SA insurance ombudsmen: Losing their way?
In 1985 the South African insurance industry voluntarily launched the Ombudsman for Long Term Insurance system. The Ombudsman for Short Term Insurance (OSTI) was launched some four years later in 1989. These bodies operated independently and separately from one another until last year. This year combined annual report was recently produced, albeit with separate sections for the office of each ombudsman.
Since the introduction of these systems, significant other developments have taken place in the SA insurance industry, especially the introduction of overwhelming extensive and intrusive regulatory and compliance requirements. The entire market conduct regulatory machinate is today predicated on the mantra of "Treating Your Customer Fairly", a mantra that now permeates even the Ombudsman reports and could yet seep unwittingly into the courts. This is an unfortunate mantra and should have been rejected out of hand by the industry when first mooted since it implies that the industry does not or did nor treat its customers fairly. Acquiescing to such a mantra implied the need for corrective regulatory intervention. Given the mantra, this has become a given.
The Ombudsmen systems consider complaints from consumers who dispute insurers' decisions to repudiate their claims. Thus the system forms part of what is known as an Alternative Dispute Resolution (ADR) framework. The Ombudsmen can, at no cost to the insured, be approached as an alternative to taking disputed claims to court. The 2020 annual report indicates that the Short-term Ombudsman received 11 095 applications to reconsider insurers' repudiation decisions and finalised 10 805 of these. These numbers alone indicate that the Ombudsman system is of considerable benefit to the public and that applications are efficiently dealt with. For example, during the same period short-term insurers received 3.8 m claims of these a mere 9 604 were re-considered by the Short-term Ombudsman, that is 0.25 per cent of the total. Clearly this is a very small number, which reinforces the view that the mantra "Treat your customers fairly" should be replaced with something less misleading and more applicable.
In 2020 on average the Short Term Ombudsman overturned just 18 per cent of the insurer's decisions in regard to complaints received, compared with 21 per cent in the previous year. These figures do not imply that the decision to repudiate claims made by insurers were obviously wrong or that insurers were intent on treating their customers unfairly.
This year's report gives some case studies: Looking at one, I do not think the claims manager who made the decision to repudiate the claim can be criticized. The insured, a son, insured two cars and indicated his father was the regular driver of both. His father being older would attract a lower premium for both cars. An accident occurred resulting in a claim. When the claims were being validated the evidence indicated the son was the regular driver of the vehicle and not the father. When previously insured, the son was listed as the regular driver. Witnesses testified the son was the usual driver of the vehicle. The father indicated his son normally drove the insured vehicle. Given this evidence, on the balance of probabilities, the conclusion that the son and not the father was the regular driver is not clearly wrong. Nonetheless, the Ombudsman looked into the legal position and the evidence in greater detail and decided to overturn the decision of the insurer. So be it; but this does not indicate that the insurer intended to treat the insured unfairly. The overturn rate cannot be taken as an indication that insurers are treating their customers unfairly.
There is a further factor. I am unaware of a single finding made by the Ombudsman which has not been implemented by insurers. When it is recalled that the Ombudsman schemes were voluntarily introduced by insurers nearly four decades ago and are fully funded by the insurers themselves, then the schemes should be seen as part of the process by insurers to ensure that insureds are indeed and in fact treated fairly. There is thus not a single known case since the inception of the schemes where an insurer is known to have treated an insured unfairly. When the Ombudsman overturns a decision and the insurer pays a previously repudiated claim, this is the system working to ensure that all customers are indeed treated scrupulously fairly.
So once again I make the point: Insurers should take steps to have the negative, misleading and inaccurate mantra "treat your customer fairly" replaced with a more appropriate, positive and practicable message.
There is, however, a section in this year’s report at paragraph 7 which is of profound concern. It reads as follows:
"If a high overturn rate [of a particular insurer] is registered, this may, but not necessarily, indicate that the insurer is not treating its customers as fairly as it should. However, the [high] overturn rate should be treated with considerable caution as a high overturn rate can also be indicative of a high degree of co-operation being received by OSTI from a particular insurer in resolving a complaint to the satisfaction of the customer."
