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2010-2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
INSURANCE CONTRACTS AMENDMENT BILL 2011
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Assistant Treasurer and Minister for Financial
Services and Superannuation, the Hon Bill Shorten MP)
Table of contents
Table of contents ..................................................................................... iii
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Standard Definition of Flood .......................................... 7
Chapter 2 Key Facts Sheet .......................................................... 13
Chapter 3 Regulation impact statement ....................................... 23
Chapter 4 Regulation impact statement ....................................... 69
iii
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ASIC Australian Securities and Investment
Commission
Corporations Act Corporations Act 2001
HBHC Home Building and Home Contents
(combined and individual)
ICA Insurance Contracts Act 1984
ICR Insurance Contracts Regulations 1985
KFS Key Facts Sheet
PDS Product Disclosure Statement
RIS Regulation Impact Statement
this Bill Insurance Contracts Amendment Bill 2011
1
General outline and financial impact
Outline
In 2010-11, there were a significant number of natural disasters in
Australia. Queensland, New South Wales and Victoria all experienced
severe flooding. The number of people adversely affected by these
natural disasters as a result of inadequate insurance cover has highlighted
the level of consumer confusion about what is covered in insurance
policies and in particular the extent to which policies provide cover for
flood and what cover for flood means.
On 5 April 2011, the Government released a consultation paper
`Reforming flood insurance: Clearing the waters' in order to engage the
community in suggesting improvements to the regulatory framework and
other aspects of Australia's insurance market. The paper contained two
key proposals designed to improve clarity for consumers in relation to
insurance policies and in particular, the cover provided for various types
of flood, namely, a standard definition of flood and the Key Facts Sheet
(KFS) to outline the key information in relation to home building and
home contents policies. The Insurance Contracts Amendment Bill 2011
(this Bill) implements these proposals.
The detail of the measures, including the actual wording of the standard
definition and the specific content of the KFS, will be made in regulations
contained in the Insurance Contracts Regulations 1985 (IRC).
These measures will enable consumers to make better informed decisions
about the purchase of insurance contracts; and will reduce the current
level of consumer confusion regarding what is and is not included in their
insurance contracts, in particular, the extent to which contracts provide
cover for flood and what cover for flood means.
Date of effect: The amendments in this Bill will take effect from the date
of Royal Assent. However, the regulations in relation to the measures in
this Bill (the standard definition of flood and the KFS) will commence
two years after the day the regulations are made in respect of each of the
measures.
Proposal announced: On 14 November 2011, the Assistant Treasurer
and Minister for Financial Services and Superannuation,
the Hon Bill Shorten MP, announced the introduction of the legislative
framework for the standard definition of flood and the KFS, as part of the
3
Insurance Contracts Amendment Bill 2011
Government's response to the National Disaster Insurance Review's
report into the insurance industry.
Financial impact: This Bill has no financial impact on Commonwealth
expenditure or revenue.
Compliance cost impact: Medium. The measures contained in this Bill
are expected to increase compliance costs for industry. However, the
compliance costs will be minimised by having a two year transition period
from the date the regulations are made.
Summary of regulation impact statement
Regulation impact on business
Impact: This Bill will affect insurers that provide insurance contracts in
respect to Home Building and Home Contents (HBHC), small business
and strata titles. The beneficiaries of the new requirements in this Bill and
regulations are the consumers who enter into these particular types of
insurance contracts.
Main points:
· Standard definition of flood
- The standard definition of flood may reduce consumer
confusion regarding what is and what is not included in
insurance policies and will avoid situations where
neighbouring properties, affected by the same inundation
event, receive different claims assessments because the
policies covering them (where they exist) use different
definitions of flood.
- Compliance costs will be incurred by industry for
reassessing and rewriting policies.
- Industry has also indicated that a standard definition could
result in re-pricing of policies or in products being
withdrawn as these policies might provide greater
coverage for flood.
· Key Facts Sheet (KFS)
- The KFS, by outlining key information in a concise form,
will provide increased simplicity, consistency and
4
General outline and financial impact
comparability for consumers when they are making
decisions regarding the purchase of HBHC insurance
policies. The KFS will also facilitate more effective
decision making through an increased level of familiarity
(knowing what to look for and the meaning of certain
words and concepts).
- Compliance costs will be incurred by industry both
initially and on an ongoing basis. The initial costs relate
to the assessment of policies to establish what key
information is required for inclusion in the KFS and the
costs for the development of each KFS. On an ongoing
basis costs will continue to be incurred for the printing,
production and distribution of the KFS.
5
Chapter 1
Standard Definition of Flood
Outline of chapter
1.1 Schedule 1 to the Insurance Contracts Amendment Bill 2011
(this Bill) contains amendments to the Insurance Contracts Act 1984
(ICA) to provide a legislative framework to allow regulations to be
established for a standard definition of flood for riverine flooding in
Home Building and Home Contents (combined and individual) (HBHC)
insurance contracts and contracts held by small businesses and strata
titles.
Context of amendments
1.2 In 2010-11 there were a significant number of natural disasters
in Australia. Queensland, New South Wales and Victoria all experienced
severe flooding. The number of people adversely affected by these
natural disasters as a result of inadequate insurance cover highlighted the
level of consumer confusion that exists in relation to the definition of
flood in HBHC insurance policies.
1.3 On 5 April 2011, the Government released a consultation paper
`Reforming flood insurance: Clearing the waters' in order to engage the
community in suggesting improvements to the regulatory framework and
other aspects of Australia's insurance market. One of the proposals
contained in the paper was the standard definition of a flood.
1.4 The standard definition of flood involves introducing a standard
form of words to describe riverine flooding and reserves the term flood
and other variations of the word flood for flooding in this context
(whether as an included or excluded event).
