Ready to go
With the publication of ASIC’s draft guidance on DDO, the General Insurance industry is now ready to go. The guidance released on 19 December 2019 comprises consultation paper CP 325 and the draft regulatory guide (RG). Comments are due to ASIC 11 March 2020.
We thought the ASIC material was generally good. There are no big surprises and it should help insurers and distributors settle on their action plans. Two particularly good things were developing the concept of a ‘product governance framework’ and the way it clearly distinguished between what product issuers and product distributors need to do.
Of course the Regulatory Guide does not answer all questions; we expected this because it needs to cover hundreds of different product types in many industry segments, so must be written in generic terms. To quote ASIC: our guidance “is intentionally high-level and principles-based”. Provided you can apply the guidance to your own circumstances, there are only a few places where we see that the burden or restrictions might unreasonably go beyond the stated intention.
This commentary is intended to help General Insurance issuers and distributors, and we draw out two main messages:
- Don't forget operations: If your regulatory and legal teams are leading your DDO project, don’t forget to involve operational people early in the process, because there are many operational actions that need to be in place before the end of 2020.
- Don't boil the ocean: With the well-known exceptions of consumer credit and motor add-ons, General Insurance products are low risk for the consumer harm that DDO is aimed at reducing. The responses, therefore, should be proportionate to the problem and do not need to go to the extremes.
Note, though, that this commentary is not relevant to consumer credit insurance and motor add-on products, which are more difficult and have other regulatory processes underway.
Issuers and distributors
The Regulatory Guide does a good job in distinguishing between issuers and distributors in what they need to do.
The product issuer (for our purposes the insurer) must:
- Make a Target Market Determination (TMD) for each product
- Make the TMD available to the public
- Take reasonable steps so that distribution is consistent with the TMD
- Meet obligations for review, record keeping and breach reporting.
The distributor (broker or agent, regardless of channel) must:
- Take reasonable steps so that its distribution is consistent with the insurer’s TMD
- Provide information to the insurer, and fulfil other compliance obligations.
A direct insurer needs to do both, but the additional obligations arising from distribution are minor and easily integrated into a single process.
Don't forget operations
If your regulatory and legal teams are leading your DDO project, don’t forget to involve operational people early in the process, because there are many operational actions that need to be in place before the end of 2020. An insurer will need to involve:
- Product management (including actuarial) - this is where we think BAU best belongs
- Distribution – every distribution agreement will have new requirements
- IT – meeting DDO obligations will involve material changes to website functionality
- Marketing – TMD needs to be referenced in all relevant marketing materials
- Customer relations – ensuring complaints and IDR processes are appropriately set up for DDO related matters
- Business intelligence - new reporting will be needed for both TMD matters and product value assessments.
Insurer - preparing the TMD
The target market is determined by asking - Would it be reasonable to conclude that the product would be aligned with the likely objectives, needs and financial situation of the retail clients who form part of the target market?
Some suggestions from Finity:
- Across the product range undertake a product value assessment - this is a structured multi-factor analysis of the extent to which the product offers value to customers
- Prepare your product value assessment beforehand and use it as a key resource for all DDO activities
- Aim for brevity, use the ‘negative target market’ (i.e. ‘this product would not be suitable for …’) as the main tool.
Don’t forget there is more to do beyond just the definition of the target market, especially in the documentation needed.
Insurer: making the TMD public
Inclusion on the website seems the obvious solution. It will need references or links in quite a number of places, including promotional material.
We have a problem with the apparent need to include in the public document the:
- Distribution conditions and restrictions
- Review triggers and maximum review periods
- Information required from distributors and reporting periods.
This information is not relevant to the consumer and will be mostly studied by competitors. We intend to take up this question in a Finity response to ASIC by 11 March 2020.
Insurer: reasonable steps
Deciding what would constitute reasonable steps to have distribution consistent with the TMD is a difficult judgement. ASIC has offered a helpful context in saying that you should make a risk-based judgement; consider the risk (likelihood) of mis-selling, the harm that would result and the mitigation steps that could be taken. We talk more about this judgement later.
Insurer: review, information and breach reporting
We think the review requirements are straightforward, based on establishing a regular timetable. For most products, two, three or maybe even five years will be reasonable for regular reviews. It will help to schedule them for the same period during each year, with products staggered across a cycle. Triggers do not need to be complex – we suggest that complaints and any initial regulatory interventions (e.g. by Code Governance Committee or ASIC) will mostly be sufficient.
For most General Insurance products we do not see the need for additional information to be provided by distributors beyond the complaints information which we see as the main source of relevant information over time. (Requesting more information could potentially put an insurer at a competitive disadvantage although this is not the main consideration.)
Compliance teams should take note of the record-keeping requirements, and include DDO as one of the items to be tracked for possible breach reporting.
The essential requirement for a distributor is to take reasonable steps so that its distribution is consistent with the insurer’s TMD. In thinking about what are ‘reasonable steps’ the same ASIC guidance as for issuers is helpful: consider the risk (likelihood) of mis-selling, the harm that would result and the mitigation steps that could be taken.
Co-operation and co-ordination between the insurer and the distributor will be the key in making this a smooth process. We expect that many contracts between insurers and distributors will need to be changed to incorporate the respective DDO requirements.
The other requirements for providing information to the issuer, keeping records and reporting breaches should not be difficult but need to get done.
The regulatory guide (para 158) indicates that a distributor should have a ‘product governance framework’. In Finity’s view this should not be needed for most General Insurance distributors.
