How to crack the “Policy Wordings” code

Industry stakeholders are talking in hushed tones about the imminent revision of the tried and tested Queen's English policy tome. It seems almost certain that the Consumer Protection Act (CPA) has something to do with this.

The Act, introduced less than 18 months ago, intends to defend the hapless consumer from unscrupulous businesses – like a costume-clad super hero. One of the provisions of the Act requires that businesses write their contracts in plain and comprehensible language. Another is that exclusions and limitations of liability are explicitly brought to the consumers’ attention.

Insurance practitioners initially heaved a sigh of relief when it was announced that the industry would be exempted from the onerous conditions of the CPA (until the end of September 2012). A further delay seems inevitable due in part to the proposed introduction of the New Financial Services Laws General Amendment Act.

This piece of legislation is still in Bill form and seeks to override the CPA by tying together the myriad insurance laws and regulations that have already been enacted for the benefit of consumers. The new Act, coupled with the impending Treating Customers Fairly (TCF) regime, will inevitably place the insurance consumer in the position they would have been under the CPA.

In other words simple language is virtually guaranteed. If the CPA does not apply to the insurance industry – and it is left to the TCF policy to dictate the structure of our verbose security blankets – then even large commercial clients will benefit from simplified wordings. How will the risk transfer market adapt to this situation?

For starters, insurers will not be able to defer the responsibility of managing policy explanations to brokers. TCF regulations insist that the actual risk carriers accept responsibility for the products they put out into the market. Therefore, a good understanding of the target market, including their literacy level and mother-tongue language, is important.

Insurers of personal product lines have had a head start with their Policyholder Protection Rules… But commercial lines insurers are still faced with an almost indeterminable range of exposures. Some options open to commercial underwriters and brokers would therefore be to:

1. Amend policy wordings into the most commonly spoken languages and refrain from using too much insurance jargon;

2. Amend wordings and create accompanying marketing material to clearly explain and highlight restrictions, exclusions, warranties and the scope of cover in plain language;

3. Use technology to create electronic "soft” copies of wordings so that plain language explanations can appear at a mouse click; or

4. If all else fails, close up shop and get into a less regulated sector such as distribution of educational material in Limpopo.

Option one is likely to be considered for the smaller commercial or SME-type risks. There will be costs in redrafting wordings and valuable case law that supported the older wordings could be lost as a result.

Option two could potentially involve less change to policy contracts and structure, and would put the insurer in a position to not only highlight limitations and exclusions, but also to draw attention to the rules, benefits and cover offered in the claim submissions.

Option three appears to be a cost effective solution. Thanks to the latest PDF technologies readers can be exposed to an interactive experience where original policy documents are enhanced with plain language explanations, video tutorials and pictorial walk-through guides.

Whilst appearing to be an attractive prospect to those with low aspirations, option four is not likely to be the first choice of many in the professional insurance industry.

It is time to let go of the past and take steps to address the negative perceptions that blight our industry. Transparent policy wordings will go a long way towards turning those grudge purchases into noble purposes.