Welcome to Part 2 of Insurance After Hayne, a series focusing on the implications for general and life insurers of the Royal Commission’s final report.  In last week’s article, we provided an overview of the recommendations applicable to the insurance industry.

This week, we look more closely at the recommendations regarding sales practices and policy terms.

1. No hawking of Insurance

The Commissioner has recommended that hawking of insurance products to retail clients should be prohibited altogether. Section 992A of the Corporations Act currently prohibits hawking of financial products but it still allows products to be offered on unsolicited calls if certain requirements are met. The Commissioner’s view is that the current provisions are inadequate to protect consumers as the exemptions ‘too readily allows the fraudulent or unscrupulous to prey upon the unsuspecting’.

The Commissioner has proposed that a definition of ‘solicited’ be legislated to avoid confusion, and that it follow the guidance in RG 38 – Hawking. ASIC’s view is that an interaction will be solicited if it ‘takes place in response to a positive, clear and informed request’ from a consumer.

Insurers relying on the hawking exemptions should start preparing for the imminent change, and it would be prudent to review all outbound call arrangements to ensure that calls are clearly ‘solicited’. It is not always straightforward – for example, even calls to existing customers will not be solicited unless there is a positive, clear and informed request to receive the call. Reliance on marketing consents, or consents in disclosure documents can be problematic. 

We expect to see criminal prosecutions for future breaches of the hawking provisions, so reviewing current outbound call arrangements and testing assumptions as to what constitutes ‘solicited’ is recommended.

2. Deferred sales model for add-on insurance

The Commissioner has adopted the recommendation of the Productivity Commission (Competition in the Australian Financial System) made in June 2018, that a Treasury-led working group should develop an industry-wide deferred sales mode for the offer of any add-on insurance product, other than comprehensive motor insurance.

The concept is not a new one. A deferred sales model already applies to certain insurance products in the UK and in August 2017 ASIC Consultation Paper 294 The sale of add-on insurance and warranties through caryard intermediaries proposed a similar model through caryard distribution arrangements.

For banks, the 2019 Banking Code of Practice, which comes into effect on 1 July 2019, already imposes a deferred sales model in respect of consumer credit insurance (CCI) sold in connection with credit cards and personal loans sold in branches or over the phone. Under the Banking Code of Practice, signatories will not offer the product to consumers until four days after the application for the credit product.

The Commissioner has not sought to address queries raised by industry in submissions to the Productivity Commission as to the scope of the model. What will constitute ‘add-on insurance’ remains unclear, with the primary examples referred to being caryard insurances and consumer credit, though the Commissioner also makes passing reference to products sold over the phone and in branches in connection with home loans, and to add-on insurance products purchased online.  Depending on the model of distribution, add-on insurance could extend to a range of general and life products, including travel insurance, event ticket and cancellation insurances, extended warranties and a range of others.

Coupled with the proposed hawking prohibition and commission caps (below), this change could have a significant effect on insurers who underwrite these products and their distribution intermediaries.

3. Cap on commissions

Add-on insurance products

The Commissioner has recommended a cap on the commissions that may be paid to vehicle dealers in relation to the sale of add-on insurance products. This was following findings that the amounts paid in commissions on add-on insurance products often exceeded the amounts paid out to insureds through this channel.

Life products – the end grandfathered commission

As widely anticipated, the Commissioner has recommended that the grandfathering period under the FoFA reforms be ended meaning that the ban on conflicted remuneration will extend to arrangements entered into pre July 2013. The Government has indicated that it will push through this reform with effect from 1 January 2021.

An industry ban on commissions?

The Commissioner is critical of the role played by commissions in creating conflicts of interests, and resulting in poor consumer outcomes, and he has tasked ASIC with ensuring that the industry’s justification for commissions is robustly tested, and to continue to reduce commission caps introduced under the FoFA and LIF reforms. The Commissioner says he can see no justification to allowing forms of conflicted remuneration to exist unless there is evidence that the reduction in the caps is contributing to underinsurance.  ASIC is due to conduct a review in 2021 and the Commissioner has recommended that ASIC look not only at reducing the cap on commissions in respect of life risk insurance products (ultimately to zero) but also whether the exception for general insurance products is appropriate.

These recommendations will have significant market consequences, although their effect will not be felt immediately. Commissioner Hayne has steered the ship on a steady path towards ending commissions in the insurance industry, one that will require the market to closely analyse and debate the level and impact of underinsurance, and consider viable distribution alternatives.

4. Application of unfair contract terms provisions to insurance contracts

The Commissioner recommends insurance contracts be subject to the unfair contract terms (UCT) regime which has applied to standard form consumer contracts since 2010. The UCT regime renders void unfair contractual terms that cause a significant imbalance in the contracting parties’ rights and obligations.

The UCT regime does not apply to the ‘main subject matter’ of the contract. In applying the regime to insurance, the Commissioner recommended that the legislated definition of ‘main subject matter’ of the contract be construed narrowly, to only terms that describe what is being insured. The Commissioner has also recommended that the duty of utmost good faith enshrined in section 13 of the Insurance Contract Act should operate independently to the UCT (including allowing the imposition of civil penalties for breach).

Work on implementing UCT legislation in the insurance industry has been underway for some time.  The Treasury published a proposal paper in June 2018 endorsing the introduction of UCT regime to insurance contracts. The release of a further proposals paper was expected late last year but Treasury presumably waited to see what the Commissioner had to say on the topic.  Insurers were hoping to make some ground on the scope of the ‘main subject matter’ of the contract but the Commissioner’s comments may not have assisted their cause.

The extension of the UCT to insurance contracts is significant, and insurers need to be considering whether their terms may expose them to breaches of the regime, and to consider the underwriting and pricing implications. A move towards simplified and consumer-friendly disclosure documents may assist in mitigating the risk, but understanding the implications of an additional overlay of ‘fairness’ to insurance policies will require some close analysis.

The changes proposed by the Commissioner were not unexpected and many were already the subject of industry consultation. However, these changes will require insurers to review their sales practices, scrutinise policies to ensure compliance (particularly with the UCT regime) and to engage with the significant issue of commission reform.  The insurance regulatory team at Norton Rose Fulbright can help you with devising and implementing your organisation’s response to the Royal Commission’s Final Report.

Stay tuned for Part 3 of Insurance After Hayne which will be released next week.

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