Insurers are at risk of misselling allegations if they inadvertently duplicate cover in different policies. But good product design can save them, says Steve Hartley

In recent years there has been a growing focus in the media and among regulators on the misselling of financial products. Within the insurance sector this has covered anything from the deliberate use of unethical methods to increase sales, to instances that highlight a lack of expertise, as when non-specialist companies sell insurance products in addition to their core offerings.

Nevertheless, some of the products offered by specialist insurers have been the subject of scrutiny too.

Some cases have made headlines. In September 2005 the Citizens Advice Bureau (CAB) lodged a 'super complaint' to the Office of Fair Trading about the sale of payment protection insurance (PPI). The CAB described the policies as a "£5bn protection racket".

The OFT's initial response last December highlighted a number of concerns, which included the bundling of store-card insurance and its effect on reducing information and choice for consumers, and the possibility that consumers might be paying for insurance cover they no longer needed or were entitled to receive.

The OFT has gone on to launch a more detailed market study, launched in April this year, before making a final response to the original super complaint.

Misselling can have costly outcomes.

In January 2005 the FSA imposed a fine of £1.1m (subsequently reduced to £575,000) on Legal & General for mortgage endowment misselling.

Large corporations, such as L&G, may more often be victims of internal procedural failings rather than deliberate attempts to defraud, but the lessons are there for all organisations to begin addressing these issues and examine their procedures, rather than falling foul of heavy fines and the inevitable damage to their reputations that comes with the adverse publicity that any case can bring.

A particular risk in the insurance sector is that brought about by the trend to sell products that offer greater cover than was the case just a few years ago. New products offer the client a sense of economy by 'bulk buying', such as when they buy an annual rather than a single-trip travel policy, or a household policy that covers garden equipment.

This trend to increase the complexity and coverage of products increases the risk of misselling due to the increasing danger that insurers will inadvertently sell several products to their own client, more than one of which may provide cover for the same area of risk, thereby creating a "double insurance" situation.

By definition, double insurance occurs where there are two (or more) policies covering the same liability against identical risks. Historically, with simpler insurance products, this has usually related to a situation where separate insurers cover the client.

Under those circumstances the insured could legally seek restitution in equitable proportion from each insurer, or could seek restitution from a single insurer, with that insurer subsequently having the right to proportional compensation from the

co-insurer. Any attempt by the insured to profit from the loss by making a full claim against both insurers would be illegal under English common law.

The traditional double insurance scenario has historically emanated from the actions of the insured party, who has insured the same risk with more than one insurer. When the same insurer sells two or more policies,

however, giving duplicate cover to a single client, the onus is clearly on the insurer to have a duty of care. The insured would not legally be able to claim twice from the policies that he would have bought in good faith, and equally clearly an accusation of misselling would be justified.

Avoiding a missale
What should an insurer do to prevent such circumstances arising?

Large organisations rely heavily on computerisation to administrate their business, but computerisation alone can often help to entrench procedural failings. Issues of misselling may occur when a new product is designed that covers a core risk and offers ancillary cover for other associated risks, but marketing teams are unaware of the data management issues that affect the accurate tracking of the risks for which they are on cover.

In addition, it is likely that the marketing process is complex, and may involve direct and broker-based sales, creating extra complications for the identification of the insurer's clients and their cover.

For their part, the IT teams charged with designing systems for the marketing of the new product may not have sufficient business knowledge to understand the insurance and legal ramifications of selling double cover. This "expertise gap" between IT and business lies at the root of the problem.

A practical example of what might happen is demonstrated by a leading insurer that markets a home insurance product that additionally covers the policyholder for touring caravans. It markets this product through a chain of brokers. It also separately markets specific touring caravan insurance directly, online and via its own call-centre.

There is a substantial risk that this insurer could actually make use of its own customer relationship management functionality to market caravan insurance to clients to whom it has already sold caravan insurance.

This type of problem highlights the need for insurers to accurately understand the characteristics of the products they are marketing. They could do this by using a team approach to product design, involving business representatives to design a business strategy defining the required market offering, its areas of cover and expected performance etc, and an IT team to analyse the data characteristics of the product, and devise a way to store data relating to it in a way that enables an accurate assessment of risks that are on cover.

Effectively that can only be done by splitting core and ancillary cover into separate policies to allow them to be referenced as such by the insurer's IT systems, and then bundling them together for marketing as a single product.

A single end product is more desirable and attractive for marketing purposes, but the breakdown into individual policies is essential if the insurer is to be able to accurately track the type of cover its client base has purchased.

A similar situation exists when a motor policy is sold bundled with legal fees cover, when a separate carrier may often provide the legal fees cover. It makes sense in that scenario to identify the separate types of cover and attribute each one to its relevant insurer. Practical benefits can be gained from a similar approach to avoid the risk of misselling via a single insurer.

A future without misselling
The Insurance Conduct of Business rules (ICOB), introduced in January 2005, deals with issues such as marketing, sales and insurance information. In June 2006 the FSA published details of the remit of its ICOB post-implementation review. It stated that the review will report early in 2007 with recommendations for rule changes where necessary.

In its June 2006 update the FSA signalled its intention to investigate the efficiency of the ICOB rules in providing customer protection from misselling, which will initially focus on products such as payment protection and critical illness, but it is apparent that other types of insurance will be monitored in due course.

In April 2003, John Tiner, then FSA managing director produced a note (reference: FSA/PN/052/2003) to clarify the FSA's position on misselling in insurance. In it he highlighted some of the obligations that firms have in respect of FSA regulation, including several of the principals for business that are particularly relevant:

  • A firm must conduct its business with integrity
  • A firm must conduct its business with due skill, care and diligence
  • A firm must pay due regard to the interests of its customers and treat them fairly
  • A firm must pay due regard to the information needs of its customers, and communicate information to them in a way that is clear, fair and not misleading
  • A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
  • He also quoted from the Conduct of Business Sourcebook about the duty of firms to comply with the "know your customer" guidance, which has been widely implemented in other parts of the financial sector.

    This guidance, coupled with the FSA's history of sometimes swingeing responses to incidences of "misselling" in the banking and mortgage sectors, ought to represent a wake-up call to insurers.

    In the future there is likely to be much more protection of the customer, and regulation caused by the failings of the few will affect everyone.

    Insurers would be well advised to ensure that their existing systems are audited to prevent inadvertent misselling, and that best-practice methods are in place to handle the transition from conception of insurance products through to computerisation. IT