The RC was a very broad investigation into the financial services industry – general insurance was really a modest player in both the hearing and outcomes. While the focus in the insurance space was on some pretty shoddy dealings with consumers, there were findings that will impact our dealings with commercial general insurance products.
First, just a brief word on the Commissioner. I was fortunate enough as a junior solicitor to be part of a legal team that worked on the landmark insurance case involving Bougainvlle Copper. In the case we briefed Ken Hayne QC. Ken was a formidable force, smart and strategically brilliant. It comes as no surprise that his findings on general insurance are measured and fair and in some important instances makes general recommendations and then pushes the responsibility back to the industry to establish fairer market practices. Some say he hasn’t been harsh enough, but I think he was smart enough to realise there is always going to be a small number of pretty awful stories coming out of any industry, but it is the issues that cause the stories to arise that needed to be addressed.
Claims Handling
Up until the RC, claims management has been exempt from the definition of financial services and thus the added oversight and compliance this would involve. So some of the general obligations imposed by section 912A of the Corporations Act – including the obligation on an AFSL holder to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly – do not apply to the handling and settlement of insurance claims. Ken Hayne felt there was no basis for such an exemption.
This will mean that companies managing claims will be subject to ASIC regulation and be required to provide efficient, honest and fair claims handling. It’s the kind of standard we aim to apply already and will be happy to be measured against. However, Insurers and Claim managers who think they can delay or not make decisions in the face of a difficult claim may soon face the real threat of meaningful sanctions for such failures. It also means that if you provide claims services, you will need to be licensed. While the licensing process is cumbersome and adds a layer of cost, it does not appear any more extensive an exercise than current Underwriter due diligence requirements. It also brings Australia into line with many advanced countries where a license is required for claim management.
One question which will not be resolved overnight is what will be covered, how far the obligations extend and who will be responsible. Does it go beyond claim managers to contractors and service providers? Ken Hayne gives a clue to this by referring in his report to specific parts of the claim process:
- Make a decision about a claim, including investigating claims and interpreting policy provisions;
- Conduct negotiations in respect of settlement amounts;
- Prepare estimates of loss or damage, or likely repair costs; and
- Make recommendations about mitigation of loss
On a reading of that, you would think that the current services of adjusters and assessors are contemplated and they will either need to be licensed or have clearly assigned and limited authority – with Claim Managers taking greater responsibility in the decision making process and accountability should their service providers not have a license. It may also mean some insurers and claim managers will need commensurately higher standards in their resources and service levels to discharge their licensing obligations.
The ICA has commented in response that “The ICA also supports removing the exemption of the handling and settlement of insurance claims from the definition of a financial service. It looks forward to further consultation on the design and implementation of this and other recommendations’.
Other Upcoming Changes
There are a number of other recommendations that will not have a significant impact on us or our clients as they are largely driven by consumer products. For instance:
- Funeral insurance will no longer be exempted from the definition of financial product
- Schemes where motor dealers organise insurance for purchasers will have a limit on commission levels – some of the case studies saw commissions as high as 79% (which is driven by an attempt to control distribution networks).
- ASIC will have new powers to preclude insurance products that aren’t commercially viable – in that they don’t really offer any meaningful cover to anything other than a very narrow market. I think that fits the oft referred category of ‘illusory’ products.
- In respect of consumer insurance contracts, the duty of disclosure should be replaced with a duty to take reasonable care not to make a misrepresentation to an insurer. This is based on the imbalance of power and the very broad questions asked in consumer insurance proposals.
Finally there was one recommendation that is likely to have an impact on our clients and that involves the Code of Practice. The Commissioner expressed concern that the Code didn’t have teeth…so he recommended the ICA and ASIC take all necessary steps, by 30 June 2021, to have the key provisions of those codes designated as ‘enforceable code provisions’. Apparently the ICA are already working on a new version of the Code with a greater focus on “customer service, financial hardship and sanctions for Code breaches”.
Broker commissions
The RC recommended conflicted remuneration be reviewed, but gave a pretty generous time frame of December 2022. Macquarie’s analysts view remains that any practitioner seen to be “overcharging” will be weeded out by the industry well before any review. Interestingly they also question whether volume based compensation and profit share arrangements for brokers will be eliminated by the industry. This is unlikely to extend to underwriting agents as the issue identified in the RC is conflicted remuneration and Agents clearly (usually at least) identify themselves as operating on behalf and aligned with the insurer.
Conclusion
There doesn’t appear to be anything earth shattering in the recommendations – indeed many, like claims handling being a financial service and the Code being enforceable, may well have been inevitable even without the RC. It is clear that the RC offers the opportunities for insurers to draw a line and move forward and that in the consumer space in particular there is the opportunity to provide fair and efficient dealings with policyholders – across underwriting and claims – on a more consistent basis.
Written by Jon Broome
