Haris Ashley
Conduct risk is a developing area of risk that has emerged in the insurance industry. It refers to the risk of firms acting in a way that causes harm to their customers. This could include providing customers with products that are poor value for money, failing to ensure that the product meets the customer's needs, or making it difficult for customers to file valid claims. Conduct risk is about implementing good practices that put the customer first and ensure fair treatment, thereby benefiting both consumers and insurers. Regulatory bodies such as the Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA) have been scrutinizing insurance firms' pricing practices to assess whether customers are receiving value from the insurance products they purchase. As a result, organizations have been developing strategies and internal standards to manage conduct risks and meet regulatory requirements, with some companies taking proactive approaches to define frameworks for their industry.
| Characteristics | Values |
|---|---|
| Definition | Conduct risk is the risk of firms acting in a way that causes detriment to their customers. |
| Recent emergence | Conduct risk is a recent risk area in the insurance industry. |
| Examples | Providing customers with a product that is poor value for money, not checking that the product meets the needs of the customer, or selling a product where making a claim is nearly impossible. |
| Regulatory bodies | Financial Conduct Authority (FCA), Competition and Markets Authority (CMA), Monetary Authority of Singapore (MAS), Australian Securities and Investments Commission, Consumer Financial Protection Bureau (CFPB), Financial Industry Regulatory Authority (FINRA). |
| Regulatory actions | The FCA has been looking into the pricing practices of general insurance firms since 2014. The MAS has proposed changes to how life insurance products are advertised and traded. |
| Impact of misconduct | Financial cost, reputational damage, loss of customer confidence. |
| Conduct risk policies | These should create conditions that reduce the likelihood of conduct risk factors, encourage a culture of compliance, and set out procedures for monitoring and mitigating risks. |
| Employee code of conduct | All employees whose roles can impact customers must follow a code of conduct. |
| Whistleblowing | Enabling employees to report wrongdoing through whistleblowing channels can help to instill a stronger culture and reduce conduct risks. |
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What You'll Learn
Regulatory frameworks
Conduct risk is a relatively new concept in the insurance industry, referring to the potential misconduct of a regulated firm or individuals associated with the firm, including employees, third-party vendors, customers, or agents. It covers actions that lead to customer detriment, adverse effects on market stability, or negative impacts on effective competition.
The regulatory landscape surrounding conduct risk is evolving, and while there is no universally accepted definition or management framework, organisations are developing strategies to address this risk. The Financial Conduct Authority (FCA) in the UK, for example, has been examining the pricing practices of general insurance firms to assess if customers are receiving value from their purchases. The FCA expects firms to develop their own conduct risk definitions, strategies, and tailored frameworks to address their specific risks. This includes understanding the drivers of conduct risk, such as insider dealing, conflicts of interest, or mis-selling, and implementing appropriate controls to monitor and mitigate these risks.
In the Asia Pacific region, regulators like the Monetary Authority of Singapore (MAS) and the Australian Securities and Investments Commission (ASIC) are introducing strict parameters for responsible lending and insurance practices. The MAS, under the Financial Advisory Industry Review (FAIR), has proposed changes to how life insurance products are advertised and traded, recommending a Balanced Scorecard (BSC) framework for financial advisor remuneration.
In the United States, the Consumer Financial Protection Bureau (CFPB) is implementing new rules and stricter monitoring against malpractice in areas such as insurance, debt collection, and the sale of ancillary products. Additionally, the Dodd-Frank Act focuses on internal and external business conduct requirements, while the Financial Industry Regulatory Authority (FINRA) assesses the suitability of products for customers.
To effectively manage conduct risk, organisations should adopt a proactive approach, identifying areas where non-compliant behaviour may occur and putting measures in place to mitigate those risks. This includes establishing a culture of good behaviour with zero tolerance for misconduct and ensuring that all employees understand their responsibilities. Organisations should also track performance metrics, targets, compensation, and reward systems as part of their conduct risk framework.
While compliance with regulations is essential, organisations should also focus on long-term conduct goals that align with their company strategy. This involves challenging and regularly reviewing the conduct risk policy to ensure it remains effective and fosters a positive corporate culture.
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Customer satisfaction
Conduct risk in the insurance industry refers to the risk of firms acting in a way that negatively impacts their customers. This could include providing products with poor value for money, policies with exceptions that lead to gaps in cover, or making it difficult for customers to file valid claims. Conduct risk can also arise from unethical or unlawful behaviour, such as insider trading or disclosing inside information.
To ensure customer satisfaction and mitigate conduct risk, insurers should put the interests of their customers first and make decisions that benefit both the company and the consumer. This includes offering products that meet the needs of the customer while providing good value for money. For example, simplifying insurance products or highlighting important features during the sales process can improve customer understanding and satisfaction.
In recent years, regulatory bodies such as the Financial Conduct Authority (FCA) have increased scrutiny on conduct risk in the insurance industry. The FCA has intervened and imposed penalties when it identifies unacceptable risks to the fair treatment of customers. Insurers can implement conduct risk frameworks that consider metrics such as customer satisfaction scores, transparency in the sales process, and issue resolution.
Insurers should also focus on employee training to ensure that all staff understands their legal obligations regarding sensitive data, conflicts of interest, and the management of inside information. Encouraging a whistleblowing culture and incentivizing ethical practices can further mitigate conduct risk. By prioritizing customer satisfaction and implementing robust conduct risk strategies, insurers can enhance customer trust, protect their reputation, and ensure stable commercial relationships.
