2021 was always going to be a tough year for the general insurance industry, off the back of ongoing pandemic disruptions and Business Interruption issues, combined with the continued implementation of Hayne Royal Commission reforms. Changes resulting from Unfair Contracts and Claims as a Financial Service are largely in place (although not quite over for many), and then we have just two months before five additional reforms take effect.
The regulatory jigsaw puzzle is slowly coming together, although a number of questions still loom above regulations slated for release over the coming year and beyond.
The below timeline reflects Finity’s high level view of the current state of play for the 14 reforms relevant to general insurers in Australia, as at August 2021.
A few additional words on the eight key reforms is as follows. Over the coming months we’ll be publishing additional analyses on specific reforms, as relevant. In the meantime, please contact us if you have a question or would like to have a general chat about any of the reforms.
1. Design and Distribution Obligations (DDO)
The inclusion of insurance in the DDO regulations is one of the most impactful changes this year. The scope of insurance entities and product types captured have kept everyone busy, although more and more Target Market Determinations are appearing online as the final 5 October deadline looms, as well as changes to product quote and buying processes to ensure compliance. Issuers and distributors also need to have their product design, distribution and governance arrangements documented, understood and effective by that date.
2. Unfair Contract Terms (UCT)
The UCT provisions as applicable to retail (including small business) insurance consumers commenced on 5 April 2021. By now, insurers will have scoured their contracts and PDS’s to ensure fairness. Finity has monitored the changes made as a result using our Product Coverage and PDS Change Monitoring Tool. ASIC has also intervened with a targeted review of insurance contracts to identify potentially unfair terms, and has worked with insurers to make additional changes where necessary. A list of common changes is available via their website.
3. Claims as a Financial Service
By 1 January 2022, all entities involved in claims handling and settlement services will require an Australian Financial Services Licence (AFSL) or authorisation under another entity’s AFSL, in order to continue providing claims services. For most organisations that handle and settle claims, this will likely require a variation to their existing AFSL as well as the development of internal policies and uplift of capabilities to meet all regulatory requirements under the AFSL regime. We’re currently in a transition period whereby all AFSL applications or variation requests need to have been lodged by 30 June so that applicants can continue providing claims services while ASIC decides whether to approve or deny their applications (up until the final 31 December 2021 deadline).
4. Deferred Sales Model (DSM)
The DSM also comes into effect on 5 October. The mechanics of the regime have been known for some time, imposing plainly onerous obligations that will require carefully structured selling methods and software. However, for most of the sector it’s the DSM-exemptions rather than the regime itself that are of most interest. Draft regulations released mid-July provided a long list of exempted products, including CTP, home, travel and comprehensive motor. We expect that only a small number of specialist organisations will sell products under the DSM, meaning limited competition and high prospects for success.
ASIC is consulting on an updated Reg Guide 38, reflecting proposed changes to the anti-hawking provisions under the Corporations Act. The three existing prohibitions in section 736 are to be consolidated into a single prohibition that now applies to all financial products (including insurance and superannuation). The updated regulations will also impose stricter requirements around consent, extended coverage to all real-time interactions, and establishing a statutory right of return.
6. Internal Dispute Resolution
ASIC’s updated Reg Guide 271 was released last year and establishes new standards and guidelines to be enforced against financial firms from 5 October 2021. In particular, it requires uplift in the way that firms handle complaints and disputes, including an expanded definition of ‘complaints’ (including social media complaints), reduced response deadlines, and new reporting obligations. The existing Reg Guide 165 will be repealed in October 2022.
7. Duty of Disclosure
From 5 October, the new duty for consumer insurance contracts shifts the onus on to insurers to obtain all necessary information to assess insurability and the premium calculation. This means that consumers will no longer have to surmise what information may be required by insurers, as is currently the case under the Insurance Contracts Act. Insurers will need to review the questions routinely asked of potential policyholders at inception/renewal to ensure their sufficiency, and update duty of disclosure warning notices to reflect the new duty. Note that the new duty will not apply to commercial lines, where the onus to provide relevant information remains on the customer (for now).
8. Financial Accountability Regime (FAR)
The FAR regime is the Government’s response to Hayne’s recommendation that the existing Banking Executives Accountability Regime (BEAR) ought to be extended to insurers, although in many ways it has raised the bar established under BEAR. The draft explanatory memorandum makes it clear that FAR, in replacing BEAR, will impose enhanced accountability, notification and remuneration obligations. In applying to all authorised deposit-taking institutions, insurers and their registered holding companies, FAR will be jointly administered by APRA and ASIC.