Ahead of the release of the Financial Services Royal Commission’s final report, the Treasury has released a discussion paper seeking input in relation to disclosure in general insurance. The focus of the paper is to explore ways to improve current disclosure requirements to ensure positive consumer outcomes.
The consultation process is open until 28 February 2019, and is in response to the recommendations made in the Senate Committee’s inquiry into the general insurance industry in 2017.
Where are we now?
The current disclosure requirements are a result of the Financial Services Reforms of 2001. Those reforms mandated the provision of a Product Disclosure Statement (PDS) to a consumer at the point of sale, and supplemented requirements under the Insurance Contracts Act 1984 (Cth). The PDS is the main form of disclosure for most retail classes of general insurance including home, contents, motor and travel.
The Corporations Act 2001 (Cth) and Corporations Regulations 2001 (Cth) prescribe what must be disclosed in a PDS. Retail customers may also be given a Financial Services Guide that provides information about the provider or issuer of the product, remuneration arrangements and discloses conflicts of interest.
Despite this disclosure, research undertaken by regulators and industry bodies has revealed that disclosure was often in the “TLDR” category – too long didn’t read. For example, ASIC research in 2014 showed that only 20% of home building insurance purchasers read the PDS. Of those who did read the PDS, they generally only read a few pages of it. That research also showed that decision fatigue can lead consumers to make a decision in a way that places the least load on their time and resources.
The focus of the current consultation is to see how to ensure disclosure is actually useful to consumers.
What are the issues that the Treasury wants to know about?
The Treasury is seeking views in relation to the Senate Committee’s recommendations. Briefly, these are as follows:
1. Premium increases and component pricing to be included in renewal notices
a. If this recommendation is adopted, product disclosure requirements would be amended to require insurers to disclose the previous year’s premium on insurance renewal notices and explain premium increases upon request.
b. It will also require disclosure of the component parts impacting an insurance premium, although as part of the consultation process the Treasury is exploring what data could be provided and whether it would be useful.
2. Standard cover requirements leading to non-standard cover
a. The Insurance Contracts Act 1984 (Cth) and its associated regulations currently prescribe a standard cover regime. They prescribe what certain types of insurance must cover at a minimum. Currently, insurers can easily depart from this by clearly informing customers, for example through issuing a PDS.
b. The Treasury wants to initiate a separate review for the current standard cover regime as some consumer research shows the threshold requirements to depart from it are too low and the PDS may not highlight the departure from standard cover.
3. Standardise key terms in the industry
a. Adopting this recommendation would mean that a standardised definition would apply between insurance contracts. For example, ‘flood’ would have to be defined so that a consistent level of coverage existed between insurance contracts. A similar regime could be adopted for definitions in exclusions, such as ‘wear and tear’.
4. Does the Key Facts Sheet truly contain the Key Facts?
a. The Key Facts Sheet was introduced in 2012 and is mandatory for retail home contents and building insurance policies. However, the Treasury identifies a risk with the short-form nature of the Key Facts Sheet as it contains much less information than a PDS.
b. The Treasury is considering whether the Key Facts Sheet should be expanded to convey more information and whether to relax the regulations that prescribe its format.
5. Keeping up with the times
a. The PDS requirements were introduced almost two decades ago. Accordingly, the Treasury is seeking input as to whether there are more effective ways to communicate information on policies to consumers, or if current regulations are hampering the development of new technologies in this space.
b. This is in light of change in the industry with insurers continuing their digital transformation journeys, and insurtechs targeting the sales aspect of the insurance value chain.
It is clear that the Treasury wants to strike the right balance between disclosure and usefulness. It is one thing to give customers everything they could ever know about a product, but another to ensure that the information is useful and presented in an easy to understand way.
Disclosure issues were also the cause of insurance-related case studies in the Financial Services Royal Commission. We will closely monitor the Treasury’s proposals to the consultation process which will no doubt be developed with close reference to the Financial Services Royal Commission’s final report due to be released this afternoon.
To read the Treasury’s discussion paper or to make a submission, visit the Treasury website here.