Conduct risk policies are essential for maintaining customer satisfaction and avoiding financial misconduct. These policies should be proactive and periodically evaluated for effectiveness. They should also align with the organization's strategic decisions and risk appetites, fostering a culture of compliance and ethical practices.
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Misconduct prevention
Conduct risk is a relatively new risk area in the insurance industry, encompassing the risk of firms acting in a way that harms their customers. This includes providing products that offer poor value for money, failing to ensure the product meets the customer's needs, or making it extremely difficult to file a claim.
To prevent misconduct, insurers should consider the following:
- Highlight products with persistently low loss ratios, which may indicate that customers are struggling to file valid claims due to restrictive terms and conditions or high prices.
- Ensure commission ratios do not exceed a certain threshold to avoid incentivizing the sale of inappropriate or unnecessary products.
- Simplify insurance products and clearly communicate any limitations or exclusions during the sales process to ensure customers understand what they are purchasing.
- Implement metrics and conduct risk reporting to monitor and manage conduct risks effectively. This includes tracking performance metrics, targets, compensation, and rewards.
- Adhere to regulatory frameworks and best practices to ensure fair treatment of customers and meet regulatory requirements. Regulators worldwide are introducing stricter parameters to promote responsible lending and insurance practices, and technology is playing a bigger role in detecting and addressing fraud.
- Be transparent about pricing and avoid using intense sales pressure tactics, such as urging consumers to buy immediately.
- Ensure all agents and brokers are licensed or registered to sell insurance in the relevant state or country. Unlicensed companies often use names similar to licensed companies, so consumers should verify the exact name and contact information of the company.
- Encourage consumers to review their bills and explanation of benefits statements to identify any discrepancies or unauthorized charges.
- Educate consumers about common fraud schemes, such as premium diversion, bogus policies, and soft fraud, where policyholders exaggerate claims or omit information to obtain a lower premium.
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Ethical behaviour
Conduct risk is a relatively new area of risk in the insurance industry, which broadly covers the risk of firms acting in a way that harms their customers. Ethical behaviour is a critical component of conduct risk, as it ensures that insurance practices are fair and benefit both consumers and insurers.
Insurers can promote ethical behaviour by implementing a comprehensive conduct risk policy that applies to the organisation as a whole and individual employees. This policy should identify potential risks of misconduct, such as conflicts of interest, misuse of insider information, or unethical sales practices, and set out clear guidelines for mitigating those risks. Senior management and employees should be aware of their responsibilities in preventing misconduct and promoting ethical practices.
Additionally, tracking performance metrics, targets, and compensation can help insurers identify areas where ethical behaviour may be at risk. Regulatory frameworks, such as those imposed by the Financial Conduct Authority (FCA) in the UK or the Monetary Authority of Singapore (MAS), can also guide insurers in promoting ethical behaviour. These frameworks often include strict parameters for responsible lending and insurance practices, ensuring fair treatment of customers and preventing malpractice.
By prioritising ethical behaviour, insurers can not only reduce conduct risk but also enhance their reputation, increase customer loyalty, and gain a strategic competitive advantage.
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Compliance culture
Conduct risk is a relatively new area of risk in the insurance industry, which broadly covers the risk of firms acting in a way that harms their customers. This could include selling products that are poor value for money, failing to ensure the product meets the customer's needs, or making it difficult for customers to claim on their insurance.
A compliance culture is developed through a conduct risk policy, which is a document that identifies the key drivers of misconduct within an organisation and sets out the responsibilities of the business, its senior management, and employees in mitigating those risks. The policy should apply to the conduct of the organisation as a whole and of individual employees. It should also outline how the organisation monitors risk, incorporates new risks into its policy, and how conduct risk relates to strategic decisions made by the board.
Some organisations have already implemented conduct risk policies. For example, Holiday Extras' conduct risk policy is clear and concise, while marketing company ODM has a more detailed policy outlining the processes behind its aims and goals. Insurance marketplace Lloyds also sets out its commitments clearly in its policy, providing further details on its compliance policies.
In addition to conduct risk policies, organisations can also implement best practices to manage conduct risks. This includes tracking performance metrics, targets, compensation, and reward. Technology can also be used to support information reporting and conduct risk analysis to inform senior management.
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Frequently asked questions
Conduct risk is the risk of insurance firms acting in a way that causes detriment to their customers. This could include providing customers with a product that is poor value for money, not checking that the product meets the needs of the customer, or making it difficult for customers to file valid claims.
Examples of conduct risk in insurance include selling a product where making a claim is difficult or near impossible, or invalidating or reducing a claim due to an obscure clause that the customer was not aware of.
Conduct risk is important because it ensures that insurance is done in a way that benefits both consumers and insurers in a balanced way. By putting the interests of the customer first, insurance firms can improve customer satisfaction and loyalty, strengthen their brand, and drive commercial success.
Insurance firms can manage conduct risk by creating a conduct risk policy that sets out the responsibilities of the business, its senior management, and employees with regard to mitigating risks. This policy should be clear and concise, identifying the key drivers of misconduct and how the organisation will monitor and address new risks. Additionally, firms can implement simple metrics, such as tracking loss ratios and commission ratios, to ensure that their products provide value to customers.
