The Royal Commission’s final report has endorsed much of the existing legislative and reform proposals for the insurance industry.
There are, however, some recommendations that were not expected. A complete ban on the unsolicited sale of insurance and a new duty of disclosure for consumer insurance will pose structural challenges for retail insurers.
While the grandfathering of life insurance commissions under the LIF reforms looks set to end, the industry will be relieved to see that general insurance commissions will remain for at least the next three years until a government review takes place in 2022.
Policy recommendations
The Royal Commission has made 12 specific recommendations for insurance (not including those for group life insurance that touch on superannuation) and these are summarised below. Many, but not all of them, were widely anticipated.
Expected | Unexpected |
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Commissions
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Hawking
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CCI and add-on insurance
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Disclosure & remedies for non-disclosure
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Unfair contract terms
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AFS licensing
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Industry codes
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Accountability
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The big picture
The Royal Commission has endorsed the current legislative plans from Treasury for the introduction of product design and distribution obligations, the proposed model law for the extension of the UCT regime to insurance, ASIC’s proposals for a deferred sales model for CCI and add-on insurance and ASIC’s planned co-regulatory approach for industry codes.
The insurance industry has avoided some of the more extreme outcomes that could have played out. For example, the Royal Commission did not adopt ASIC’s submission to it that:
- general insurance commissions should be banned;
- the sale of accidental death, tyre and rim and certain types of TPD insurance should be banned outright;
- the standard cover regime under s35(2) ICA should be strengthened; and
- the regular updating of medical definitions should apply to legacy as well as on-sale life products.
Insights and trends
Many of the recommendations have been anticipated by the insurance industry, which has moved in recent times to adjust its sales and distribution models and practices. For example, many insurers no longer produce CCI insurance, and life and general insurers have moved to further develop their industry codes to address known problematic issues.
The Royal Commission’s Final Report will provide certainty for the process of further structural change ahead of the legislative implementation of the recommended reform proposals.
So what does this mean for the industry?
Both major political parties have accepted the Royal Commission’s recommendations for the insurance industry, as has the Insurance Council of Australia. For its part, the Financial Services Council has welcomed the final report but is currently considering the recommendations affecting the life industry.
Insurers and their intermediaries will want to carefully consider the structuring of existing arrangements as legislation is prepared that touches on them to ensure they are not only compliant but that their commercial objectives can be realised and optimised. In particular:
- ban on grandfathered life commissions – insurers will need to consider how their contractual arrangements will be affected by a ban which will include issues such as:
- What contractual liabilities to counterparties may arise;
- How legitimate service arrangements and the fees payable for service fees/operating expenses can continue to operate; and
- Reliance on existing carve-outs for conflicted remuneration.
- hawking – the proposed ban on the making of unsolicited offers of insurance will require product distributors to reconsider their sales models and practices, including their distribution agreements.
- claims handling - cedants and reinsurers should review how the claims authorities under their reinsurance arrangements will be affected by the regulation of claims handling as a financial service. For example, insurers will need to consider to extent to which the new statutory requirements will permit them to cede contractual claims settlement rights to reinsurers who are not bound by the same obligations.
Legal Notice
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2023