1.5 The purpose of introducing a standard definition is to reduce
consumer confusion regarding what is and what is not included in flood
coverage and avoids situations where neighbouring properties, affected by
the same inundation event, receive different claims assessments because
the policies covering them use different definitions of flood. It will also
improve consumers' ability to evaluate potential insurance policies and
compare between different insurers.
7
Insurance Contracts Amendment Bill 2011
Summary of new law
1.6 The provisions contained in this Bill will introduce a
requirement for a standard definition of the term flood to apply to all
HBHC, small business and strata title insurance contracts in accordance
with regulations contained in the Insurance Contracts Regulations 1985
(ICR).
Comparison of key features of new law and current law
New law Current law
Insurance providers will be required Currently the term flood is not
to use a standard definition of the defined in the ICA resulting in
term flood (and all related terms) in insurers defining the term in different
all HBHC, small business and strata ways.
title insurance policies and their
supporting documents. The term
flood will be defined in regulations.
Detailed explanation of new law
The application of definition of flood provisions (Division 1A) in this Bill
1.7 The definition of flood provisions in this Bill apply only to the
types of contracts prescribed in regulations (prescribed contracts) if those
contracts are entered into the day after the regulations are made. [Schedule
1, item 1, paragraph 37A(1)(a) and 37A(1)(b)]
1.8 However, the definition of flood provisions will not apply if:
· a contract that would be considered to be prescribed contract
(once the regulations are made), is entered into prior to the
making of those regulations; or
· a flood event to which the standard definition of flood applies
(as provided in the regulations) occurs prior to the
commencement of the regulations.
[Schedule 1, item 1, subsections 37A(2) and 37A(3)]
1.9 For the purposes of Division 1A, the time between the making
of the regulations and the commencement of the regulations is the
transition time. [Schedule 1, item 1, subsection 37A(4)]
8
Standard Definition of Flood
1.10 The regulations will commence two years after the day the
regulations are made.
Example 1.1
On 1 June 2012 the regulations for the provision of a standard
definition of flood were made.
On 8 August 2013, Arthur a small business owner selling golfing
supplies entered into a small business insurance contract, to amongst
other things, cover his premises for flood.
In accordance with the application of the standard definition provisions
the contract entered into by Arthur is the type of contract to which the
standard definition of flood provisions apply (as the contract was
entered into after 1 June 2012).
On 1 January 2014 (five months prior to the commencement of the
regulations) a local dam near Arthur's premises overflowed causing
minor damage to Arthur's storage room. The definition of flood in
Arthur's policy did not cover his premises for damage caused by water
overflowing from a dam. As the flood event (the overflowing of the
dam) happened prior to commencement of the regulations, the damage
to Arthur's premise was not covered.
On 1 July 2014 (one month after the commencement of the
regulations) the dam once again overflowed causing extensive damage
to Arthur's premises. However, on this occasion the standard
definition of flood applied (as the regulations had commenced) and as
such the damage to Arthur's premises caused by the overflowing of the
dam is covered. This is the case irrespective of whether the Arthur's
insurer had not updated Arthur's insurance policy to reflect the
standard definition of flood (as provided in regulation).
Standard definition of flood for home building and home contents, small
business and strata title insurance policies
1.11 This Bill inserts Division 1A of Part V into the ICA. Division
1A requires a standard definition of the term flood to be applied to all
insurance contracts as prescribed in the Division. The provisions
contained within Division 1A while acting independently remain
consistent with other requirements in the ICA. A prescribed contract for
the purposes of Division 1A is an insurance contract included in a class of
contracts of insurance declared by the regulations to be a class of contracts
in relation to which Division 1A applies. [Schedule 1, item 1, paragraph 37A
(1)(a)]
1.12 The standard definition of flood has been introduced to, amongst
other things, reduce the current level of consumer confusion surrounding
9
Insurance Contracts Amendment Bill 2011
the word flood. The two key types of insurance contracts where it is
considered to be critical for consumers to have a standard definition of
flood are home buildings and home contents (both of these types of
contracts are contracts to which standard cover applies). Therefore,
regulations will declare HBHC insurance contracts as prescribed contracts
to which Division 1 A applies.
1.13 In addition to Home Building and Home Contents (combined
and individual) (HBHC) insurance contracts, it was considered
appropriate to include other similar insurance contracts that directly
impact consumers. Therefore, regulations will declare insurance contracts
covering small business and strata titles, as defined in the regulations, as
prescribed contracts to which Division 1A applies.
Meaning of flood in prescribed contracts
1.14 The meaning of flood in prescribed contracts must be provided
in regulation. [Schedule 1, item 1, subsection 37B(1)]
1.15 While the actual wording for flood included in regulations will
be subject to consultation, it is expected to be consistent with the wording
proposed in the Government's Consultation paper, `Reforming Flood
Insurance: Clearing the Waters'. The proposed wording is:
· Flood means the covering of normally dry land by water that
has escaped or been released from the normal confines of:
- any lake, or any river, creek or other natural watercourse,
whether or not altered or modified; or
- any reservoir, canal, or dam.
