Royal Commission proposes changes for Australian insurers

Insurers in Australia face a number of new regulations and a supervisory shake-up following the completion of a Royal Commission into the banking sector. In total, there were 15 recommendations made in relation to insurers with the most notable being a proposed ban on commissions, a legally enforceable code of conduct and an overhaul of the claims handling process that could result in criminal sanctions for a number of insurers. The government-led inquiry was sparked by accusations of mis-selling and malpractice from Australian financial institutions, including banks and wealth managers as well as insurers. The commission heard a number of testimonies from consumers during an 11-month period. And while the damaging revelations centred on consumer-led services, the ramifications are likely to affect the whole financial services sector, including general and commercial insurers. Most shocking was the case of a 26-year-old man suffering from Down’s Syndrome who was subject to high-pressured sales tactics and sold “worthless” insurance products by an agent from Freedom Insurance. A telephone call of the sales pitch was made public during the televised inquiry, leading to widespread public revulsion. In addition, other financial institutions including Commonwealth Bank Australia and AMP were found to have continued charging fees to dead customers, while the insurance industry was taken to task over its use of questionable tactics and old definitions to deny claims. In delivering his final report, the Royal Commissioner and former senior judge Kenneth Hayne referred to “unconscionable conduct” and recommended civil and criminal sanctions against a number of insurers including CommInsure, TAL, Allianz, Suncorp, Youi and Freedom. Mr Hayne also recommended that insurers should treat claims as financial services, which will be seen as a blow to the insurance industry, which has argued that some of its products should be treated differently to other financial services. Mr Hayne noted that such a move would enable insurance contract holders to more easily challenge those contracts over their definitions and terms. "There can be no basis in principle or in practice to say that obliging an insurer to handle claims efficiently, honestly and fairly is to impose on the individual insurer, or the industry more generally, a burden it should not bear," said the commissioner. Other recommendations that could affect general insurers include a review of the current exemption on general insurance and credit insurance products from rules on commissions, a deferred sales model for add-on insurance products, and an extension of the code of practice (the Banking Executive Accountability Regime) to cover both general and life insurance companies. This move would make the code legally enforceable and make insurers accountable to the Australian Financial Complaints Authority (AFCA). The move was welcomed by the AFCA, whose chief executive and chief ombudsman David Locke said: “We believe these measures are critical to ensuring that consumers and small businesses are treated fairly.” However, others felt that the suggested reforms did not go far enough, considering the extent to which widespread malpractice was exposed during the inquiry. This view was supported by the fact that shares in the top four banks in Australia actually rose slightly following the publication of the report. Insurers though will have to brace themselves for more changes that could result from the forthcoming Australian Securities and Investments Commission in 2022, which is likely to suggest that the insurance market be brought more in line with more heavily regulated sections of the financial services market.

Royal Commission proposes changes for Australian insurers

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