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The parable of the lost money and short-term regulation

01 August 2014 Robert W Vivian, James Britten, University of the Witwatersrand

Years ago a joke was doing the rounds and recall that it is said that there is much truth in jest. This is true of this joke. Because of its relevance, we call it the parable of the lost money;a story containing significant lessons.

The joke goes like this. Early one evening a minister of religion was walking along a road and came across a distressed man under a lamp-post. He asked if he could be of assistance. The man informed him that he had lost his week’s wages. The minister offered to help search for the man’s lost wages, but without success. The minister thought a more systematic approach was called for and asked the man if he had any idea where he had lost the money.

The man replied: “Oh yes, there, down the road.” The minister was somewhat taken aback and asked: “If you lost the money down the road, why then are we looking for the money here?” “Oh,” the man replied, “because there is more light under the lamp-post.”

The moral of the parable is easy to spot. If you wish to solve a problem, first identify the source of the problem and then apply remedies at source. The joke would be quite funny if it were not that it often reflects reality. More often than not the source of problems is not identified, and useless remedies are applied at the wrong place. These remedies solve nothing.

An example of this is the modern regulator as illustrated by the following examples.

Defective justification for increased insurance regulation

The oft repeated justification given by regulators for the increased insurance regulation is the so-called global financial crisis. In giving this as the reason, regulators are really looking for the money under the lamp-post. The financial crisis was caused by the banking system, having nothing to do with the insurance industry.

Repeating a lie often does not transform it into the truth, but perception can overshadow the truth. A repeated lie can be perceived to be the truth, making it nothing more than mere propaganda. The global financial crisis is no justification at all for increased insurance regulation. Imposing increased, inefficient expensive regulation on the short-term industry for problems in the banking system is clearly nonsense.

TFC claims unfair treatment

Another piece of propaganda is that the short-term industry treats its customers unfairly. There is no evidence of this. In respect of the short-term industry one can look for the money anywhere without finding it because it simply has never been lost. Indeed the most futile search possible is to look for something that does not exist. It cannot be found.

The one place where one would expect to find evidence of unfair treatment, if it exists, is in the examination of claims. The insurance industry a quarter of a century ago, of its own accord set-up the voluntary Ombudsman’s scheme allowing an Ombudsman to reconsider repudiated claims.

The Ombudsman reports that a mere three out of every 1000 claims are referred to his office. This is a mere 0.3 percent of claims. Of these he overturns one out of the three, or 0.1 percent of the claims.

This figure has been constant over the years. In fact, as a matter of law, the overturnable figure is even lower for at least four reasons. Firstly, various Ombudsmen have emphasized that they apply principles of equity when considering claims. There are cases in law which the insurer should repudiate, but the Ombudsman overturns these, even although the repudiation is legally correct. The insurance industry has done the same thing when making ex gratia payments. As is well known the way equity was being applied was a matter of concern, and the current Ombudsman, Mr Dennis Jooste, has attempted to place equity on a firmer legal footing. Because of equity, it can be accepted the 0.1 percent is inflated.

Secondly, the fact that a claim is rejected does not mean the insurer did so unfairly. The insurer may have legitimate legal reasons to reject a claim but when considered by an independent adjudicator, he may find the reasons have not been proven, and overturn the decision.

Thirdly, the existence of the Ombudsman scheme can influence insurers and insureds. An insurer’s claims manager when faced with a difficult decision may well decide to reject the claim, leaving it for the Ombudsman to make the decision. If no Ombudsman existed, the claims manager would have to make these hard decisions, often in favour of the insured. Insureds on the other hand, having nothing to lose, have an incentive to approach the Ombudsman.

Finally, as pointed out above, the Ombudsman scheme was put into place a quarter of a century ago to ensure the public gets a fair deal on every claim. Every decision overturned by the Ombudsman is in fact paid for by the industry. No insured’s claim deemed to be a valid claim by the Ombudsman has not been paid.

Overturned decisions are not reflections that insureds have been treated unfairly. They stand as testimony of the industry’s commitment to treat customers fairly. Since all claims have been paid, as a matter of fact, one can say there is no known claim where an insured has been treated unfairly during the last 25 years. The millions of claims disposed of during the past 25 years that the system has been in place is a testimony that customers are treated fairly.

Some time back a well-known journalist wrote an article arguing that the industry treated its customers unfairly based on a claim he discussed. It should be noted that the example he used was by his own admission a hypothetical case. In the face of the thousands of actual cases available he could not refer to a single actual unfair case.

Regulatory programme: Treat your customers fairly

In the absence of any evidence that the industry is treating its customers unfairly, what can one say about a regulator who introduces a statutory requirement for insurers to treat their customers fairly?

This programme has brough about a most amazing transformation in the industry. Since introduced those involved in this programme have increasingly become convinced that the industry treats its customers unfairly, The programme has become a self-fulfilling prophecy.

The more people look for the lost money, which cannot be found, the more convinced they will be that money has been lost. Some interesting research has been done on failed prophesies. It was found that more they fail, the more people believe in them. Very odd indeed. TCF causes reputational damage.

Quick Polls

QUESTION

How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?

ANSWER

Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
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