We asked the TIA2023 task sponsors to guide us, as to what they were looking for in their tasks. Below is a for Episode 6 from Financial Sector Conduct Authority (FSCA).
Looking at how the culture of financial institutions can result in good or bad conduct or prudential outcomes is becoming of increasing importance to regulators internationally.
This is also a targeted focus for the FSCA, as we try to understand the extent to which institutional culture properly enables and supports the embedment of good conduct and fair customer treatment throughout an organisation’s behaviours, decision-making and practices.
In conceptualising the FSCA task, we identified real examples of poor conduct from various insurers and put them together into one example to create a profile of an insurer that poses serious conduct and prudential risks. The idea was to create a task, whereby the contestants could identify how specific drivers of culture within the institution may have led to the problems facing the insurer, and what potential improvements would be necessary from a leadership perspective to remediate the challenges identified in the interests of customers. The effectiveness of an insurer’s culture may be assessed by looking at how all aspects of the insurer’s business (whether leadership, governance, operations etc.) support and promote fair outcomes for customers.
What the FSCA was looking for
Through careful examination of the case study, the contestants needed to consider and identify the key drivers (behavioural and decision-making factors) that caused the entity to be financially unsound, as well as the behaviours and decisions that led to poor outcomes for policyholders.
Furthermore, once this was achieved, the contestants needed to come up with an implementation plan to shift the culture from “ineffective” to “effective” in order to ensure the consistent delivery of fair outcomes to policyholders throughout its processes. It was also important that the contestants could explain why they would prioritise or implement certain changes and demonstrate how those changes would potentially improve the current situation.
What was the correct answer?
The task was not about reaching a correct or incorrect answer. Instead, it was about the contestants being able to understand what the various drivers of culture are within an institution (from the pre-reading provided) and apply these to various scenarios set out in the case study. The case study contained numerous examples and issues that needed to be remediated. It was not expected that the contestants would need to cover every single issue or challenge. But rather they should have been able to choose a few key cultural issues/drivers that they believed would result in the most meaningful positive change for the insurer (and policyholders) in the time period provided.
Some examples of the issues that could have been explored include the following:
Prudential Drivers
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Prudential Drivers |
Issues that could or should have been explored by the contestants in more detail |
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Ineffective and deficient governance frameworks Poor risk management and control functions |
· The CEO (who has been in the position for over 15 years) has tendered his resignation with immediate effect. This could have pointed to some internal leadership challenges. · The Head of Compliance had resigned after occupying the position for less than a year. No exit interview details were available as the individual declined to be interviewed. In addition, this position had been vacant for more than a year before that. This could have raised red flags about the internal compliance culture and psychological safety of staff to speak out. · The small compliance team has a high staff turnover and is overseen by the Chief Financial Officer (CFO), who reports to the Chief Executive Officer (CEO). This raises concerns about the independence of the compliance team and the likely dominance of the CFO and CEO in respect of risk and control matters. |
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Not maintaining financial soundness |
· The FSCA also learns that WeAreAfrican is about to be placed on heightened financial reporting as they are dangerously close to breaching their minimum capital requirements, and the PA has increasing concerns about the accuracy of their financial statements. · It also appears that the current CEO approved several highly volatile investment transactions over recent years that have exacerbated the insurer’s deteriorating financial position. This led to the entity being financially unsound.
The above issues could be indicative of deficiencies in the internal control environment, poor risk culture and overly aggressive financial strategy potentially at the expense of fair customer treatment. |
Market Conduct Drivers
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Market Conduct Drivers |
Issues that could/should have been explored by contestants in more detail |
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Inappropriate incentive structures that promote short call times and high sales targets
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Ineffective disclosures · Sales call recordings showed that most sales agents failed to make all the relevant disclosures regarding the different components of the bundled products. · Community members seemed to have a firm grasp of the value-added benefits but struggled to fully appreciate and/or understand the insurance-related benefits. · Community members found it difficult to claim on these policies and were often not aware of crucial terms and conditions (including exclusions) attached to the policies. · Some community members were under the impression that their policies were funeral policies as opposed to life cover.
Possible misspelling · A high number of policies not-taken-up (NTUs), i.e., policies that were incepted but where the first premium was not paid. · A high number of policy cancellations. |
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Ineffective complaints handling process and procedures |
· Claimants struggled to have their complaints resolved by the insurer, so they resorted to escalating them to the FSCA and the OLTI. · Claims and complaints are recorded on an Excel sheet. |
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Insufficient data management and access to policyholder information |
· Claims and complaints are recorded on an Excel sheet. · Information about outstanding claims seemed to be sitting with several third parties and was not readily producible by the insurer. |
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Insufficient claims management processes, and procedures
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Claims barriers · In the event of a death of a family member, claimants had to produce a valid Covid-19 certificate. Failure to produce the certificate resulted in claims being repudiated, despite this condition not having been disclosed at policy inception. · It was unclear why only accidental claims seemed to be paid out, while death claims for many of the lives insured were repudiated based on underwriting done at the claims stage. · Information about outstanding claims seemed to be sitting with several third parties and was not readily producible by the insurer. · High number of outstanding and repudiated claims reported over several quarters. · Claimants had to continuously follow up to determine the status of their claims. · ForthePeople was not adequately resourced and did not have the necessary expertise to deal with claims. |
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Insufficient/ineffective product design (product suitability) |
· This product offering initially seemed to be well received by the targeted communities, with consumers appearing to have taken a special interest in the value-added component. · Some community members were under the impression that their policies were funeral policies as opposed to life cover. · Community members found it difficult to claim on these policies and were often not aware of crucial terms and conditions (including exclusions) attached to the policies. · In the event of death claims due to natural causes, claimants were only eligible to claim once the twelve-month waiting period had run out. · There was a 12-month waiting period in the event of a death caused by HIV/AIDS. · Claimants were not eligible to claim for any pre-existing conditions. · It was unclear why only accidental claims seemed to be paid out, while death claims for many of the lives insured were repudiated, based on underwriting done at the claims stage. |
Was there more than one correct answer?
Yes. As previously mentioned, the task was not about arriving at a correct answer as the contestants could have approached the scenario from various angles. What was important was for the contestants to understand what the desired customer outcomes were that the insurer should strive to achieve and link it to as many or as few cultural drivers that could be identified from the case study provided. The FSCA’s approach to conduct is increasingly outcomes based and, therefore, the answer could have varied in terms of what actions the contestants proposed to implement, as long as these actions were aimed at the desired outcome of ensuring fair treatment for customers.
Identifying the drivers, as per the table above was important as similar outcomes could be linked to various conduct drivers or factors present in the case study. The proposed solutions may differ, provided the contestants were able to show how they would successfully achieve the desired outcomes and improve the overall culture of the insurer. Since the contestants had to step into the role of the CEO, an important component was to demonstrate the role that leadership plays in setting and promoting the desired culture across the organisation. The winning contestant was able to demonstrate this by sharing his own personal story and linking his proposed action plan to his personal values and sense of purpose, which would drive the vision and direction of the organisation.
The biggest clue that most contestants missed was using the background or pre-reading material, particularly the international paper on insurer culture. This material provided a great foundation for contestants to link specific cultural drivers with examples of poor outcomes contained in the case study. An important piece of advice for future contestants would be to pay more careful attention to background material as it can help very much in formulating an appropriate response to the task.
Farzana Badat
Deputy Commissioner
Financial Sector Conduct Authority (FSCA)
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