What does the future hold?

There is a growing appetite for litigation and regulatory enforcement in the insurance industry. The consistent message from legislators, regulators and courts since the Financial Services Royal Commission is that the insurance industry plays an important role in the community and should be held to account accordingly.

In line with this trend, further regulatory burdens are on the horizon, as set out below. A lot of work lies ahead for insurers, both in adjusting their existing sales models and processes, and managing growing regulatory and litigation risk into the future. While ASIC has indicated a degree of leniency for inadvertent breaches as they are first introduced, the clear expectation is for insurers to 'gear up' to meet the new standards soon. This expectation is reflected in ASIC's new breach reporting regime which commenced on 1 October 2021.


Product design and distribution obligations

The Product Design and Distribution Obligations (DDO) regime under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth) will be the first time product governance requirements have been applied to insurance products.

Under the DDO regime, a financial product must not be distributed unless the issuer (ie the underwriter) has a Target Market Determination in place, and the distributing entity must take reasonable steps to distribute the product consistently with that Determination. In essence, the DDO regime requires firms to take a consumer-centric approach to both the design and distribution of financial products. For more information, we issued a detailed guide to the DDO regime late last year.


Deferred sales model for add-on insurance

In general terms, the deferred sales model prohibits the sale of add-on insurance for at least four days after a customer commits to acquiring the principal product or service. This is a new concept for the insurance industry, and addresses Recommendation 4.3 of the Financial Services Royal Commission. The aim of the model is to ensure customers are given ample time to make rational, informed purchasing decisions when it comes to add-on insurance products.

By 5 October 2021, insurers will need to identify which products are sold as a secondary product, consider whether an exclusion applies and, if not, consider how they can comply with the deferral period requirements. Insurers will need to reconcile these requirements with existing processes such as cooling-off periods, and will need to do this in cooperation with others involved in the sales process (eg brokers). Insurers will also need to consider how the deferral period is communicated to the customer in a digestible way. If a product is sold in contravention of these provisions, a new remedy will give the customer a right of return or refund. Breaches of the new rules are subject to criminal and civil penalties.


Hawking prohibitions

A new 'hawking' prohibition will come into effect from 5 October 2021, which makes it an offence to offer a financial product (including an insurance product) for sale by means of 'unsolicited contact'. This is defined as any contact that a consumer has not consented to, and which is made by telephone, in a face-to-face meeting or in 'any other real-time interaction in the nature of a discussion or conversation'.

This definition, which differs from the initial proposal in the exposure draft bill, is more concrete and makes it clear that emails and other such communications are generally not caught by the ban. 


False or misleading representations

While not specific to the insurance sector, insurers continue to be caught up in ASIC's broader focus on false or misleading representations, particularly in marketing and advertising materials. ASIC's Interim Corporate Plan 2020–21 — released to address its strategic priorities in responding to the impact of the COVID-19 pandemic — identified 'the increased risk of consumers being exploited through misleading or fear-based advertising', especially in credit and insurance products. Especially in the current climate, insurers should take abundant care to ensure that information published about their insurance policies is complete and transparent.


General Insurance Code of Practice 

Following a review of the General Insurance Code of Practice, the Insurance Council of Australia released a significantly revised version of the Code that came into effect on 1 July 2021 before being updated on 5 October 2021. The revised Code contains new obligations, which relate to customer vulnerability, hardship, training requirements and mandatory standards for claims investigators. These changes have required general insurers to undergo significant reviews of processes and controls, and implement IT and organisational changes.

The Code Governance Committee has been granted broader enforcement powers and may require a general insurer to pay a community benefit payment of up to $100,000 for significant breaches of the Code.


Class action risk

The focus and priorities of Australian regulators (such as ASIC) are key indicators of future class action risk and, in recent years, it has become common to see class actions commenced following regulatory investigations or enforcement action. The numerous 'fees for no service' and Takata airbags class actions are just two examples of this trend, as outlined in more detail in our recent Class Action Risk 2021 report.

In the insurance sector, we are already seeing a spate of class actions against insurers that have declined to pay out business interruption claims stemming from COVID-19 and associated government restrictions on trade. However, the increased regulatory risks set out in this report should also be treated as a bellwether for heightened class action activity in the insurance sector over the years ahead.