This article was published in December 2019. For a more recent update on Claims as a Financial Service please click here.
We’ve previously expressed our thoughts on how ASIC is likely to regulate claims handling as a financial service. Draft legislation has now been released by Treasury.
Many businesses that handle and settle insurance claims for retail clients including technology providers will need to be licensed as an AFS licence holder (or appointed as an authorised representative). New disclosure obligations will apply including the requirement to give a Statement of Claims Settlement Options with offers of cash settlement.
These changes will apply from 1 July 2020 to all general and life insurance retail products but not health insurance, CTP or workers compensation. We outline the transition arrangements under “Timeframes” below.
What are 'claims handling and settling' services?
A person will be providing a claims handling and settling service if they do any of the following:
- make a recommendation or state an opinion that could influence a decision whether to make an insurance claim;
- assist another person to make an insurance claim;
- assess whether an insurer is liable under an insurance product, or provide assistance in such assessment;
- make a decision to accept or reject all or parts of an insurance claim;
- quantify an insurer’s liability under an insurance product, or provide assistance in relation to such quantification;
- offer to settle all or part of an insurance claim; or
- satisfy a liability of an insurer under an insurance claim.
This is a broad definition, but not every party will need to be licensed, as we discuss below.
Who needs to be licensed?
For a start, lawyers providing a claims handling service will generally not be subject to ASIC regulation.
Entities that need to be licensed (with an AFSL or as an AR) are:
(a) As expected, those with decision-making authority over claims:
- underwriting agencies with delegated claims authority and brokers acting under a claims binder; and
- third party claim managers and administrators including anyone acting for overseas insurers;
(b) A limited range of others:
- loss assessors and loss adjusters;
- insurance fulfilment providers such as smash repairers or builders, if they have authority to reject all or part of a claim (notably, having the authority to accept a claim does not trigger a need to be licensed, which is a practical outcome);
- those who provide financial advice to an insured about whether to accept a claim or claims settlement option (e.g. life insurance advisers).
The list may come as a surprise to businesses who didn’t expect to be impacted by these amendments and will need to make arrangements to become an authorised representative or go through the process of obtaining their own AFSL.
There will be increased compliance costs for AFS licensees both in their own right and for training, monitoring and supervision of their authorised representatives.
Will there be exemptions?
Yes - mainly relating to wholesale (i.e. not retail) business. An insurer (or their agent) who is relying on the current licensing exemption for APRA-regulated entities who deal only with wholesale clients, does not need a new authorisation. Also, insurers who enter into an intermediary authorisation with an AFS licensee that has the claims handling authorisation will be exempt.
This exemption is only available if APRA has regulatory or supervisory responsibilities in relation to the financial service. We would have expected a change to the law to explicitly allow the exemption to extend to claims handling - however this could be an area where Treasury considers the current exemption is sufficient.
There may be underwriting agencies that hold an AFSL, but deal only with wholesale clients and do not rely on the exemption for their underwriting activities. Even if the claims handling activities are for wholesale clients only, our view is that they will still need to apply for a license variation.
Financial product advice?
The exemption regarding financial product advice provided as part of the claims handling service was a welcome relief. It means that recommendations or opinions which are a necessary part of handling and settling a claim will not be treated as financial product advice.
The Explanatory Memorandum already confirms that the following types of advice will be treated as financial product advice because they are not regarded as a necessary part of handling and settling an insurance claim:
- how an amount to be paid to a person in settlement of a claim under an insurance product is to be structured;
- the management or use of an amount paid, or to be paid, to a person in settlement of a claim under an insurance product; and
- advice that is given in response to a claim, or potential claim, made under an insurance product and which relates to other insurance products or financial products.
We expect ASIC will provide greater clarity on this point in its regulatory guides, once the Bill is passed.
What further obligations will apply?
AFSL holders and their representatives will be required to provide their services honestly, fairly and efficiently meaning they will need to handle and settle claims:
- in a timely manner, without undue delay;
- in the least onerous and intrusive way possible;
- fairly and transparently; and
- in a supportive manner, particularly when dealing with vulnerable claimants.
