Thursday, 30 May 2019
The Royal Commission: What’s next for insurance?
by Paul Murphy
You’d be forgiven for assuming that, at first glance, the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘the Commission’) had very little to do with insurance.
However, although the bulk of media analysis was devoted to the Commission’s investigation into banks and financial advisors, Commissioner Hayne and his team also directed their intensive scrutiny towards many companies and practices in the insurance sector, with serious implications for the entire industry.
A period of unprecedented change is on the horizon.
Time to prepare
While the insurance industry has been granted some breathing space (since the implementation of many of the Commissioner’s recommended changes will depend on the results of an Australian Securities and Investment Commission (‘ASIC’) review scheduled for completion in 2022), it’s important to seize the moment and prepare for the inevitable changes.
The Commission’s 15 recommendations for the insurance sector
Of the Commission’s 76 recommendations, 15 (i.e. 20%) related very specifically to the insurance industry. You can view the detail on pages 31-34 of Volume 1 of the final report. Two further recommendations regarding conflicted remuneration in the selling of insurance products appear on pages 26 and 27 of the report. Treasurer Josh Frydenberg says that the government is taking action on all 76 recommendations.
The Commissioner’s recommendations are designed to align the regulation of the insurance sector with that of the rest of the finance industry and to bring about a better balance between the rights and obligations of the insurer and the insured. The main changes can be accumulated under five headings.
1. Changes to commissions
Once the life and general insurance sectors are subjected to a regulatory regime similar to that imposed on the financial services sector, strict limits would be placed on commissions charged on insurance product sales. (In fact, ASIC has called for a total ban on general insurance product commissions, although the Commission’s recommendations did not go quite this far.)
Grandfathered commissions would be banned, and life insurance commissions (which are currently exempt from the conflicted remuneration ban) would possibly be removed altogether.
A cap would be also be imposed on the commissions that car dealers can earn when they make add-on insurance sales such as extended warranty.
2. Changes to the cold-calling sales process
‘Hawking’ of insurance policies would be forbidden. ‘Hawking’ is simply another term for cold calling. The ban is in response to reports of insurance agents’ aggressive sales tactics during the Commission’s public hearings. Effectively, it means that consumers would have to initiate an enquiry about a specific product before sales agents could discuss it with them.
3. Changes to add-on policy sales
It would no longer be possible for ‘add-on’ insurance to be offered for sale at the same time as the product to be insured is sold. Examples include extended warranty insurance policies sold concurrently with a car purchase, screen insurance when a smartphone is sold, or consumer credit insurance offered when a loan is granted.
Sales of this kind of product would not be banned altogether, but the timing of the sales approach would be deferred. Agents would be able to contact the product purchaser at a later date to provide details of the optional insurance policy.
4. Changes to claims handling
Insurance claims would be defined as a ‘financial service’ under the Corporations Act, giving ASIC greater powers in terms of intervention and penalties for breaching the requirement for honest and fair standards when negotiating and approving claims.
A similar change of definition would be applied to funeral expenses policies, which would no longer be excluded from the definition of a ‘financial product’ under the Corporations Act.
5. Changes to the insurance code of practice
Although compliance with the Insurance Council of Australia’s Insurance Codes of Practice, requiring insurers to provide services to their customers in a fair and honest way, are monitored by a governance committee, there are currently no mandatory codes, enforceable provisions or sanctions for breaches. The Commission’s recommendations include the establishment of these mandatory codes, enforceable provisions and sanctions.
Additionally, the Banking Executive Accountability Regime (‘BEAR’) would be extended to include executives of both life and general insurance companies. This would make them answerable to the Australian Financial Complaints Authority.
Get your organisation ready to embrace change
Regardless of a Liberal Government being elected in the May 2019 federal election, and the outcome of ASIC’s 2022 review, there is absolutely no doubt that the Australia insurance industry is facing change on a level never before encountered. Now is the time to get in touch with Ensure Recruitment. Our experts have a thorough and up-to-date knowledge of what is happening in the world of insurance and can help you to prepare for the challenges ahead by getting the right people on board your team.
This article has been reposted on the Australian Journal of Financial Planning here