The standard definition of flood in prescribed contracts
1.16 Insurance providers, are required to use a standard definition of
the term flood, when using the word flood (or other parts of speech or
grammatical forms of that word, such as flooding)) in prescribed contracts
(or the notice or other document or information) as provided in the
regulations. If the definition or meaning of the word flood (or other parts
of speech or grammatical forms of that word, such as flooding) provided
in the prescribed contract (or the notice or other document or information)
is different from the definition of meaning of word flood provided in the
regulations, the prescribed contract will be taken to have the meaning of
flood as provided in the regulations. [Schedule 1, item 1, subsections 37B(2) and
37B(3)]
10
Standard Definition of Flood
Circumstances in which a prescribed contract is taken to provide
insurance cover
1.17 Prescribed contracts that include provisions (flood provisions)
that provide insurance cover in respect of any loss or damage caused or
resulting from one or more flood events as defined as a flood in the
regulations are taken to provide insurance cover for flood as defined in
regulation. [Schedule 1, item 1, subsections 37D(1) and 37D(2)]
1.18 When applying the standard definition of flood in respect of
prescribed contracts a flood event is an event that is, or would be, a flood
as defined by regulation. For example, one flood event in relation to the
standard definition of flood as defined in `Reforming flood insurance:
Clearing the waters' would be `water that has escaped or been released
from the normal confines of a lake'. [Schedule 1, item 1, subsection 37D(7)]
1.19 If any loss or damage caused or resulting from flood events is
sustained by the holder of a prescribed contract (the insured), an insurer
may not refuse to pay a claim where the contract provides cover for a
narrower definition of flood than the standard definition. For example,
where the standard definition of flood covers the flood event `water that
has escaped or been released from the normal confines of a lake' but the
insurer's definition of flood does not cover this flood event, the insurer
must pay a claim for the excluded flood event as it forms part of the
standard definition under the regulations . [Schedule 1, item 1, subsection
37D(3)]
1.20 In the event that a prescribed contract provides different
maximum amounts of insurance for different flood events (within the
standard definition as prescribed in the regulations), the contract is taken
to provide the highest maximum amount of cover offered in respect of any
flood event. When a prescribed contract provides different maximum
amounts for different flood events, an insurer cannot refuse to pay an
amount equal than that maximum amount for an event on the basis that
any loss or damage caused or resulting from that event was less than the
maximum amount of flood cover. [Schedule 1, item 1, subsections 37D(4) and
37D(5)]
Example 1.2
Scarlett enters into an insurance contract that offers cover for flood.
The contract stipulates that loss or damage of property sustained by
water that has escaped from a river is covered for a maximum amount
of $200,000. The contract goes on to stipulate that loss or damage of
property sustained by water that has escaped from a dam is covered for
a maximum amount of $100,000. Following a flood event Scarlett
makes a claim on her insurance contract for loss or damage valued at
$150,000. The loss or damage is determined to have been caused by
11
Insurance Contracts Amendment Bill 2011
water that has escaped from the confines of a dam. While Scarlett's
insurer has provided a maximum level of $100,000 in respect of the
loss or damage of property sustained by water that has escaped from a
dam, the insurer is required to accept Scarlett's claim as the maximum
cover for flood is the highest maximum provided in respect of all flood
events which in respect to Scarlett's insurance contracts is $200,000.
1.21 The provision of the maximum cover provided in respect to
flood in relation to a prescribed contract, that is, the highest maximum
provided in respect of every flood event, will apply irrespective of
whether or not the insurer clearly informed the insured of the purported
effect of the flood provisions in the contract. [Schedule 1, item 1, subsection
37D(6)]
Provision of insurance cover for other events outside the standard
definition
1.22 The definition of flood in a prescribed contract has the meaning
of flood in the regulations. If the definition of flood used by the insurer is
broader than the standard definition of flood, the prescribed contract will
still provide cover for those events not included in the standard definition
of flood. [Schedule 1, item 1, paragraphs 37E(a) and 37E(b)]
Example 1.3
Abbie enters into a home building insurance contract with ABC
Insurance to cover her new beach house at Bryon Bay. ABC's home
building insurance contract offers cover for flood and contains a
definition of the term flood that includes sea inundation, in addition to
the flood events as prescribed in the regulations.
Six months after entering into the home building insurance contract
Abbie's beach house was damaged as a result of a king tide. While the
definition of flood in the contract is taken to be the standard definition
of flood, the sea inundation event is still covered by the contract.
Insurer to clearly inform insured whether prescribed contract provides
insurance cover in respect of flood
1.23 In order for consumers to be aware of certain aspects of
insurance contracts, the ICA imposes a requirement on the insurer to
`clearly inform' the insured of these aspects in writing prior to a contract
being entered into. Consistent with these requirements, consumers must
also be made aware of the extent to which insurance contracts provide
cover for flood so they can make informed decisions about the insurance
contract. Therefore, the insurer must clearly inform the insured in writing
on whether their insurance contract covers flood. [Schedule 1, item 1, section
37C]
12
Chapter 2
Key Facts Sheet
Outline of chapter
2.1 Schedule 2 to the Insurance Contracts Amendment Bill 2011
(this Bill) contains amendments to the Insurance Contract Act 1984 (ICA)
to implement a requirement for an insurance provider to provide
consumers with a Key Facts Sheet (KFS) for Home Building and Home
Contents (combined and individual) (HBHC) insurance contracts in
accordance with the regulations.
Context of amendments
2.2 In 2010-11 there were a significant number of natural disasters
in Australia. Queensland, New South Wales and Victoria all experienced
severe flooding. The number of people adversely affected by these
natural disasters as a result of inadequate insurance cover highlighted the
level of consumer confusion that exists in relation to what is and is not
covered by HBHC insurance policies.
2.3 On 5 April 2011, the Government released a consultation paper
`Reforming flood insurance: Clearing the waters' in order to engage the
community in suggesting improvements to the regulatory framework and
other aspects of Australia's insurance market. One of the proposals
contained in the paper was the KFS.
2.4 Insurers are currently required to give consumers a Product
Disclosure Statement (PDS) if they offer or issue an insurance policy.
PDSs can be lengthy, making it difficult for consumers to access key
information about the features of the policy, including the inclusions and
exclusions.
2.5 The KFS will make information about what is covered by
HBHC policies more accessible to consumers. In particular, the KFS will
outline key information in relation to the HBHC policies in an easy to
read and consumer friendly layout, enabling consumers to access the key
information in a simple and effective way. Consistent with current
requirements, a PDS will still need to be provided in addition to the KFS.
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Insurance Contracts Amendment Bill 2011
Summary of new law
2.6 The provisions contained within this Bill introduce a
requirement for insurers to provide a KFS in accordance with regulations
contained in the Insurance Contracts Regulations 1985 (ICR) for HBHC
insurance contracts.