Three things about this statement should be noted. The first is that the OSTI effectively concedes that this report is indeed being used as a measure of the degree to which insurers are "treating their customers fairly" and correctly points out that it should not be.
Secondly, it is an admission that the overturn rate of an insurer is likely to be used against that insurer by competitors or even regulators, which should also not be the case.
Thirdly, the view highlighted is that claims are to be resolved to the satisfaction of consumers. This is especially concerning and cannot be. If this is indeed the basis for resolving claims, it is a matter for acute concern. Claims can only be resolved as provided for in the insurance contract. It is worth recalling the statement by a Chairman of Lloyd's that the insurance market can only operate if it is on the basis of the insurance contract itself. The Ombudsman cannot become a consumer activist resolving claims to the satisfaction of complainants. The Ombudsman is an impartial adjudicator who does not descend into the arena of the dispute on the side of one party. The position of the Ombudsman was clearly and correctly stated in the ADR guidelines published in the Good Law Report Chaired by Professor Merwyn King and curated by a former Life Ombudsman Dennis Jooste and Advocate Michael Kuper SC:
Although the state is the sole repository of the judicial system, the need for a somewhat quicker, more flexible and more specialised process is often called for. Hence the idea of an alternative dispute resolution (ADR) service first set up by the industry over 35 years ago. The "alternative" in the name indicates that the process stands in contradistinction to the "standard" dispute resolution process, namely the courts. One of the great advances of the modern state is self-regulation, whereby industries create adjudicative processes and procedures through which recurring problems may be dealt with expeditiously and by an expert so as to protect the goodwill of the industry and public alike.
The Ombudsman system is an alternative to the judicial system. It stands in the place of the judicial system. It is an alternative dispute resolution system which has the objective of arriving at the same conclusion that the "standard" judicial system would have reached. It does this more expeditiously and efficiently. It succeeds in these objectives. It is not a different system and it does not utilize different law. Indeed, our Constitution would prohibit it from doing so.
That a regulatory system can lose its way is clear from the UK experience. In 1986 the UK introduced its first bureaucratic financial services regulatory system when it passed the Financial Services Act (FSA - 1986). In 1995 Barings Bank's collapse sent shockwaves through the UK financial system. Politicians generally do not have a mechanism to solve regulatory problems so they establish bureaucratic systems in the belief that the new systems will solve the problem. The politicians convinced themselves that the problem of Barings Bank was the existence of what they saw as nine regulators and would be solved if they introduced a single regulatory "peak". The 1986 FSA system was then converted into a "single peak" regulator. That is, one regulator for all financial services, including banks and insurers. The regulation of Banks was taken away from the Bank of England and given to the new single peak regulator, the Financial Services Authority (FSA). That was a disaster of monumental proportions as the World Banking Crisis of 2008 subsequently demonstrated. What happened to the grand plan of the single prudential banking regulator? Lord Turner, the then chairman of the FSA explained later, "It is true to say in retrospect that we focused too much on conduct of business [market conduct] and not enough on prudential". The FSA, created to ensure another banking failure did not occur, forgot all about that and morphed itself into little more than a consumer activist.
Unless fastidiously guarded against, there is a real danger that the Ombudsman schemes will increasingly see themselves as bodies whose purpose is to achieve consumer satisfaction and not to be a legitimate alternative dispute resolution body, making objective decisions in law based objectively and exclusively on the insurance contract itself.
Robert W Vivian
Robert Vivian is Professor of Finance and Insurance, School of Economic and Business Sciences, at the University of the Witwatersrand. He is a member of the Free Market Foundation Board, Executive Commitee, and Rule of Law Board of Advisors.
Publish date: 08 July 2021
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The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation. This article may be republished without prior consent but with acknowledgement to the author.