New regulations that impact the insurance industry came into effect on October 05. The Financial Sector Reform Act 2020 was approved by parliament in December last year in response to the Hayne Royal Commission. The new measures include hawking prohibitions and product design and distribution obligations.
The global law firm Kennedys specializes in insurance industry issues. Special counsel Nicholas Blackmore told Insurance Business that while the insurance industry has known the changes were coming for some time there was at least one surprise in the reforms.
“Perhaps the surprise was how prescriptive some of these reforms are. For example, the product design and distribution obligations are highly prescriptive in requiring insurers and distributors to have a documented ‘product governance arrangement’ which sets out details about how the business will meet and manage its product design and distribution obligations,” said Blackmore.
He said these highly prescriptive new rules mean that most insurers will have had to adopt a specific policy on this topic just for their Australian operations.
The other change under the new rules is obliging those selling insurance products to specify a ‘target market.’ Blackmore said this idea is not completely new.
“Insurance regulators in the UK and Europe have increased their focus on ‘conduct risk’ - which addresses the risk of insurance firms acting in ways that are detrimental to their customers - over the past few years.”
He said, even if only from a marketing perspective, the insurance industry has always considered identifying a ‘target market’ when designing an insurance product as good practice.
“But mandating that the design process for a consumer insurance product must begin with identifying the target market and build from there is quite novel.”
Blackmore said the product design and distribution obligations require the insurer to design their consumer insurance products to meet the needs of a clearly identified target market, to distribute their consumer insurance products in a way that directs the product exclusively towards that target market, and to review the effectiveness of the design and distribution of the product on a regular basis.
He also said the insurer needs to have a documented ‘product governance arrangement’ setting out their compliance with the product design and distribution obligations and a ‘target market determination’ for each consumer insurance product they issue.
There are also deferred sale model rules which aim to protect consumers in situations where they may be under pressure to purchase a product they may not fully understand at short notice. Blackmore gave the example of buying a mobile phone and how consumers probably don’t think about any device protection insurance until the salesperson suggests it when they are about to buy the phone.
“Sometimes the law prescribes a cooling off period. In this case the law has mandated a four day ‘deferral period’ to give the consumer a chance to think about the add-on insurance product, consider its benefits and value, look up reviews online, and perhaps research alternatives,” he said.
New hawking prohibitions are also in the law.
“The amendments to the hawking prohibitions aim to prevent pressure selling of consumer insurance products, discourage sales techniques that may prevent consumers from making informed decisions and protect consumers,” said Blackmore.
He said the hawking provisions are based around a single general prohibition which says a person must not issue, sell, request or invite the purchase of a financial product to a consumer by means of unsolicited contact.
“‘Unsolicited contact’ means a telephone call, face to face meeting, or any other real-time interaction in the nature of a discussion or conversation, to which the consumer did not consent. ‘Consent’ requires a positive, voluntary and clear request from the consumer to be contacted about the financial product and is valid for six weeks from the time the contact is initiated.”
Blackmore said consumers can also specify how they can be contacted and withdraw or vary their consent at any time.
There’s also a new ‘duty to take reasonable care not to make a misrepresentation’ which could change the way the insurer interacts with the customer quite significantly.
“The new duty may not change consumer insurance policies themselves; but it may change the application process quite a bit. Until now, people applying for a consumer insurance product have had a duty to inform the insurer of any facts known to the insured which the insured knows, or ought to know, are relevant to the decision of the insurer whether to insure the risk and on what terms.”
Blackmore said this was quite a significant obligation on the insured and was arguably unfair in some respects. The duty effectively required the consumer to know what information would be relevant to the decision of the insurer to insure the risk, he said.
“There is a reasonable argument that the insurer is better placed to understand these risks than the insured, and therefore this reform requires the insurer to ask whatever questions are necessary to elicit any relevant information from the insured,” he explained.
Blackmore said the likely effect of this reform will be to increase the number of questions that an insured needs to answer when applying for a consumer insurance product, as the insurer needs to cover every possible question that affects whether it insures the risk and on what terms.
“Of course, insurers also know that a lengthy application form is a barrier to new customers, so it will be interesting to see how they strike this balance,” he said.