Comparison of key features of new law and current law
New law Current law
In addition to existing disclosure The existing disclosure obligations in
requirements for home building and the Corporations Act require an
home contents insurance policies insurer to disclose information in
contained in the Corporations Act relation to the terms and risks
2001 (Corporations Act), insurers are associated with the insurance policy
required under the ICA to provide a in a product disclosure statement.
KFS, which outlines the key There is no disclosure requirement in
information on what is and what is the ICA for a document containing a
not covered in respect of the summary of the key information to be
particular home building, home made available to consumers for
contents or home and contents home building and home contents
insurance policy at the requested by insurance policies.
of a consumer.
Detailed explanation of new law
Key Facts Sheets for home building and home contents insurance
policies
2.7 This Bill inserts Division 4 of Part IV into the ICA, which
imposes requirements on insurers to provide consumers with a one page
KFS on request.
2.8 A KFS is a document which contains the key information
relating to prescribed contracts, or potential prescribed contracts. A KFS
will be required to meet content, format and provision requirements as
prescribed in regulation. [Schedule 2, item 6, paragraph 33B(a)]
2.9 The content, format and provision requirements for the KFS will
be determined in regulations after extensive public consultation to ensure
appropriate consumer and industry outcomes can be achieved.
2.10 The KFS is a one page document that will summarise the key
information about a given HBHC insurance policy, which may include:
14
Key Facts Sheet
· what is covered;
· what is not covered;
· the cooling off period;
· what type of cover is offered under the policy; and
· an explanation of how the KFS is to be used.
2.11 The regulations will also prescribe any other requirements in
relation to the introduction of the KFS, such as the prescription of the
length of the KFS. [Schedule 2, item 6, paragraph 33B(b)]
Prescribed and potential prescribed contracts
Prescribed
2.12 A prescribed contract for the purposes of Division 4 is a contract
prescribed in the regulations. A prescribed contract will exist only where
the contract of insurance has actually been entered into. [Schedule 2, item 6,
paragraph 33A(a)]
2.13 The contracts that will be prescribed in regulation will be
contracts for HBHC insurance contracts in accordance with Divisions 2
(home building insurance) and 3 (home contents insurance) of Part II of
the ICR.
Potential prescribed contracts
2.14 A potential prescribed contract is a contract that if entered into
would be a prescribed contract in accordance with Division 4. The term
potential prescribed contact is intended to apply in situations where there
is no contract of insurance but it is possible that there will be a contract of
insurance in the future. [Schedule 2, item 6, paragraph 33A(b)]
Example 2.1
Charlie is looking for an insurance policy to cover his home contents.
In order for Charlie to establish if the insurance policy he is
considering satisfies his insurance requirements, he requests
information from the insurance policy provider regarding the types of
events the policy covers.
At that time Charlie has only requested information regarding the
policy and has not entered into a contract and as such a contract would
not exist. However, if after receiving the information Charlie decides
15
Insurance Contracts Amendment Bill 2011
to enter into the insurance contract, the contract that he would be
entering into would be a prescribed contract under Division 4.
Therefore at the time information was requested by Charlie the
insurance contract can be seen to have only have the potential to be a
prescribed contract.
An insurer's obligation to provide a Key Facts Sheet
2.15 In order to ensure consumers are able to effectively access key
information on HBHC insurance contracts, insurers are required to
provide a KFS in the circumstances prescribed in the regulations.
2.16 The regulations will specify that a KFS will be required to be
provided, when a consumer makes a request regarding a particular HBHC
insurance contract. [Schedule 2, item 6, subsection 33C(1)]
Things to be done before entering into a contract cannot deferred until
the contract is entered into
2.17 Currently subsection 11(11) of the ICA, provides that where a
provision of the ICA requires anything to be done before a particular
contract is entered into, it is sufficient if that thing is done at the time the
contract is entered into.
2.18 The timing of the request made by the consumer is not a relevant
consideration for an insurer when a KFS is required to be provided. A
KFS is required to be provided for both prescribed contracts and potential
prescribed contracts.
2.19 The KFS is required to be provided at the time a request is made
by a consumer in relation to a particular prescribed or potential prescribed
contract. An insurer is not able to defer the provision of a KFS until an
insurance contract is entered into. [Schedule 2, item 6, paragraph 33C(4)(a)]
When a contract is entered into prior to obtaining a KFS
2.20 In some situations a consumer may not request information
regarding a particular prescribed or potential prescribed contract prior to
entering into the insurance contact. In this situation, the regulations are
expected to take the entering into the insurance contract as a request for
information regarding that contract and as such the KFS will be required
to be provided at that time.
2.21 When a prescribed contract is entered into through an insurance
broker.
16
Key Facts Sheet
2.22 Under subsection 71(1) of the ICA any requirement (other than
subsection 58(2)) an insurer is not required to give a document to an
insured before contract is entered into if the contract was arranged by
certain insurance brokers acting as agents of the insured.
2.23 The requirement to provide an insured with a KFS before
entering into a contract will not apply if the contract to which the KFS
was to be provided was arranged by the type of broker that was acting as
agent of the insured as provided in subsection 71(1).
Situations where it is not practicable for the Key Facts Sheet to be
provided
2.24 Section 69 of the ICA currently allows insurers to provide
information within 14 days after the day a contract is entered into when it
is not practicable for the information to be provided at that time. This
allows insurers and consumers to enter into insurance contracts without
having to satisfy the normal disclosure requirements at the time the
contract commences.
2.25 While this flexibility is required in certain situations, insurers
are not able to utilise the flexibility provided under section 69 when
providing KFSs to consumers. [Schedule 2, item 6, paragraph 33C(4)(b)]
2.26 However, in order to ensure that insurers can meet their
requirements under Division 4 in situations where it is not practicable to
provide a KFS, the regulations will provide some flexibility in the timing
of their provision.
