Changing the duty of disclosure – insurers should have to ask the questions
The Commissioner criticises the scope of the duty of disclosure under the Insurance Contracts Act 1984 (ICA), particularly the requirement that consumers disclose “all matters that a reasonable person in the circumstances could be expected to know to be a matter so relevant”. His view is that consumers often have little understanding of what is and isn’t relevant to an insurer, leading to unintentional non-compliance.
For consumers, the duty of disclosure will be replaced with a duty to take reasonable care not to make a misrepresentation, shifting the burden from the consumer to the insurer by requiring the insurer to elicit the required information. This approach may increase the burden insurers presently face in seeking to reduce liability for a claim as a result of non-disclosure. Demonstrating that a consumer failed to take reasonable care is arguably more difficult.
Hawking of insurance products “unscrupulous” – further clarity recommended
There will be a stronger, blanket prohibition on the hawking of insurance products (except to wholesale clients or under eligible employee share schemes). Hawking of such products “too readily allows the fraudulent or the unscrupulous to prey upon the unsuspecting”.
It will be interesting to see whether the introduction of a definition for the term “unsolicited” provides greater certainty regarding the application of the anti-hawking provisions. Any definition of “unsolicited” will need careful drafting to take into account the wide range of sales models for insurance products.
Handling of insurance claims should be a “financial service”, provided “efficiently, honestly and fairly”
Claims handling is currently exempt from the definition of a “financial service”, giving ASIC limited ability to intervene. The removal of the exemption will mean insurers would need to provide claims handling services “efficiently, honestly and fairly”.
These changes are particularly important when coupled with the increased enforceability of breaches and wider sanctions. Insurers could be subject to penalties/regulatory actions for unreasonable delay in responding to a claim, drawn out assessments or repair works and incorrect decisions on indemnity, particularly for vulnerable insureds following natural disasters. There may be lessons to be learned from the Japanese insurance industries’ approach.
Other restrictions on the sale of insurance products
Other recommendations aim to increase consumer protection in the content and sale of certain insurance products:
- Unfair contract terms regime will apply to insurance policies. This is not new – see our previous article on this proposal here.
- Funeral expense insurance will be included within the definition of “financial product”.
- Add on insurance (other than comprehensive motor insurance) will be offered under a deferred sales model.
- Caps on commissions will be introduced for add-on insurance connected with motor vehicle sales.
Self-regulation through industry codes not enough – a breach of a code should be a breach of the law
Some industry codes will become mandatory and all industry codes approved by ASIC will include ‘enforceable code provisions’, breach of which will constitute a breach of law.
Consumers will be able to elect to enforce breaches through existing dispute resolution mechanisms or through the courts (think AFCA and consumer complaints), and the Code Governance Committee will be permitted to impose sanctions on insurers in breach of the Code.
Additional consequences specific to life insurance
As the value of a life insurance policy turns heavily on key definitions, terms and exclusions, the Commissioner recommends that Treasury, in consultation with industry, determine the practicability, and likely pricing effects, of legislating universal key definitions, terms and exclusions for default MySuper group life policies.
One of the general themes in the final report is the question of how conflicts of interest can be avoided. In line with this, the Commissioner recommends that RSE licensees that engage a related party to provide group life insurance, or who enter into an arrangement with a life insurer where the insurer is given a priority in the provision of life insurance, will be required to provide to APRA independent certification that the arrangements and policies entered into are in the best interests of members and otherwise satisfy legal and regulatory requirements.
ASIC should consider further reducing the cap on commissions for life risk insurance products in its review of conflicted remuneration. The cap should be zero unless there is a clear justification. ASIC is called on to consider whether the remaining exemption to the ban on conflicted remuneration for general insurance and consumer credit insurance products remains justified.
Further, the final report raises concerns over higher premiums being charged to default members unless trustees receive specific information from the member to the contrary. RSE licensees will be required to be satisfied that the rules by which a particular status is attributed to a member in connection with insurance are fair and reasonable.