In brief 5 min read
The Federal Government has released a consultation paper which takes action on Recommendation 4.8 of the Banking Royal Commission's Final Report. If implemented, the handling and settlement of insurance claims will become a 'financial service' under the Corporations Act 2001 (Cth) and will be subject to oversight by the Australian Securities and Investments Commission (ASIC). Even with careful and staged implementation, such a change would likely cause disruption, and require insurers and service providers to review their services and compliance with the newly imposed obligations. Partner Simun Soljo and Lawyer Virginia Wang report.
On 1 March 2019, the Treasury released its Consultation Paper – Insurance Claims Handling, which outlines the Government's proposal to remove the exclusion of insurance claims handling from the definition of 'financial service'. The proposal will apply to claims for both life insurance and general insurance products.
Currently, insurance claims handling has been excluded from the scope of the Corporations Act in two ways:
- the definition of 'financial service' does not include many of the activities undertaken in relation to handling an insurance claim; and
- regulation 7.1.33 of the Corporations Regulations specifically excludes activities carried on in the course of handling an insurance claim that would usually fall within the definition of 'financial service'.
The Treasury states that a key objective of the proposed reforms is to ensure ASIC has 'a clear mandate' over both claims handling activities and 'the regulatory tools necessary to adequately supervise' claims handling. More specifically, the Treasury referred to:
- the case studies examined in the Royal Commission;
- ASIC's limited regulatory intervention powers in relation to claims handling;1 and
- the Royal Commission's view that ASIC's regulatory oversight of claims should be enhanced, and insurers should be obliged to handle claims efficiently, honestly and fairly.2
The Treasury proposes a 'two-pronged approach', which involves:
- removing regulation 7.1.33; and
- explicitly including 'handling and settling an insurance claim' as a 'financial service' for the purposes of the Corporations Act.3
1. Removing regulation 7.1.33
The Treasury proposes to amend the Corporations Regulations by removing regulation 7.1.33. This will remove the exemption for activities carried on in the course of handling insurance claims.
2. Making 'handling and settling an insurance claim' a 'financial service'
The Treasury proposes that the activity of 'handling or settling of an insurance claim' be explicitly included as a 'financial service' for the purposes of the Corporations Act. While the precise definition will need to be further developed, the Treasury has indicated it could cover all conduct of an insurer (or its representatives) in relation to claims handling, including:
- making decisions about a claim (including investigating claims and interpreting policy provisions);
- conducting negotiations in respect of settlement amounts;
- preparing estimates of loss or damage, or likely repair costs; and
- making recommendations about mitigation of loss.4
Key requirements that would apply to claims handling as a financial service would include the general obligations under section 912A, which would require an Australian financial services licensee to:
- act efficiently, honestly and fairly when handling an insurance claim;
- have adequate measures in place to manage conflicts between representatives' own interests (in refusing claims), and legal obligations owed to clients; and
- adequately supervise claims handling conduct and ensure that representatives are adequately trained and competent.5
Breaches of these obligations could result in the imposition of penalties, which were recently increased by the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018. The Treasury proposes that certain other obligations would not apply (such as those relating to advising or dealing). This would need to be specifically dealt with in the amendments.
The proposed changes are expected to affect:
- insurers that provide a claims handling service – this includes the insurer's employees and related body corporates providing a claims handling service on behalf of the insurer;
- third party representatives of insurers that provide a claims handling service – this includes service providers such as investigators, loss adjustors, loss assessors, collection agents and claims management services; and
- other persons that ASIC declares are included.6
The Consultation Paper states there needs to be further consideration on whether the trustees of superannuation funds should be excluded from the scope of the proposed changes.7 It also raises the option of limiting the application of the proposed changes to claims handling services provided to retail clients.8 Clearly, there is potential for the amendments to affect a large number of service providers not currently subject to the licensing obligations.
The Treasury has noted that the removal of the current exemption and introduction of a new financial service could trigger a heavy compliance burden on insurers and third parties involved in handling insurance claims. However, the Treasury believes this burden could be mitigated by mechanisms such as:
- allowing claims handling to be included under the current authorisations held by an Australian financial services licensee (via section 926B of the Corporations Act);
- restricting the new financial service to persons who act on behalf of the insurer – this would likely exclude persons who contribute to assessments but are not directly acting for the insurer (eg medical practitioners); and
- creating a new category of persons entitled to engage in specified financial services in a representative capacity, without being an authorised representative.9
The proposals will need to be carefully implemented to ensure there are not unintended consequences. Even with careful and staged implementation, however, the change is likely to cause disruption and will require insurers and service providers to review their services and compliance with the newly imposed obligations.
The Treasury has invited submissions on the proposed changes in the Consultation Paper. Submissions are due by 29 March 2019 and comments should be sent to:
Insurance and Financial Services Unit
PARKES ACT 2600
- Treasury, Insurance Claims Handling: Taking action on recommendation 4.8 of the Banking, Superannuation & Financial Services Royal Commission – Consultation Paper (1 March 2019), 4
- Ibid, 2.
- Ibid, 9.
- Ibid, 10.
- Ibid, 12.
- Ibid, 13.
- Ibid, 12-13.