Exemptions to the requirement to provide a Key Facts Sheet
2.27 There are situations where the provision of a KFS would not be
consistent with the policy intent of the KFS and these will be declared in
regulation. [Schedule 2, item 6, subsection 33C(3)]
2.28 Circumstances where it may be considered that an exemption to
the requirement to provide the KFS will (consistent with the policy intent)
include:
· where the insurer has already provided the consumer with a
KFS for a particular HBHC insurance contract and the new
KFS would be the same (except for its date);
· where the insurer reasonably believes that another person has
already provided the consumer with a KFS, and the new KFS
would be the same (except for its date); and
17
Insurance Contracts Amendment Bill 2011
· where the consumer has indicated that they do not wish to
have a KFS provided in relation the HBHC insurance
contract that they are seeking to have information on.
2.29 The insurer bears the evidentiary burden in relation to any
defences for not providing the KFS, as these are matters that are within
their knowledge and/or control. [Schedule 2, item 6, subsection 33C(3)]
The provision of a Key Facts Sheet
2.30 Currently under subsection 77(1) of the ICA notices and other
documents that are required or permitted by the ICA must or may be
given:
· to a body corporate in the way in which documents may be
served on the body corporate; and
· to a natural person
- personally; or
- by post to that person's last known address.
Documents are not permitted to be provided electronically.
2.31 Consistent with the current requirements of subsection 77(1) of
the ICA, insurers will be able to provide the KFS to a body corporate in
the way in which documents may be served on the body corporate and to a
natural person either personally or by post.
2.32 However, in order to ensure insurers are able to provide the KFS
electronically, this Bill also allows for the regulations to prescribe the
circumstances in which an electronic means of the provision of the KFS is
able to be, or must be made. [Schedule 2, item 6, subsection 33C(2)]
2.33 The provision of the KFS through electronic means will be
permitted irrespective of the requirements relating to giving notices in
subsection 77(1) of the ICA. [Schedule 2, item 6, subsection 33C(2)]
2.34 Circumstances where it is expected that the regulations will
allow a KFS to be provided electronically include when:
· a consumer has verbally provided their email address for the
purpose of being provided the KFS; and
18
Key Facts Sheet
· a consumer has sought to be provided the KFS from the
insurer's website by providing their email address
electronically.
2.35 Insurers may also (or be required to) provide the KFS (in a
printable form) on their websites, subject to certain criteria being satisfied.
An insurer's requirement to `clearly inform' is not satisfied through the
provision of a Key Facts Sheet
2.36 The ICA requires insurers to `clearly inform' insureds of any
derogation from the standard cover provided for prescribed contracts. The
requirement to `clearly inform' must be in writing and may be satisfied by
providing the insured a document or documents containing provisions or
relevant provisions that outline the derogation.
2.37 In order to satisfy the `clearly inform' requirements under the
ICA, the requirement must be made in writing. In order to achieve this,
insurers may use as many or as few documents as they require. However,
in most cases insurers use the insurance contract and it's associated PDS
(as required under the Corporations Act) to satisfy their `clearly inform'
requirements.
2.38 As the KFS is only a guide providing the key information about
a particular HBHC insurance contract, the provision of a KFS will not be
able to be used as a mechanism for satisfying the insurers need to clearly
inform insureds of any derogation in their particular policy. [Schedule 2,
item 6, section 33D]
Failure to comply with the regulations regarding the content, format or
provision of a Key Facts Sheet
2.39 This Bill introduces an offence in the ICA when an the insurer
engages in conduct and that conduct contravenes the insurer's requirement
to provide the KFS for a prescribed or a potential prescribed contract in
the circumstance, and manner, prescribed in the regulations. [Schedule 2,
item 6, paragraphs 33C(5)(a), 33C(b) and 33C(c)]
The penalty for not failing to comply with the regulations
2.40 Currently, the ICA provides a penalty of 300 penalty units for
offences relating to an insurers failure to inform an insured. In these
instances the failure to inform also results in a failure to satisfy the
`clearly inform' requirement in the Act. The KFS will not be able to be
used to satisfy the `clearly inform' requirement. As such a penalty of 300
penalty units would not be appropriate.
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Insurance Contracts Amendment Bill 2011
2.41 In relation to the provision of information to Australian
Securities and Investment Commission (ASIC), if an insurer fails to
comply with a notice to provide information relating to insurance
documents or review administrative arrangements the ICA provides a
penalty of 150 penalty units.
2.42 The importance of disclosure for individual consumers is
considered to be significant. On this basis, if an insurer fails to comply
with the regulations by not providing or failing to provide a correct KFS,
the insurer will be taken to have committed an offence. The offence
attracts a criminal penalty of 150 penalty units. [Schedule 2, item 6, subsection
33C(5)]
Engaging in conduct
2.43 In order to facilitate the offence provision for the failure for an
insurer to meet their requirements in accordance with the regulations in
Division 4, the conduct the insurer engages in must be taken into
consideration. This Bill amends subsection 11(1) to provide a meaning of
to engage in conduct. [Schedule 2, item 1, subsection 11(1)]
Application and transitional provisions
2.44 The amendments in this Bill, in relation to the KFS, will take
effect from the date of Royal Assent. However, in order to minimise the
compliance costs of implementing the KFS, a two year transition period
will apply from the day after the Regulations are made in order for
industry to make the necessary changes to implement the amendments.
Consequential amendments
Changes to Part IV of the Insurance Contracts Act 1984
2.45 This Bill inserts Division 4 in Part IV of the ICA. Under
Division 4 an insurer is required to provide a KFS in accordance with
regulations. Currently Part IV of the ICA predominately deals with
disclosure duties and misrepresentations of insureds.
