Treating Customers Fairly (TCF): Assessing risk at inception

Assessing the risk of new business at the inception of cover not only creates a host of benefits for insurers, advisors and their clients, it will also help insurers meet their obligations in terms of the new Treating Customers Fairly (TCF) requirements.

Research conducted by MUA Insurance Acceptances, following nearly 20 000 valuation exercises on buildings and contents, has revealed the level of underinsurance of buildings and contents amongst South Africa’s high net worth individuals is as high as 40%.

Far-reaching benefits

“Doing a full valuation at inception of cover ensures not only that the property is insured for the correct value, but also that the client is paying the correct risk premium,” says Christelle Fourie, Managing Director of MUA Insurance Acceptances. “Claims handling is also greatly improved if the insurer has a valuation and inventory on file, as it removes the need for the insured to prove ownership and enables the settlement of claims to be fast-tracked.”

Global trend

Fourie notes that while the assessment of risk at inception of cover is common internationally, it is still relatively rare in South Africa. “The majority of local insurers survey or assess a risk purely from a theoretical risk perspective. However, by doing a physical risk inspection and valuation at inception and at renewal stage, the insurer can get a clear view of the condition of the insured risk, as well as the correct replacement value.”

Real risk management

A full valuation at inception is also a vital tool through which an insurer, UMA or advisor can properly advise clients on risk improvement measures, as well as non-compliance with policy requirements.

“For example, if an insurance policy contains a home alarm warranty but the surveyor finds the insured’s alarm does not extend to outbuildings and servant’s quarters, then the policy can either be restructured to include this cover, or the consumer advised prior to a loss that there is no cover in place,” explains Fourie.

“The same principal also applies to valuation certificates for contents such as jewellery. If an inventory finds the insured does not have the required up-to-date valuation certificates for jewellery, then the insurers or the client’s broker can then advise them to obtain the required documents to ensure smooth claims handling.”

Cost-benefit analysis

Few insurers currently conduct a valuation and/or inventory for new clients because it is an expensive exercise. “However, by doing this the insurer or underwriter is able to eliminate the application of the average clause in the event of underinsurance, which is often interpreted by policyholders as unfair treatment.”

When compiling a business case, it is vital for companies to take a long-term view on their return on investment, specifically considering increased premium at inception and reduced claims costs as a result of the pre-loss assessment.

TCF compliance

With Treating Customers Fairly (TCF) becoming the new buzz word in the industry, the challenges surrounding the application of average will come under the spotlight.

“Underinsurance and the average clause concept is one of the biggest reasons why clients regard insurance as a grudge purchase. By assessing the risks involved for each client from the outset, the insurer is able to eliminate this problem and ensure a smoother process for all parties,” says Fourie. “Those insurers and underwriters who take back the responsibility of calculating the correct insurance replacement value upfront, thus eliminating the need for the average condition, are directly responding to outcome 1 of TCF: Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture".