as that in the IA's review. There are a number of other common problems stemming from these complaints, as follows.
No Chinese version and small font size in most cases
36. The Council considers that neither of these are acceptable. In comparison, most standard agreements, such as the estate agent agreements, have a Chinese version. Without a Chinese version, consumers have to rely on the insurance intermediary's representations which therefore creates room for potential dispute. A Chinese version of an insurance policy and proposal should be made available to policyholders if so requested.
37. In addition, description in insurance policy and proposal should be printed in clear and legible type and in a font size that facilitates easy reading. This will enhance transparency of terms and conditions of insurance policy and proposal. The Office of Telecommunications Authority and the Estate Agents Authority have set down their requirements on the font size applicable to contracts.
Non-insurance intermediaries selling insurance products
38. At present, bank staff and travel agents can sell insurance to consumers. To maintain a level playing field, the IA should consider whether similar requirements should be imposed on bank staff and travel agents carrying out the work of insurance intermediaries. In contrast with the insurance industry, bank staff carrying out the duties of securities broker are required to be approved by the SFC.
Opt out practice
39. Some insurance agents make cold call and/or offer free trial insurance to potential policyholders. Disputes frequently arise when the agents assume that potential policyholders' non-refusal is an acceptance to take out insurance policy and to make an automatic premium deduction. Such opt out practices, as the Council has always stated, is not acceptable. Opt-in would be a preferred practice as this provides potential policyholders a choice to select.
Material disclosure
40. Under usual insurance policy practice, consumers have to declare certain material facts such as pre-existing illness and smoking habits in the application form. There have been cases where either the insurance agents (for fear of losing business) do not fill in the facts or they advise the potential policyholders not to disclose the information in order to pay a lower premium. This has resulted in the cancellation of insurance policies or failure to obtain claim. It is therefore suggested that efforts should be made in educating the public on the importance of stating factual information in the application form.
Whether the insurers should be responsible for the act of the insurance agents
41. Quite often agents quit or change jobs in a short time and therefore the agent case is passed to another agent to follow up. With little commission to earn, the latter will naturally take less attention to the "orphan" policy.
42. Whenever there is any dispute, insurers may argue that they are not responsible for the work of their agents, leaving the consumer in a helpless situation. This is unacceptable to the Council. Reference can be made to the securities industry where a securities firm must be responsible for the work of its staff. In fact, it is already stipulated by law that "an insurer is not able to exclude or limit its liability for the actions of its appointed insurance agents….". Once again, policyholders should be made aware of the obligation of insurers.
43. The IA may consider giving guidelines to insurance companies for handling of those unattended insurance policies.
Inform customers the basis on which investment return will be determined
44. Insurance companies and/or intermediaries should provide customers with guidelines on investment related policies (particularly on life-related policies) the calculation, the interpretation and the basis of computations for the investment return portfolio. This enhances transparency in an insurance policy.
Inadequate understanding of insurance policy terms and coverage
45. Based on the complaints, it appears that most policyholders do not have a clear understanding of the terms and conditions and coverage of their insurance policies. To address these problems, the IA should require 'plain' wording in policies and develop an education program. The frameworks developed by other authorities for intermediaries, such as the SFC, are instructive.
46. Consumer education is important and whilst the Council will continue its efforts in educating the public about insurance, it suggests the IA set up an insurance resource centre similar to that of the SFC's Investor Resource Centre. Further, giving guidelines on interpretation on the definition of terms (particularly on medical insurance policies) would assist consumers understanding the terms of insurance policy. A recent example is the definition of bodily injury/visible wound.
Highlight salient terms and conditions in the proposal and policy
47. To ensure policyholders understand major terms and conditions before taking out insurance policies, the Council suggests that salient terms and conditions such as premium level, insured coverage, cooling-off period, investment return and its calculation basis, should be provided in both the proposal and the policy.
Need for restructure of payment of commission to agents
48. At present, an agent gets a share of the premium when a new policy is struck. A review should be conducted to examine whether payment of commission to agents is appropriate, or efficient given that the incentives to earn commissions could be the root cause of some of the problems that have arisen with regard to misrepresentation.
Disallow insurers acceptance of inappropriate premium
49. The IA should spell out in the relevant code of practice the requirement that insurers should be prohibited from knowingly accepting a premium that "over-insures" or "under-insures". For instance, in the case of fire / property insurance, it is common that an insurer would calculate the premium based on the bank's loan amount instead of property reinstatement cost.
ISSUES FOR FURTHER CONSIDERATION
Self-Regulation Systems
50. Under the existing system, self-regulatory bodies are required to enforce compliance of the relevant codes of conduct and membership rules by those insurance intermediaries registered with them.
Benefits
51. As a competition advocate, the Council shares the IA's view that a good regulatory system should encourage open and fair competition. The Council's position is the enactment of comprehensive competition legislation and the establishment of an overseeing authority in the long run. However, before that goal is achieved, and even after it has been achieved, self-regulation by industries provides useful input to the formulation of a practicable policy as promulgated in the Government's Statement on Competition Policy.