2.46 In order to clearly distinguish the current Divisions of Part IV of
the ICA with Division 4, the headings of Divisions 1, Division 2 and
Division 3 have been amended to include a reference to the insured.
[Schedule 2, items 3, 4 and 5, Division 1 of Part IV, Division 2 of Part IV, Division 3 of
Part IV]
20
Key Facts Sheet
Clarifying the scope of this Act
2.47 This Bill amends subsection 11(1) to clarify that a reference to
`this Act' in the ICA will include a reference to the regulations. [Schedule
2, item 2, subsection 11(1)]
2.48 Clarifying the scope of the ICA in this way, will ensure that the
powers and functions of ASIC in respect to the administration of the ICA
will apply to the regulations as well as the Act.
21
Chapter 3
Regulation impact statement
REFORMING FLOOD INSURANCE -- STANDARD
DEFINITION OF FLOOD
REGULATION IMPACT STATEMENT
Background
3.1 There are various possible sources of inundation that can cause
damage to a property. The Insurance Council of Australia (ICA) has
suggested the risks can be divided into three broad categories, summarised
below:
A. Stormwater/rainfall runoff: These terms refer to high
intensity, short duration storms producing localised flooding.
Most insurance policies (but not all) cover this risk. Some
insurers also use the term `flash flooding' with similar intent.
B. Riverine/inland flooding: Inundation caused by watercourses
or catchments overflowing their banks due to long duration
rainfall over large areas. Some insurers provide cover for this
risk, but many exclude it. Whether included or excluded, the
definitions of this risk can vary greatly.
C. Actions of the sea/sea level rise/storm surge: Inundation
caused by movement of seawater. Few insurance policies cover
this risk.
3.2 Aside from various definitions for category B (riverine
flooding), some policies use terms such as flash flooding, accidental
flooding and tidal flooding, to describe other types of inundation risk.
3.3 In the wake of the recent floods in Queensland and Victoria, a
number of policyholders have reported that they were surprised their
policies did not cover the type of inundation that affected their property.
The variation in the usage of the term flood and flooding in policies are
the potential sources of confusion for many consumers.
23
Insurance Contracts Amendment Bill 2011
3.4 On 5 April 2011, the Commonwealth Government
(Commonwealth) released a consultation paper `Reforming flood
insurance -- Clearing the waters' in order to engage the community in
suggesting improvements to the regulatory framework and other aspects
of Australia's insurance market. The paper contained two key proposals
designed to improve clarity for consumers in relation to insurance policies
and in particular, the cover provided for various types of flood. The
proposals include a standard definition of a flood and a key fact sheet
(KFS) which will outline the key information in relation to home building
and home contents policies. This regulation impact statement (RIS)
covers the former proposal.
3.5 On 4 March 2011, in response to the escalating number of
natural disasters, the Hon Bill Shorten, MP Assistant Treasurer and
Minister for Financial Services and Superannuation announced an
independent review into disaster insurance in Australia. The Natural
Disaster Insurance Review (NDIR)1 has been tasked with looking the
broad issues relating to insurance in the context of the long term funding
of disaster relief. Affordability and availability of flood insurance are
issues being addressed by the NDIR and are outside the scope of this RIS.
3.6 On 2 June 2011 the Standing Committee on Social Policy and
Legal Affairs2 commenced an inquiry into, and report on, the operation of
the insurance industry with specific reference to extreme weather and
disaster events.
3.7 In addition, Queensland3 and Victorian4 governments are each
conducting their own reviews into the events surrounding the 2010-11
flood season. These reviews are looking at such as claims process
handling and other state based flood issues.
1 The terms of reference of the NDIR can be found on the National Disaster Insurance Review
website: www.ndir.gov.au
2 Standing Committee on Social Policy and Legal Affairs website:
http://www.aph.gov.au/house/committee/spla
3 http://www.floodcommission.qld.gov.au/
4 http://www.floodsreview.vic.gov.au/
24
Regulation impact statement
The problem
Summary
3.8 At present, insurers use different definitions of flood in policies
making it difficult for consumers to know kinds of water damage are
covered. The different definitional approaches taken in insurance
policies to flood and related terms result in potential confusion for many
consumers. This confusion makes product comparison difficult and may
lead to underinsurance for flood risk. Underinsurance in this context
means a situation where an insured does not possess sufficient insurance
so as to cover them in the event of certain events.
3.9 The following examples illustrate the differences that can be
seen to exist between Home Building and Home Contents insurance
policies (HBHC) (combined or individual policies). However, it should
be noted that some of these definitions are not too dissimilar to that
proposed in the consultation paper:
· `Flood -- The inundation of normally dry land by water
which has overflowed, escaped or been released from a lake,
river, creek, storm water channel, canal or any other
watercourse whether natural, altered or man made.'
· `Flood -- The inundation of normally dry land by water
which has overflowed, escaped or been released from a lake,
river, creek, storm water channel, canal or any other
watercourse whether natural, altered or man made.'
· `Flood means the inundation or covering of normally dry
land by water which:
- escapes or overflows from, or
- cannot enter (because it is full or has overflowed), or
- is prevented from entering (because other water has
already escaped or been released from it),
- the normal confines of any watercourse or lake, including
any that may have been modified by human intervention,
or reservoir, canal, dam or stormwater channel.'
· `Flood: Rising water which enters your home as a result of it
running off or overflowing from any origin or cause.'
25
Insurance Contracts Amendment Bill 2011
· `Flood means: rain which results in water pooling on,
flowing from or failing to drain away from:
- a body of water
- land
- roads and streets
- water that escapes or is released from a body of water.
A body of water can include a river, lake, dam, stormwater
channel or canal, but not the sea.'
Current situation
3.10 There are currently 6.2 million properties in Australia.
Modelling indicates that of those, six million properties are considered to
have little or no flood risk. Of the remaining 200,000 properties, 100,000
are considered to be at the core of the issue surrounding the need for a
standard definition.5 In terms of insurance cover, those 100,000
properties are comprised of insureds who possess a mixture of :
· Sufficient flood cover;
· Insufficient flood cover; and
· No flood cover.
