The Insurance Council of Australia (ICA) has cautioned against removing the conflicted remuneration exemption for general insurance products, at least until the impact of recent reforms such as design and distribution obligations (DDO) to improve consumer protections are known.
However, the industry supports a review of advice definitions, as the existing financial product advice regime for general insurance “hinders” insurers from engaging and assisting consumers with choosing policies best suited to their needs, ICA says in its submission to Treasury’s Quality of Advice issues paper.
ICA says while the issues paper does not outline any potential reforms or any consumer harms, the industry “is open to considering reforms” where consumer harm is identified and further strengthening of protections is justified.
For now, the peak body says it sees no reason for changing the status quo. It points out the issues paper has noted statutory protections against the mis-selling of general insurance products have been significantly improved since the Future of Financial Advice changes several years ago.
Reforms introduced following the Hayne royal commission recommendations in 2019 include DDO, the deferred sales model for add-ons, unfair contract terms regime and commencement of claims handling as a financial service.
ICA says the outcomes of the reforms should be assessed prior to any further significant regulatory changes.
“Given the pace of regulatory reform within the insurance industry over the past few years (and considering upcoming reforms such as the consumer data right) any further changes should be justified by reference to clear evidence of consumer benefit,” the ICA submission says.
“We strongly suggest that any proposed reforms be tested with industry and other stakeholders prior to finalisation.”
ICA says broader consideration should also be given to the effectiveness of the recent reforms in addressing consumer detriment.
Issues previously identified with products distributed through intermediated channels – such as high commission rates for some types of add-on insurance and some low-value insurance products – have been addressed by the recent reforms, it says.
Citing the deferred sales model for add-ons, ICA says there is now a four-day pause between the sale of a primary product and the sale of an add-on, and the change helps individual customers make informed decisions when purchasing insurance.
The ICA submission also touches on the role of intermediaries like brokers, online aggregators and third-party distributors such as banks.
ICA says with appropriate consumer protections in place, intermediated sales channels can provide unique value to consumers by providing a timely and convenient path for retail customers to obtain insurance coverage.
The peak body notes the issues paper is specifically addressed to the question of the compensation structures within those channels and says Treasury will need to weigh the benefits of intermediaries against any detriment that is identified through this consultation process
On advice definitions, ICA says the delineation between general advice, personal advice and factual information can be “fine” under the current regime.
“As a result, insurers are disincentivised from freely offering advice to consumers in relation to their products, out of fear of it becoming personal advice which attracts a wide array of obligations,” ICA says.
“In our view, there is no need to treat general insurance advice in the same way as investment advice – general insurance products are inherently different from investment products, as they meet a simpler need and are less risky.”
Citing an Australian Securities and Investments Commission review of home insurance sales, ICA says the report found consumers who called their insurer frequently sought assistance about how to best decide on a sum insured amount.
Many ended up making “poor decisions” in relation to the sum insured amount as they were told by sales staff they were not able to provide any assistance.
“On the whole, consumers want and need advice – they pay more attention to what they are told by sales staff rather than disclosure documents,” ICA says. “For this reason, we support a review of the advice definitions.”
ICA says one option is to consider whether a new level between “general” and “personal” advice is needed and make clear that insurers can discuss key questions with customers such as choosing policies with appropriate cover.
Click here for the ICA submission.
