“After some years of hard work and considerable expenditure, insurers are at the stage where most of the reforms have now commenced and we are tidying up regulatory loose ends, such as ASIC (Australian Securities & Investments Commission) guidance and relief, and embedding the reforms,” Scofield told Insurance Business.
“There have been many reforms drafted, legislated, and implemented in a relatively short time period, some of which have overlapping objectives and even conflicting impacts. Moreover, the whole supply chain – product governance and design, sales, distribution, and claims and complaints handling – has been impacted.”
“Like any large-scale and complex reform exercise, there will be teething problems,” stressed the former senior adviser to the Prime Minister, “and some of the issues on which insurers are currently engaging government are about addressing matters that would otherwise have unintended adverse impacts on our customers.”
In Scofield’s view, it will take time for all the reforms and new ways of operating to settle and integrate with each other.
The Allianz Australia chief corporate affairs officer asserted: “While some regulatory ‘repair and maintenance’ may be required over the next couple of years as implementation and embedment proceeds, the new regime needs to be given time to bear fruit.
“The last thing the insurance industry needs is premature declarations that particular reforms, or the reforms in general, have failed because quick and large movements in various metrics (for example, cancellation rates or loss ratios) have not been observed. The industry needs a sustained period of regulatory stability so we can get on with delivering fair and competitive products to our customers.”
The reforms that took effect on October 05 are the product design and distribution obligations (PDDO), deferred sales model (DSM) for add-on insurance, hawking prohibitions, duty to take reasonable care not to make a misrepresentation, and new rules on internal dispute resolution.
Last December, ASIC issued a 91-page guide on PDDO, explaining the regulator’s interpretation of the obligations, its general approach to administering them, as well as ASIC’s expectations for compliance.
Commenting on PDDO, Scofield told Insurance Business: “The impact of the product design and distribution obligations will be more at the margin than having any significant or fundamental impact on the sale or purchase of insurance.
“Most customers know what basic insurance products they want to buy and the key features of those products. Experience has shown, however, that a small proportion of customers purchase or, worse, are ‘sold’ products that do not suit their individual needs and circumstances. The product design and distribution obligations should largely prevent this from occurring by placing the onus on insurers and distributors to align a product offered with the needs of the customer and, if they do not align, not sell it to them.”
According to ASIC’s Regulatory Guide 274, issuers must design financial products that are likely to be consistent with the objectives, financial situation, and needs of the consumers for whom they are intended. Additionally, issuers should monitor consumer outcomes and review products.
On DSM, meanwhile, the Allianz executive had this to say: “The proposal for a deferred sales model originated in response to many of the same issues and, in particular, the sale of so-called ‘add-on’ insurance products, that the PDDO is designed to address. For mainstream personal insurance products, such as home and motor, customers are generally familiar with the products, brands, and distribution channel choices available to them. There was always a question of whether there was a need for a deferred sales model for such products.
“For example, what was the underlying principle that drove the Royal Commission to recommend that comprehensive motor insurance be exempted from the proposed DSM but not, for example, third-party property motor insurance or boat insurance or, for that matter, home and contents insurance? Let alone travel insurance, where customers need insurance protection at literally the instant they purchase a travel product, and where underinsurance is a recognised problem.”
“Fortunately,” Scofield stated, “Treasury recognised these issues and the logical and persuasive arguments advanced in favour of providing exemptions for most commonly purchased and well understood personal insurance products.”
In July, ASIC published its regulatory guide and final customer information requirements as part of the watchdog’s work to implement the new deferred sales model for add-on insurance.
As Scofield suggested, it remains to be seen just how much of an impact all the changes will have on the insurance industry and consumers.