- Treasury has sought, but has been unable to obtain data
indicating the precise number of properties and
individuals that fall into each of the three categories noted
above.
3.11 In the wake of the recent floods in Queensland and Victoria, a
number of policyholders reported that they were surprised their HBHC
policies did not cover the type of inundation that affected their property.
The majority of these cases relate to policies that do cover category A
(storm water/rainfall runoff) but exclude cover for category B (riverine
flooding).
3.12 Other consumers cited confusion over the fact that they
understood their level of cover but were unaware of the risk they were
5 Finity Consulting Pty Limited Flood and other natural perils p3.
26
Regulation impact statement
exposed to or were unaware of the coverage they were insured for when
multiple types of inundation occurred simultaneously.
3.13 In their submission to the NDIR, the Financial Ombudsman
Service (FOS) noted that, as a percentage of insurance claims, the number
of disputes lodged with FOS is high for flood events. FOS cited a number
of factors in explaining this, including exclusions for flood cover provided
by some insurers; whether flooding was caused by a flood or storm; and
delays in processing claims due to reliance on hydrology reports to
determine whether a particular flood event was covered.6 FOS also cites
factors including whether sections 35 and 37 of the Insurance Contracts
Act 1984 (IC Act) were satisfied and what representations were made at
the point of sale in explaining why the number of disputes lodged with
FOS is proportionally high for flood events.
3.14 In addition to its submission to NDIR, FOS has provided data on
the number of disputed claims they have received in relation to the recent
major natural disasters.
· In relation to the Queensland floods, 597 disputes have been
lodged.
· In relation to Cyclone Yasi, 70 disputes have been lodged.
· In relation to Victorian bushfires in 2009, 19 disputes were
lodged since 1 January 2010 (earlier data is not available).
3.15 When looking at this data in conjunction with the number of
total claims lodged (57,730 claims for Queensland floods and 71,145
claims for Cyclone Yasi as reported by the ICA) a much higher rate of
disputation can be seen to occur in relation to floods than in relation to
other natural disasters. In this regard, disputation can be seen to occur as
a result of the Queensland floods, at more than 10 times than for Cyclone
Yasi (approx 1/97 claims for Queensland floods compared to 1/1016
claims for Yasi) and from the available data the rate of disputation for the
2009 Victorian bushfires was considerably lower than for the Queensland
floods. It must be noted that the data is incomplete.
· The high rate of disputation points to the complexity of flood
coverage compared to other types of cover and the fact that
many people felt they were covered when they were not.
6 Natural Disaster Insurance Review Submission by the Financial Ombudsman Service
Limited
http://www.ndir.gov.au/content/submissions/issues_paper_submissions/Financial_Ombuds
man_Service_Limited.pdf
27
Insurance Contracts Amendment Bill 2011
3.16 As part of the Queensland Floods Commission of Inquiry and
the NDIR, individuals were asked to provide detail of their experiences as
they related to the events of early 2011. Submissions have been published
and provide additional information in support of the introduction of a
standard definition of flood.7 However, despite a considerable volume of
evidence in the form of case studies and submissions to the various
government inquiries currently underway, Treasury is unable to provide
quantitative data supporting the introduction of a standard definition.
Therefore the magnitude of the problem is not quantifiable.
3.17 The variations in usage of the term flood and `flooding' in
HBHC policies are a potential source of confusion for many consumers.
For example, a policy which is stated to cover `accidental flood' or `flash
flooding' could give the initial impression that the policy covers risks
arising from rivers breaching their banks. However, the policy might
contain an exclusion for riverine flooding cover that would be evident on
careful examination.
3.18 While there is no empirical evidence supporting confusion
regarding the understanding of what is meant by the word flood in
insurance policies, the issue has been recognised for a number of years.
3.19 In the Formal Review of the Insurance Council of Australia
Ltd's General Insurance Code of Practice released in 1998, the issue of
consumer confusion was raised:
` ... the use of technical terms, or terms whose meaning in the
insurance context differs from their ordinary meaning, should be
kept to a minimum. Plain language continues to be a problem
when dealing with terminology, such as definitions `flood',
`stormwater' , `pre-existing conditions' etc, all of which are not
very user friendly and are difficult for many consumers to
understand'
In addition, the report also stated that:
`There appear to be special problems experienced by consumers in
areas prone to flood: they often seem to believe they have cover
against flood when, in fact, they only have cover against
stormwater.'
7 Submissions made to the Queensland Floods Commission of Inquiry can be viewed at
http://www.floodcommission.qld.gov.au/submissions. Submissions made to the National
Disaster Insurance Review can be viewed at
http://www.ndir.gov.au/content/Content.aspx?doc=home.htm The submission made by
Legal Aid Queensland contains a number of relevant case studies.
28
Regulation impact statement
3.20 The issue of consumer confusion was highlighted again in 2000
when the Australian Securities and Investments Commission (ASIC)
noted in a report that due to difficulty in understanding policies on the
issue of flood insurance, consumers may not be aware whether they are
covered for flood and, if they are, about the importance of the distinction
between flood and other storm damage.
3.21 In 2008, the Australian Consumer and Competition Commission
(ACCC) also raised the issue of consumer confusion regarding the
definition of flood in insurance policies and have stated that:
`Flood insurance has become a critical issue for Australian
consumers in recent years, with a number of reports identifying
unsatisfactory levels of consumer confusion about insurance cover
for flood'8
`the ACCC supports effects to establish a common definition of
flood that is widely understood by consumers and can be used as a
benchmark for flood cover for insurance policies'9
Current regulation
3.22 The main aim of the current standard cover regime in section 35
of the IC Act is to ensure that exclusions and limitations which an insured
might not expect are brought to the insured's notice before the contract of
insurance is entered into.
