A recent speech by Peter Kell, Deputy Chairman of the Australian Securities and Investments Commission (ASIC), detailed ASIC's regulatory priorities for 2014 as well as ASIC's current and upcoming initiatives as part of its all-encompassing Financial System Inquiry within the insurance sector.
The Financial System's Inquiry has, in part, been undertaken in response to the insurance sector's response to numerous claims that arose through the recent natural disasters that occurred throughout Australia. The inquiry has been extensive, touching on most aspects of the general insurance sector. Mr Kell further discussed recent reforms within the insurance sector and noted ASIC's increased powers to take action to ensure compliance with such reforms.
Mr Kell's speech provides useful insight into some of ASIC's areas of focus for insurers in 2014. Home insurance, ad-on insurance and consumer credit insurance are all key focuses for ASIC in the upcoming months. In particular, ASIC is focusing on:
- transparency and consistency in communications with customers (home insurance);
- monitoring, supervision and controls in sales (add-on insurance); and
- complaints handling procedures (consumer credit insurance).
Recent reforms within the insurance sector
Mr Kell commented that the devastating effects of the Australian floods in 2010-2011 revealed numerous shortcomings within the retail insurance sector as insurance complaints reached unprecedented levels. Consumers did not fully understand the extent of their insurance cover or were unaware that their home building and home contents insurance policies either failed to cover "flood" or limited the cover to varying types and degrees of "flood".
In response, numerous reforms have been implemented to address such ambiguities. A standard definition of "flood" has been introduced to the insurance sector and numerous websites focusing on improving consumers' knowledge of insurance have been developed. Certain reforms have been made to the Insurance Contracts Act 1984 (Cth) to allow insurers to use electronic communication to issue statutory notices and documents and encourage greater communication between insurers and customers. Further changes have also been made to the "duty of disclosure" to ensure consumers can more easily comprehend and comply with the duty.
Reforms have also been made to the General Insurance Code of Practice following the ICA's recent review of the Code. The review is said to be one of the most comprehensive since the Code was first introduced and the reforms consist of new commitments and processes around claims and complaints handling, and offer consumers important options where they are experiencing financial difficulty.
To ensure compliance with such reforms, ASIC has increased its powers to take action to address breaches of the duty of utmost good faith by insurers, including in respect of claims handling.
Recent reviews within the insurance sector
Mr Kell noted that an extensive evaluation of the insurance industry is being undertaken by ASIC, both in Australian markets and abroad, to ensure identification of existing and impending challenges within insurance policies and processes. Particular policies in the areas of home insurance, add-on insurance and consumer credit insurance have been focal points within ASIC's Financial System Inquiry.
ASIC is currently undertaking a review of home insurance policies to address the current challenges associated with underinsurance within the sector. Recent claims arising from the NSW bushfires have highlighted a number of cases of underinsurance where consumers have found that, notwithstanding their claim being paid in full, they are unable to rebuild their homes. Though the reasons for this are said to be varied, ASIC maintains that the key contributing factors are associated with consumers inadequate understanding of key aspects of their insurance. Transparency and consistency in communication within this area are issues that ASIC will seek to address. A report in relation to these issues not only within the home insurance sector but further within the general insurance sector is anticipated to be published in mid-2014.
Add-on insurance products have also been identified by ASIC as a potential area for numerous problems including mis-selling and inappropriate conduct. ASIC's recent regulatory action in relation to tyre and rim insurance, raised doubts as to whether there were adequate monitoring, supervision and controls on the insurances and other add-on products included within car finance packages. Such experiences, together with scandalous overseas incidents in relation to add-on insurance products, have culminated in concerns that Australia may also be at risk of larger mis-selling problems within this area. ASIC has responded by exercising increased vigilance within this space. Further inquiries are being conducted in relation to add-on insurance sold through car yards and the recent overseas incidents. ASIC hopes such an examination will distil the hazardous processes associated with add-on insurance as well as the appropriate actions to take to ensure such problems are rectified.
ASIC will continue to pay particular attention to claims handling procedures within the consumer credit insurance sector as it strives to improve sales practices in relation to consumer credit insurance. ASIC published a comprehensive research report last year in relation to consumer credit insurance experiences which revealed that many consumers were not aware that they had purchased consumer credit insurance or had been pressured and harassed by sales staff to do so. Following on from the research report published last year, ASIC intends to release a further report in relation to consumer credit insurance sales practices in the first half of this year.
Product Disclosure Statements (PDSs) in relation to complimentary travel insurance which is provided with credit cards is also being monitored by ASIC. Reviews will be undertaken to ensure that disclosure practices are in line with Corporations Act requirements and ASIC's guidance on disclosure.
Recent regulatory action within the insurance sector
ASIC has vowed to continue to take a more proactive approach to the regulation of advertising across the financial services sector. Last year Mr Kell noted that action was taken in relation to a significant company's Comprehensive Car Insurance product advertising campaign which was found to have included a misleading price comparison. Differences between the company's insurance product and the product consumers had switched from were not made explicit and the disclaimer within the advertisement was found not sufficiently prominent to effectively qualify the savings claim.
ASIC cautioned that some forms of advertising are not appropriate if qualifications cannot be explained. Certain advertisements within the funeral insurance sector have also been identified as failing to provide consumers with realistic expectations in relation to the cost and risks of the product.
ASIC has been active in reviewing financial product advertising over the last 12 months and Mr Kell warned that it will continue to review consumer advertising and take action where appropriate.
What should insurers do now?
In response to ASIC's Financial Systems Inquiry and recent regulatory action in relation to insurance advertising, it is timely for providers of insurance products and services to undertake a review of their governance, risk and compliance (GRC) arrangements and considering priorities for 2014. We recommending test some of the areas of focus identified by Mr Kell in his speech and the upcoming reports he has foreshadowed to be released in the next month.
The Clayton Utz Governance and Compliance and insurance teams can assist you with evaluating your GRC arrangements and are experienced in assessing these arrangements against regulator expectations.