The sixth round of public hearings considered issues associated with the sale and design of life insurance and general insurance products, the handling of claims under life insurance and general insurance policies, and the administration of life insurance by superannuation trustees. The hearings also considered the appropriateness of various aspects of the current regulatory regime for the insurance industry.
Evidence was taken in respect of case studies involving ten insurers. The Commissioner identified the issues he considers to have arisen from those case studies under the following broad headings:
issues relating to the manner of selling some insurance products (which were sometimes compounded by issues relating to the low value of particular insurance products);
- issues relating to the avoidance of insurance policies as a result of pre-contractual non-disclosure or misrepresentations;
- issues relating to the use of, and reliance upon, potentially unfair contract terms;
- issues relating to claims handling;
- issues relating to the lack of enforceability of code obligations; and
- issues relating to external dispute resolution.
In keeping with the themes developed elsewhere in his report, the Commissioner pointed to aspects of the interrelated areas of culture, governance, remuneration and accountability as underpinning or contributing to many of the areas of concern that were identified. In a number of instances he attributed poor conduct to a focus on profit and sales ahead of customer outcomes. In this regard, the Commissioner has obviously seen merit in consistency of regulation and has proposed winding back various of the exceptions that have been afforded to insurers in respect of aspects of the financial services laws.
The impact of the insurance recommendations
The individual recommendations of the Commission for general and life insurance were not unexpected. If they are fully implemented we may see significant changes in the way in which insurance products are created and distributed. However, full implementation may take until 2022.
The more important recommendations can be grouped into two broad categories.
Contract Formation, Contract Terms and Claims
The first category concerns the formation of contracts, their terms and the way claims are to be dealt with. In this area there are a number of important recommendations which, when accumulated, are likely to have a real impact on insurance provided to consumers.
Firstly, there are recommendations that disclosure and misrepresentation laws contained in the Insurance Contracts Act 1984 should be refocused so that the insured's duty will be determined by the standard of negligent misrepresentation. This will mean that insurers will need to be much more focused on identifying to consumers the matters on which information is required. They will not be able to place great reliance on the existing general duty of disclosure. Although there have already been changes in this area in relation to certain eligible insurance contracts, under the proposed new arrangements those provisions would have little further work to do. The interesting questions in this area that are left to be worked out are how a 'consumer contract' will be defined and where the burden of proof will lie. Moreover, will the definition of 'consumer' be determined by reference to particular types of contract, such as a home and contents policy or will it be by reference to the type of insured (ie an individual or certain small businesses) regardless of the type of contract which is being purchased? Will the insurer have to prove negligence or will the insured have to show the misrepresentation was without fault?
Secondly, the proposal that certain provisions of codes of practice will be subject to regulatory enforcement will have an impact on the terms of the contract of insurance itself and the way in which it is administered. It will be interesting to see how this issue and the approval process develops.
Thirdly the application of unfair contract terms as set out in the ASIC Act to insurance contracts regulated by the Insurance Contracts Act will require a review of contract terms to identify any that are potentially unfair to consumers. It is recommended that the unfair contracts provision will operate alongside of the continuing duty of good faith found in section 13 of the Insurance Contracts Act and so s14 will continue to disallow reliance on terms that would involve a breach of this duty.
Finally, the recommendation that claims handling be no longer excluded from the definition of financial service means, amongst other things, that claims handling must be undertaken in line with the principles of efficiency, honesty and fairness. Presumably the content of those principles would be sought to be addressed in Codes of Practice.
These changes, together with the passing of legislation for ASIC to be able to intervene in respect of products, have the potential to generate significant differences to the terms of insurance contracts sold to consumers and their administration through any claims process.
Distribution and marketing
The second group of changes relate to distribution and marketing.
These changes include:
- the prohibition against hawking, that is unsolicited telephone sales,
a deferred sales model for the sale of add-on insurance (other than Comprehensive Motor Insurance),
- a cap on commissions that can be paid to motor vehicle dealers,
the proposal that exemptions for general insurance should be removed in respect of the various existing provisions relating to conflicted remuneration; and
- the limitations on commission were risk-based life insurance may ultimately be reduced to zero.
All of these provisions are put forward by the Commission without any real discussion about structural issues within the insurance industry where some companies are much better placed to operate by direct sales and others are very dependent on sales through intermediary channels. Those firms with existing large customer bases may be advantaged over new players or those with an existing smaller business.
So hard rules on benefits paid to intermediaries may severely disadvantage intermediated businesses compared to those that are integrated and selling by direct means (particularly off the back of existing customer bases) unless the remuneration arrangements in the integrated businesses prohibit value or volume benefits in a similar way.
There has been little direct discussion about the need for intermediation in a competitive economy. If the new rules make it next to impossible to remunerate intermediaries then competition may be adversely impacted. Is it preferable to better regulate and supervise intermediaries and their activities rather than to severely constrain their use? It may be that further debate of this issue is needed before these recommendations are implemented.
The broader findings of the Commission as to governance, risk and compliance matters, together with the recalibration of relationships with regulators and the way in which regulators may approach questions of enforcement, are all issues which are also of significant relevance to the boards and senior management of insurers. The extension of the BEAR regime to insurers is also on the horizon. If it comes to pass it will more formally require a very significant focus on issues surrounding remuneration and accountabilities.