52. The Hong Kong General Chamber of Commerce, whose members include the insurance industry, also shares the view that self-regulation within the business community is an effective means of promoting competition. The Chamber issued a statement on competition to promote pro-competitive practices among Chamber members, so as to preserve and enhance free competition. It also encourages industries to develop a complaints-handling procedures as well as provisions to deal with non-compliance of their members.
Drawbacks
53. However, self-regulatory systems are not without drawbacks. The first pre-requisite to self-regulation is self-restraint. When self-restraint ceases to be a part of the practice culture of the industry, self-regulation fails.
54. A number of the IA's findings suggest that the current self-regulatory system may not be effective in discharging the licensing requirements (paragraphs 14, 15 & 16 of the consultation document refer). Self-regulatory bodies do not have effective measures in enforcing codes (para. 20), not to mention that those codes have no legal backing (para. 17) and operational deficiencies (para. 18). The codes are silent on certain important areas (para. 19). Last, but perhaps the most important, is that the credibility and impartiality of the IARB (para. 21) are questioned by some insurers.
55. Further, judging from the review findings, the self-regulatory bodies may be less than diligent in their pursuit against members who have breached fair practice. Loss of commercial benefits to the self-regulatory bodies, or damage to influential vested interests, may affect investigations or the objective assessment by employee compliance officers. There may also be a perception of conflict of interest (paras. 23, 24 & 25 refer). All these could significantly curtail the effectiveness of the self-regulatory regime.
56. The experience gathered from the previous self-regulatory system adopted by the securities industry is instructive. The former Stock Exchange of Hong Kong Limited (SEHK) was criticized in 1987 for being a club which appeared to serve the interests of the brokers rather than the investors. Again in 1998, the criticism still remained. This has raised a question as to whether the self-regulatory system is an appropriate form of regulation in the broking industry. Stemming from the market structure reform announced by the Financial Secretary in 1999, the regulatory responsibility of SEHK was transferred to the SFC.
57. Considering the above, some thought could be given as to whether the IA, like the SFC, should assume a direct supervisory role over the insurance industry, and the existing self-regulatory bodies should be left for, say, a market development function. Research carried out by the IA elsewhere also indicates the trend is for direct supervisory role, instead of a self-regulatory system.
58. Insurance is a complex matter and can be a life-long decision not to be taken lightly. Based on the IA's review findings and the complaints received by the Council, it can be seen that current self-regulation efforts are fragmented, confusing to consumers and wasteful of resources. A direct regulatory model, similar to that as adopted by the SFC and EAA is worthy of further consideration, where the IA, for example, could be granted the power of licensing, complaints handling, disciplinary power and the responsibility to provide education to the insuring public.
Insurance Ombudsman
59. At present, if consumers want to lodge complaints relating to the activities of insurance agents or claims, they can either go to the IARB or the Insurance Claims Complaints Bureau (ICCB).
60. There has been a concern whether the existing complaint handling mechanisms are a cost effective service in view of the rising costs of handling complaints. Furthermore, there is a rising of public expectation of a fair and timely mechanism for better consumer protection.
61. In light of this concern, the Council suggests, for the IA's deliberation, whether an Independent Insurance Ombudsman might be appropriate for Hong Kong, or having the IA assume the role of an Insurance Ombudsman. As a suggestion, the Insurance Ombudsman's jurisdiction would be to consider any complaint (including a dispute or claim) referred to it in connection with or arising out of a policy (or proposed policy) of insurance. Further consideration can be made on the Insurance Ombudsman's functions, e.g. to make monetary award.
62. The aim of setting up the Ombudsman would be to have arrangements which are fair, efficient and simple to administer; which provide consumers with certainty in terms of one-stop complaint mechanism and consistency in Ombudsman's decision; and which encourage firms to resolve complaints at an early stage. The Insurance Ombudsman service could be funded by a combination of a general levy paid by all firms and a user-pays element (i.e. case fees) paid by firms for individual complaints. This latter feature would act as a means to discipline firms to ensure their agents do not cause complaints.
63. As noted earlier in the paper, insurance products are becoming increasingly sophisticated, the boundaries between such products and other investment vehicles are blurring. It is also noted that intermediaries selling insurance-related products might be subject to different regulatory regimes. In view of such developments, the Council suggests the Government also consider whether it would be more appropriate to propose a Financial Ombudsman Service instead of a sector specific Ombudsman. In UK, the Financial Ombudsman Service currently handles complaints on behalf of six different complaints-handling schemes (including the Insurance Ombudsman) now brought together under one roof.
Notes:
1. A total of 177 complaints cases for the first 6 months ended in 2001.
Link to the consultation document by Office of the Commissioner of Insurance
