Conduct of Business - (COB)

  • the United States, the term “market conduct” instead of “conduct of business” is more widely used.

2015 0501 - AAA to IAIS - Committee Comments To IAIS On Conduct Of Business Risk Draft Paper

ICP 19 Conduct of Business

  • The supervisor requires that insurers and intermediaries, in their conduct of insurance business, treat customers fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied.

Sources of conduct of business risks

  • conduct of business risk can arise from multiple sources, including factors inherent to insurance markets, the insurer’s or intermediary’s governance and business processes, and broader economic and environmental factors
  • conduct of business risk includes risks arising from poor business conduct to which insurers, intermediaries and the insurance sector itself are exposed, but importantly also risks to which insurers and intermediaries expose their customers.

2015 0617 DRAFT - IAIS - Issues_Paper_on_Conduct_of_Business_Risk_and_its_Management - 45p

Conduct of Business - ICP 19

  • Application Paper on Approaches to Conduct of Business Supervision (“the COB Supervision paper”)1
  • 2015 0815 - Compiled Comments on Consultation Document: Issues Paper on Conduct of Business Risk and its Management- 01-Jul-15 to 14-Aug-15 - Comments as compiled on 15 August 2015

Typical risks found in inclusive insurance business models

Six common risks34 can be identified that have a distinct manifestation in inclusive insurance distribution:

Prudential risk35 is the risk that the insurer as risk manager is not able to keep its promises and deliver benefits to the beneficiaries. Prudential risk derives largely from the features of the insurer’s operations and management and therefore a lack of capacity of the insurer and a lack of regulation and oversight regarding the management of insurers heightens prudential risk.
Aggregator risk is the risk of reduced customer value and inappropriate products being sold to customers when an insurer accesses the aggregated customer base of a non-insurance third party to sell its products through that channel.
Sales risk is the risk that the salesperson will misrepresent the product to the customer or sell a product that the customer does not need. Reduced customer value or inappropriate product choice can also be the result of sales risk.
Policy awareness risk is the risk that the insured is not aware that he or she has insurance cover and is therefore unable to lodge a claim should the risk event occur. The manner in which insurance is sold through certain inclusive insurance business models can heighten the risk that policyholders are unaware that they have insurance coverage. There is also the risk that the insured is not fully aware of the terms and conditions of the insurance or does not know how to make a claim.
Payments risk is the risk that the premium will not reach the insurer, that the premium will not be paid on the due date or that the cost of collecting the premium is disproportionate. Payments risk means there is a heightened possibility that premiums are not regularly received by the insurer.
Post-sales risk is the risk that customers face unreasonable post-sale barriers to maintain their cover, change between products, make enquiries, submit claims, receive benefits or make complaints. It therefore refers to the risk of poor service and the potential disincentive for insurers and intermediaries to be efficient in claims processing and service provision.

See the annex for more details. (p17)

33 Paragraph 11 of the Issues Paper on Conduct of Business Risk and its Management indicates that Conduct of business risk can be described as “the risk to customers, insurers, the insurance sector or the insurance market that arises from insurers and/or intermediaries conducting their business in a way that does not ensure fair treatment of customers.”

2015 11 - IAIS - Issues Paper on Conduct of Business in Inclusive Insurance

  • While the dramatic changes envisaged in the scenarios presented to us might generate immediate and drastic response by a firm in another industry, in the life insurance industry the response -- if any -- comes at a more measured pace.
  • The crisis reaches its peak before the industry begins to respond effectively to the problem.
  • By the time response is forthcoming, the crisis is past and another issue begins to pick up steam to take its place.
  • The financial momentum of the business enables companies to sail by the crisis peak, if I may mix a metaphor, and on into other troubled waters.
  • The slower, more deliberate reaction of the life industry enables the necessary changes to be made over longer periods of time, thereby gradually improving performance.
  • So far, this general avenue of conduct has been successful.
  • Will it continue to be so in the 1980's?

-- John R. Gardner


Selected reference to international standards or material on COB supervision:

• AMF, Quebec: Sound Commercial Practices Guideline (June 2013)
• EIOPA: Guidelines on Complaints Handling by Insurance Undertakings (June 2012)
• EIOPA: Report on Best Practices by Insurance Undertakings in handling complaints (June 2012)
• EIOPA: Report on Good Practices on Comparison Websites (January 2014) FCA, UK: Journey to the FCA (October 2010)
• FCA, UK: Applying behavioural economics at the Financial Conduct Authority (April 2013)
• FSA, UK: Mystery Shopping Guide (November 2006)
• FSA, South Africa: Implementing a twin peaks model of financial regulation in South Africa (February 2013)
NAIC: Market Regulation Handbook (2013)
• OECD: G20 High-level Principles on Financial Consumer Protection (October 2011)

2014/10 - IAIS - Application_Paper_on_Approaches_to_Conduct_of_Business_Supervision  - 59p