The Unspoken Role of a Legal Advisor in the Insurance Industry

Often the focus is on the role of a financial advisor and creating awareness around the pivotal role financial advisors play towards financial customers and the immense regulatory obligations faced by financial advisors.

At the heart of it market conduct regulation aims to achieve fair customer outcomes and to protect the interests of the financial customer. In this regard, the role of financial advisors holds great importance as they have a fiduciary duty to act in the best interest of the customer, to uphold the Treating Customers Fairly (“TCF”) outcomes, provide diligent and honest advice and offer products to customers that are suitable for their needs.

However, this is just one side of the coin. On the other side of the coin is the pivotal role of a legal advisor. A legal advisor is there to ensure regulatory compliance and manage legal risks. Let’s break it down:

• Product design - when products are designed, a legal advisor has to ensure that the products the institution intends to offer are not in contravention with any applicable laws or regulation; that they are in line with the classes of business for which the insurer is authorized to do business in; do not contravene any license conditions; and where applicable, ensure that the authorities are notified of the product offering.

• Policy terms and conditions – not only must the legal advisor put its legal cap to ensure that policy terms and conditions are legally sounds and appropriately protect the interests of the insurer, BUT the legal advisor must also ensure that the fair interests of policyholders are achieved, uphold the TCF principles and ensure that the terms and conditions presented to the customer do not create post sale barriers.

The drafting of insurance policy terms and conditions does not merely entail the skill of contractual drafting that legal advisors have but requires the knowledge and understanding of applicable laws and what obligations are imposed by law on the insurer in order for the insurer to satisfy its regulatory obligations and sufficiently fulfill the insurance obligations embodied in the policy terms and conditions. For this, the legal advisor must have a good understanding of the TCF principles and the financial services legislation, particularly the Policyholder Protection Rules.

• Sales force – yes financial advisors drive sales by offering financial products, provide advice to customers, manage and service the financial product, however, one needs to understand that it is not just about presenting a product offering to a customer, but what level of detail needs to be provided to the customer and what disclosures need to be made in order to enable the customer to make an informed decision.

A legal advisor has a role to play, ensuring that material used to drive sales, i.e. application forms, sales scripts, records of advice material are fit for purpose and ensuring that appointed intermediaries complete product specific training. The legal advisor must understand applicable legislation well enough to advise the sales distribution force on requirements that must be satisfied when a financial service is rendered and what disclosures need to be made, and at which point of the customer journey.

• Governance & oversight – insurers usually appoint intermediaries to render financial services in respect of products underwritten by the insurer. Such an appointment is underscored by a contractual agreement between the insurer and the intermediary, but the legal advisor does not play a role in the oversight or management of that arrangement. Business or relationship managers must at the very least adopt effective governance measures that provide for prudent management and oversight into the insurance business and the relationship with the appointed intermediary, which adequately protects the interests of policyholders.

However, while the legal advisor does not have a direct relationship with the appointed intermediaries, working with the business and relationship managers, a legal advisor is in a suitable position to be able to guide the business on short comings that may have a negative impact on the customer, be able to identify risks, advise on how such risks can be mitigated; and understand the contractual provisions well enough to advise the business on the application and enforcement of such provisions.

• Customer Complaints - Legal advisors can advise on how to deal with complaints, interpret the law and policy wording in responding to the complaint, however a value add to the role of a legal advisor is that through complaints, the legal advisor can identify process gaps within the business, regulatory non-compliance issues and breaches, areas of improvement, and training needs. Being able to identify these aspects, the legal advisor can then advise and guide on regulatory compliance while keeping the principle of ensuring fair outcomes to policyholders in mind. Then on the other hand, the business can implement based on the advice received and remediate on the gaps and shortcomings identified by the legal advisor.

• Ongoing awareness of legislation – the financial services industry is a heavily regulated industry, apart from knowing which legislation applies, a legal advisor must have a good understanding of such legislation, keep up-to-date date with regulatory developments, trends, and industry practices and the impact of artificial intelligence shaping the insurance industry. To be able to advise the business, a legal advisor must accordingly be equipped with the right level of knowledge.

With that said, a legal advisor is not just a back-office resource, legal advisors in ensuring regulatory compliance can shape the compliance culture in the organization. Their role contributes incredibly to ensuring regulatory compliance and the achievement of fair customer outcomes.