At present, an insurer remains responsible for the actions of its service providers, whether or not those providers need to be authorised.
AFS licensees will have to pay a minimum ASIC regulatory levy of $500 in addition to a graduated component calculated to reflect their share of the total number of claims in each financial year. Details are likely to be released by ASIC next year.
Disclosure (from 1 July 2020)
If claims handling and settlement services are the only financial service that an entity offers, it will not be required to give a Financial Services Guide (FSG) to retail clients. Others such as underwriting agencies who also provide insurance/underwriting services on behalf of the insurer to retail clients, will need to update their existing FSG to include information about their claims handling services.
A new disclosure document called a “Statement of Claim Settlement Options” must accompany any cash settlement offers made to a retail client in relation to a general insurance claim. This document will outline options available to them for settling the claim (along with other prescribed content). Hefty penalties will apply to breaches of this obligation.
There will now be a requirement to notify an insured when a claim is accepted or settled using a ‘confirmation of transaction’.
Consultation on the exposure draft is currently open and submissions must be made by 10 January 2020.
These reforms present some challenges for insurtechs and raise the question of how they will fit into this new regime. Whether they will need to be licensed will depend on what function their technology actually performs in the claims process and whether the technology means the business as the platform provider has any delegated claims handling authority.
Instead of appointing a large number of authorised representatives, insurers may expect loss assessors and insurance fulfilment providers to obtain their own AFSL. As a result, we may see the emergence of groups comprised of these entities getting together under one AFSL to share the compliance costs and burden.
Also if a provider acts for multiple insurers, the cross endorsement consent process will apply if they wish to be authorised as a representative for more than one insurer.
ASIC has not yet released information about how it intends to manage the licensing process and what other information needs to be submitted beyond the standard licensing application requirements. We anticipate that ASIC guidance will cover how applicants can demonstrate the competencies of their proposed responsible manager in support of the claims handling authorisation.
We also expect ASIC to proceed as it has in the past in with newly regulated services and to accept the experience that responsible managers obtained while operating in an unregulated environment. We expect ASIC guidance to be released in the first quarter of 2020 allowing entities to prepare for licensing.
We think this reform is a pretty reasonable outcome for the industry. One could argue that it is overkill, but once the Royal Commission recommendations were accepted by government there was always going to be a major reform.
Our earlier note, along with discussions and submissions, raised a number of potential difficulties depending on how the requirements were specified. The Bill has been drafted to avoid many of these difficulties – for example experts and doctors do not have to be authorised. Streamlined fulfilment activities do not need authorisation so long as the service provider does not have authority to reject all or part of a claim. They can accept a claim on behalf of the insurer but must refer to the insurer for a decision to reject. Combined with a reinvigorated and (at least in part) enforceable Code of Practice, we should see insurers and their suppliers lift their game for the benefit of customers – anything less will simply not be good enough.
Practically, insurers and their service providers will need to review the following, leading up to these changes:
- Which of their activities and functions fall under claims handling and settling
- Would they require specific ASIC authorisation, or be exempt
- Is it better to obtain an AFSL, or to become a AR
- What are the general and specific obligations that they will need to fulfill e.g. training
- Are the systems, processes and people up to the standard required for providing claims handling and settling services efficiently, honestly and fairly
- What are the governance structures and processes with respect to claims handling, including capturing complaints, breaches and addressing poor customer outcomes.
About the Fold
Servicing clients nationally from offices in Sydney and Brisbane, The Fold Legal offers a full range of regulatory, corporate and commercial legal services to financial services and credit businesses. As a specialist industry-focussed law firm, The Fold has extensive industry knowledge and is known for giving strategic advice that specifically addresses clients’ commercial needs. If you need advice on what the Royal Commission recommendations mean for your business, get in touch with The Fold’s team of experts.
Ph +61 2 8252 3332
Mobile +61 409 918 804
Ph +61 7 3854 4202
Mobile +61 408 244 736
Ph +61 8353 6623