Sunday, 26 May 2019

Royal Commission Report – Life Insurance and General Insurance – Lexology

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released on 4 February 2019. In addressing the findings from hearings into the insurance industry, Commissioner Kenneth Hayne made several recommendations for the government to consider and implement into law. These recommendations pave the way for the future of regulation in the industry.

1. Recommendations

1.1. No hawking of insurance 

The Commission examined the unsolicited offers and sales of insurance following ASIC’s conclusion that such unsolicited sales are ‘commonly associated with poor sales conduct and increase[d] the risk of poor consumer outcomes’.

ASIC’s findings were confirmed in the Freedom and ClearView case studies. Hayne found that remuneration incentives and a disregard for the vulnerable led sales agents to offer complex financial products (often forcefully) to individuals who had not turned their minds to, and did not have adequate information about what value the product has for them.

Accordingly, the Final Report recommended prohibiting the unsolicited offer or sale of insurance products, except to those who are not retail clients and except for offers made under an eligible employee share scheme.

1.2. Removing the exemptions for funeral expenses policies

The Commission saw no justification for providers of funeral expenses policies to be exempt from the requirement to possess an AFSL. Hayne noted that all forms of funeral insurance should be subject to the same regulatory regime and supervision. He also expressed concern that funeral expenses policies contained a lack of value for customers.

Therefore, it was recommended that the law should be amended to:

  • remove the exclusion of funeral expenses policies from the definition of ‘financial product’, and
  • put beyond doubt that the consumer protection provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) apply to funeral expenses policies.

1.3. Add-on insurance

a) Deferred sales model

The Commission responded to ASIC’s concerns that add-on insurance products expose consumers to unfair sales tactics and adverse outcomes. The IAG case study highlighted that motor dealers are incentivised to sell as many add-on insurance products to consumers as possible, regardless of their suitability or value to customers.

Consequently, it was recommended that add-on insurance should generally be sold under a deferred sales model, (except policies of comprehensive motor insurance). Under this model, insurers or their representatives would be required to wait for a specified period of time before attempting to sell add-on insurance products to their customers.

A deferred sales model inserts a pause into the sales process and is designed to give consumers additional time to navigate the complexities of add-on products and thereby facilitate improved decision making.

b) Cap on commissions – sale of a motor vehicle

Evidence given to the Commission demonstrated that the high levels of commissions paid to motor vehicle dealers in connection with the sale of add-on insurance products contributed to the mis-selling of those products. In the 2015 financial year, ASIC found that the commission paid to dealers for the sale of these insurance products were as high as 79% of the premium.

Accordingly, it was recommended that ASIC should impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products.

1.4. Pre-contractual disclosure and representation

a) Duty to take reasonable care not to make a misrepresentation to an insurer

Currently, in consumer insurance contracts, the individual seeking insurance has a duty to disclose any matter relevant to the decision of the insurer on whether to accept the risk. Hayne noted that a duty framed in this way fails to recognise that insurers are always better placed than an insured to identify the categories of information that they consider to be relevant to their decision of whether to insure a risk.

Consequently, the Final Report recommended that the duty of disclosure be replaced with a duty not to make a misrepresentation to the insurer. As a result the burden is placed on the insurer to elicit information that the Insurer needs in order to assess whether it will insure a risk and at what price.

b) Avoidance of life insurance contracts

Section 29(3) of the Insurance Contracts Amendment Act 2013 (Cth) has been understood as expanding the circumstances in which an insurer could avoid a contract of life insurance. The removal of the words ‘on any terms’ means that a life insurer now can avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if the Insurer can show that it would not have entered into the same contract.

The TAL case study demonstrated that the amendment of s 29(3), provided scope for insurers to use inappropriate conduct including the engagement of, and inappropriate use of external investigators; the excessive use of surveillance; bullying tactics and offensive communications in order to avoid paying an insurance claim.

Therefore, Hayne recommended that the position prior to section 29(3) be restored, so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if the Insurer can show that it would not have entered into a contract on any terms.

1.5. Unfair contract terms 

The Commission found that the rationale for an unfair contract regime for financial products and services apply equally to insurance contracts, a conclusion echoed by the Treasury.

Consequently, Hayne recommended that the unfair contract terms provisions now set out in the ASIC Act should apply to insurance contracts regulated by the Insurance Contracts Act 1984 (Cth).

1.6. Claims handling

The handing and settlement of an insurance claim is currently carved out from the definition of ‘financial service’ in the Corporations Act 1989 (Cth) (Corporations Act). Therefore, the obligation to do all things necessary to ensure that financial services are provided efficiently, honestly and fairly, do not govern the ways in which insurers make a decision about a claim or conduct negotiations in respect of settlement amounts.

In Hayne’s view there is no basis in principle for continuing to exclude claims handling from the definition of ‘financial service’. As endorsed by ASIC, the intrinsic value of an insurance product for consumers lies in the ability to make a successful claim when an insured event occurs.

Accordingly, the Final Report recommended that the handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of ‘financial service’.

1.7. Status of industry codes

Hayne recognised the limitations of self-regulation in the insurance industry including that:

  • the standards set may not be adequate;
  • not all industry participant