A product governance framework
ASIC crystallises the overall requirements and issues with DDO into the suggestion of a ‘Product Governance Framework’ for insurers. While this is not specifically mentioned in the legislation or Explanatory Memorandum, we think it makes good sense. Some insurers already have this to some degree.
We see a formalised Product Governance Framework as an integral part of an insurer’s overall risk management framework. The benefits of developing such a framework include:
- Having a single, permanent document setting out how the company has decided to deal with DDO and why.
- Having a consistent structure and labelling with other APRA-led risk management requirements, making it easier to understand where it fits, for both Board and management.
- The ability to include other aspects of product governance that the insurer has adopted, e.g. pricing, legal risk, in order to minimise duplication and to have clear accountabilities and processes: the FAR (Financial Accountability Regime) will almost certainly go to this.
- Providing a mechanism for risk management, internal audit and/or compliance to test the company’s response to its Design and Distribution Obligations.
Our guess is that, while not essential, it will be a ‘path of least resistance’ for an insurer to include the Product Governance Framework in its responses.
Don't forget to do renewals
As 5 April 2021 is the date to be fully operational, consideration of renewals needs to be finished by the end of 2020. Have a read of Example 14 on page 57 – it helps think about it. The only specific content in the example is the transition from Comprehensive Motor to TPPD as a car ages.
An unanswered question
Should there be one TMD for one PDS, or are there situations where one PDS might need several TMDs?
We had anticipated (perhaps hoped) that there would be a one-to-one match between a PDS and a TMD. However, Para 102 (p36 ‘Bundled and customisable products) says otherwise.
When multiple products are ‘packaged’ or ‘bundled’ by an issuer, a target market determination must be made for each separate product. [s764A(1A) deems an insurance contract that provides two or more kinds of cover or covers two or more kinds of assets, to be separate products].
One of the examples in the regulatory guide also suggests that a product option with a high excess might need a different TMD to the same product with a low excess.
We don’t yet know how this will play out. It is a question the insurer must tackle during DDO development. Our early thinking is to publish the different product TMDs as paragraphs of the same document, so that everything can be kept together.
Using the ASIC guide
Reading and interpreting the consultation paper and the draft regulatory guide is not easy. They are 50 and 80 pages respectively, contain a lot of repetition, and have such broad coverage that applying each paragraph to General Insurance is a mental challenge.
There are a few examples that refer specifically to insurance (life and general not distinguished) that help. The examples in the regulatory guide worth looking at are:
- Add-on insurance and choice architecture (Para 55, page 20)
- High excess products possibly needing a different TMD (Para 84, page 29)
- Consumer credit insurance and consumer needs (Para 85, page 30)
- Metrics relevant to review triggers (Para 130, page 46)
- Renewal of General Insurance policies (Example 14, page 57)
- Tyre and Rim insurance (Example 15, page 64) – we note for this much-criticised product, the only example is about selling to people who cannot claim (e.g. old car, business use).
Paras 203 to 234 (page 68) are about ASIC’s powers and how it envisages using them. Stop Orders and Product Intervention Powers feature. The legal remedy is via Court. ASIC can use its PIP unilaterally but cannot apply penalties on its own. ASIC can apply to the Court and, unsurprisingly, ASIC ‘expects remediation’.
Reasonable steps - risk, harm and mitigation context
As we noted earlier, deciding what are ‘reasonable steps’ is a difficult judgement. We expect ‘reasonable steps’ (with the exception of CCI and motor add-ons) to be much lighter for General
Insurance than for products such as direct life insurance, funeral insurance, managed investments and the like.
What are ‘reasonable steps’ will include consideration of:
- Risk – what is the likelihood of mis-selling
- Harm – the nature and degree of harm that might result from mis-selling
- Mitigation steps – what could be done to eliminate or minimise the risk.
Thinking through these questions will demonstrate that most General Insurance products will not require onerous or disruptive steps to be ‘reasonable’. Don’t boil the ocean.
The risk is high when there is a strong financial incentive for a distributor to make sales and consumers are in a position to be convinced by a good salesperson.
The harm is usually limited to the financial cost of the premium, or potentially a high excess. This is much smaller harm than can occur with an investment product or a high-premium life insurance cover.
The possible mitigating steps might include more audits of sales, asking more specific questions of a potential customer or follow-up contacts with customers after a sale. The cost of the actions (financial and business disruption) can be considered alongside the potential benefits.
Don’t forget that ‘reasonable steps’ does not mean 100% success in every case. It is not necessary to ‘pre-qualify’ every potential customer and some sales will occur outside the defined target market.
A few reminders of key points
DDO is for retail products only (the seven nominated products in the Corporations Act, including sale of these products to small businesses), but will probably include some non-insurance products as specified in the ASIC Act.
There is an opportunity to structure this project to kill several birds with the one stone. It is a time when you will certainly open the PDS and so implementing all desired changes in one go is worthwhile. An effective program of work on DDO can address all of the following reforms as well:
- Unfair Contract Terms – update for known issues
- Consumer duty of disclosure
- Deferred sales model
- Updated sales scripts and training.
How Finity can help?
You might find Finity helpful in the following ways:
- A health check and readiness assessment with your current progress on DDO
- An independent and expert assurance for the Board and others about the quality and suitability of the Product Governance Framework and the TMDs
- Preparing the product value assessment process and metrics and the TMD documentation
- Some coaching or training for your people involved with this task
- If you get stretched, adding some resources to get the work done.
To discuss the above or should you have any queries contact us:
Ph +61 2 8252 3337
Mobile +61 412 123 684
 CP 325 para 19 (page 9)