A model to determine the need to modernise the regulation of the principle of utmost good faith
| DOI | https://doi.org/10.1108/JFRC-12-2020-0120 |
| Published date | 03 July 2021 |
| Date | 03 July 2021 |
| Pages | 454-473 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Andre Farrugia,Simon Grima |
A model to determine the
need to modernise the regulation
of the principle of utmost
good faith
Andre Farrugia and Simon Grima
Department of Insurance, Faculty of Economics, Management and Accountancy,
University of Malta, Msida, Malta
Abstract
Purpose –The purpose of this paper is to determine and layout the variables that influence countries to
carry out regulatorymodernisation of the regulation of the principle of good faithin insurance so as to ensure
standardisation of its applicationand to reduce regulatory asymmetries and uncertainties in the handling of
this requirement, given the fast pace of changes in the current ecosystem. Moreover, the authors show
whether thesevariables differ, given the different demographic factors of the respondentsparticipating in this
research.
Design/methodology/approach –To collect the research data, which consisted of 1,794 valid
responses, the authors administered a purposely built survey, which they designed after carrying out and
extensive literature search, which yielded 3,248 valid records and resulted in the inclusion of 27 research
articles through a scoping review after considering inclusion/exclusion criteria (i.e. the PreferredReporting
Items for Systematic Reviewsand Meta-Analysis) search strategy. The authors carriedthis survey between
September 2019 and June 2020 using the social network, verbal and online communication systems. The
survey was addressed to persons within insuranceassociations, professional members, persons within large
corporates in the insurance industryand selected experts in the field who were purposely selected based on
the work experience held, roles occupied in the industry, qualifications attained and area of expertise.The
quantitative data was analysed using statistical tools, specifically descriptive statistics, exploratory factor
analysis, Cronbach’salpha and multiple linear regression. The qualitativedata obtained was analysed using
the thematicapproach.
Findings –The authors found thatfour variables determine the need for modernisation ofthe principle of
utmost good faith requirement, specifically institutional stakeholders and the political-legal framework; the
market, consumer influence and the socio-economic environment; socio-technological environment and
insurance practice; and international business. Moreover, the authors found that these variables hold
relationshipswith some demographic variables and differwith age, gender, level of education and occupation
in a variety of ways.
Practical implications –The statements grouped under the themes determined as influencing factor
variables for the need for modernisation of the principle of utmost goodfaith, can be used by stakeholders
such as policymakers and reformists within countries as a measure to determine whether this regulatory
requirement is in need of modernisation or it can be used as a model for determiningmodernisation of other
regulations or for the developmentof other similar models. Moreover, scholars may use this model forother
sectorsand other regulatory frameworks in different jurisdictions.
Originality/value –Although, the authorshave noted several articles about modernisationcarried out on
regulations, to the best of their knowledge, they have not encountered articles that capture the influencing
factor variablesfor the need for modernisation of the principle of utmost good faith under a group of themes.
Keywords Internationalbusiness, Stakeholders,Regulations, Faith,Modernisation, Socio-Economic,
Insuranceindustry, Utmost good faith, Socio-political, Insuranceconsumers
Paper type Research paper
JFRC
29,4
454
Received30 December 2020
Revised8 March 2021
31March 2021
Accepted31 March 2021
Journalof Financial Regulation
andCompliance
Vol.29 No. 4, 2021
pp. 454-473
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2020-0120
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
1. Introduction
As industries develop, we recognise that businesses must adapt to change to remain
relevant and profitable. Insurance hascome a long way from the days of funeral clubs and
sea merchants, which were primitive forms of fund-raising methods to cater for the
unexpected. Traditionally,insurance relies on the truthful statements made by the enquirer
on which the insurance underwriterrests to decide whether to accept cover and if so, at what
price, terms and conditions. Such reliance on material facts is known as utmostgood faith.
This principle has not been practised without problems and throughout the past decades,
such reliance on truthful and complete statements has been the source of many court cases
and litigation worldwide.
Essentially, the problem arises due to contract imbalance created by the very nature of
the insurance contract wherein one party knows all about the risk to be insured and the
other party who is accepting to bear the risk knows practically nothing, thereby relying on
utmost good faith Merkin and Gurses (2015). Differentcountries adopting different types of
legal systems and insurance practices could create difficulties in international insurance
business because of the different approaches. Traditionally, those countries that operate
under a common law jurisdiction are those thatstill adopt the principle of utmost good faith
and those that are predominantly civil law countries enact legislation on which businesses
rely (Parsons, 2016).
Some jurisdictions recognised the problemsassociated with this principle and sought to
reform the practice of uberrimafides (utmost good faith), the latest being the UK which after
a century, passed statute law to abolish the legal principle previously embedded in the
Marine Insurance Act1906. This has motivated the research, the reason why theprinciple of
utmost good faith was used tobuild the research statements to ultimately attain the desired
objectives.
Regulatory modernisation is required to establishstability and sustainability once there
is a variance from what the regulationis expected/or needs to achieve, that is, when there is
need for a future-proof regulatory framework to reduce regulatory asymmetries and
promote competition, innovation and investment in the ecosystem. Regulatory
modernisation is achieved when one can establish as much as possible the reduction of
uncertainty in the objectives, which in this study we relate to the requirement of the
principle of utmost goodfaith.
2. Aim and objective
Through this paper, we determine and lay out the influencing variables that may be
considered by policymakers and reformists in their decision to carry out regulatory reform
in an effort to ensure standardisation, in the long-standing principle of utmost good faith in
insurance. As noted above,there is need for future-proof modernised regulatory frameworks
to reduce regulatory asymmetries and uncertainties in the handling of this requirement,
given the fast paced changes in the current ecosystem. Moreover, we then show whether
these variables differ,given the different demographic factors of survey participants.
Our study will focus solely on factors determiningthe need for regulatory modernisation
of the principle of utmost good faith in different countries. We follow the approach chosen
by other researchers such as Pavia et al. (2021)and Grima et al. (2020), who have carried out
studies on specific regulationsand requirements and used them as focussed laboratory tests,
which findings can later be tested on and used for other requirements. Taking a holistic
approach to regulatory reform may result in various variables, which may be only specific
to some type of regulatory requirement and industries but not others. Focussing on the
Principle of
utmost good
faith
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