Insurance companies which flout a new voluntary code coming into force today could face fines of up to $100,000.
The Insurance Council says the revamped code, which includes new time-frames for responding and settling claims, is more "customer-centric".
Insurance Council chief executive Tim Grafton said the maximum fine under the previous code was $500.
"So it's gone up exponentially.
"But what we're trying to do is actually ensure that if there is something wrong, it's put right. And I'm sure all of our members will endeavour to do that."
The hefty new penalties - together with independent scrutiny and public reporting of breaches - will give the regime "real teeth", he said.
It was the first time the code had been updated since the Canterbury earthquakes and many of the changes came out of that experience, Mr Grafton said.
"The previous Code didn't take into account catastrophe situations and didn't set out any timeframes for responding to claimants or keeping them informed of the progress of their claims."
Under the new code, insurance companies must respond within five business days and make a decision within ten business days of the date they have all the necessary information.
With more complex claims that cannot be met within the best practice guidelines, they must update claimants at least once every 20 business days.
The council's 28 members cover 95 percent of general insurance policies for house, contents and vehicles.
The code does not include health insurance or life insurance, and only covers individuals and businesses with fewer than 20 employees.
"There will be independent scrutiny of breaches of the Code, with a focus on putting things right for the insured and sanctions for significant breaches," Mr Grafton said.
"The number of breaches will be reported publicly to add a further level of accountability."
The Code Compliance Committee, chaired by Mr Grafton and including former Governor General Sir Anand Satyanand, former Finance Minister David Caygill and Dr David McGee CNZM QC, will investigate significant breaches of the code.