Section 35 of the Insurance Contracts Act 1984 -- standard cover
3.23 Section 35 of the IC Act provides that standard cover (that is,
minimum levels of cover for prescribed events) will be deemed to be
included in certain classes of prescribed insurance policies, including
HBHC insurance (other than cover notes and renewals). The standard
cover terms and conditions are set out in the Insurance Contracts
Regulations (the Regulations).
3.24 By way of example, the Regulations state that standard cover in
respect of home contents insurance includes loss that is:
... caused by or results from -- ... storm, tempest, flood, the action of
the sea, high water, tsunami, erosion or landslide or subsidence ...10
8 ACCC Chainman, Mr Graeme Samuel
9 Ibid
10 Regulation 10(a)(xi) of the Insurance Contracts Regulations 1985
29
Insurance Contracts Amendment Bill 2011
3.25 If an insurer seeks to limit or exclude its liability in respect of
the standard cover, then the insurer must prove that:
· it `clearly informed' the consumer of the limitation or
exclusion in writing before the contract was entered into (or
within 14 days if provision before the contract was not
reasonably practicable, for example, telephone sales); or
· the consumer knew of the limitation or exclusion; or
· a reasonable consumer in the circumstances could be
expected to have known of the limitation or exclusion.
3.26 If the insurer is unable to prove one of these three cases, then the
insurer will be liable to make good any losses suffered by a consumer that
were caused by, or resulted from, any of the standard events (construed in
accordance with their ordinary meanings) up to a maximum limit (usually
$2 million).
3.27 There have been a number of court and dispute resolution cases
in relation to interpretation of `clearly inform', which illustrate that
although there could be various means to inform, provision to the insured
of a policy document containing exclusions is sufficient, unless there are
exceptional circumstances (for example, if the provisions in the policy are
particularly confusing or complex). The court decision most cited on this
issue (Hams) includes the following passage:
`... a fair reading of s35(2) does not warrant the conclusion that the
result need go further than provide for the relevant exclusion in the
policy wording in clear and unambiguous language and in a manner
which a person of average intelligence and education is likely to
have little difficulty in finding and understanding if that person
reads the policy in question.'11
3.28 In practice, the standard cover regulations are very often
rendered non-applicable by the provision to the insured of a policy
document (usually contained within a PDS), thereby satisfying the
requirement to `clearly inform' the consumer. In a case where such a
policy document was provided, the protection offered by section 35 may
be available if the terms in the policy were particularly complex or
confusing.
3.29 A common view is that a large proportion of policy holders do
not read in detail the policy documents they receive from their insurer so
11 Hams & Ors v CGU Insurance Limited [2002] NSWSC 273
30
Regulation impact statement
the protection offered by section 35 is not, in practice, a very effective
tool to ensure that consumers are informed about their cover.
Dispute resolution options through the Financial Ombudsman Service
3.30 Consumers who believe they have not received the correct ruling
from their insurance provider are advised to make their complaint to the
provider, giving the provider's internal dispute resolution mechanism the
opportunity to rectify any error that may have occurred.
3.31 If the dispute remains unresolved after a complaint has been
made to the insurance provider, a dispute can be lodged with the FOS at
no expense to the consumer.
Do the current laws deal effectively with the problem?
3.32 Current laws do not effectively deal with the problem. As noted
in paragraph 3.29, it cannot be assumed that consumers will carefully read
and fully understand policy documents, particularly in relation to
definitional matters either before or after purchase. When this is
considered together with the fact that current legislation allows for
multiple definitions of the term flood, there is the risk of consumer
confusion and resulting underinsurance.
Conclusion
3.33 The key points to note about the problem are that:
· Anecdotal evidence in the form of consumer and industry
submissions to the consultation paper, `Reforming flood
insurance -- Clearing the waters' and the various
government inquiries currently underway in paragraph 3.5
and 3.6 suggest that there is consumer confusion in the area
of flood insurance in respect to:
- the types of inundation risk covered under a particular
policy; and
- what exclusions exist in particular policies based on the
definition(s) used by individual insurance providers.
· Consumer confusion may potentially result in adverse
outcomes arising for both the individuals affected and
communities in general;
31
Insurance Contracts Amendment Bill 2011
· Despite a considerable volume of evidence in the form of
case studies and submissions to the various government
inquiries currently underway, Treasury is unable to provide
quantitative data supporting the introduction of a standard
definition. Therefore the magnitude of the problem is not
quantifiable; and
· Although there is protection for consumers in the current law
in respect to minimum levels of flood insurance in the IC
Act, this protection is limited in that it can be overridden
where the consumer has been made aware of an express
exclusion in the policy. In making those exclusions, insurers
currently use multiple definitions of flood, sometimes
making it difficult for consumers to understand what kind of
flood damage is being excluded. Hence, the extent to which
consumers are fully informed is questionable.
Objectives of Commonwealth Government action
3.34 The Commonwealth's objective is to help consumers better
understand the extent to which an insurance policy includes cover for
flood. Reducing confusion about flood cover may reduce the risk of
inappropriate cover and the associated negative consequences for affected
policyholders if a relevant event were to occur.
Options that may achieve the objectives
3.35 In previous consultations with stakeholders, a number of options
and variations have been proposed and debated. The possible options
have been refined to the following set:
· Option 1: Status quo. Individual insurers will continue to
provide their own definition of flood and offer cover
accordingly.
· Option 2A: Apply a standard definition of flood for riverine
flooding (category B) to HBHC insurance policies. The
ongoing issue of consumer confusion over the meaning and
extent of flood coverage may be best addressed by
standardising the definition of `riverine flood' and restricting
the use of the terms `riverine flood' and `riverine flooding' to
the standardised definition.
32
Regulation impact statement
Standardising the definition of flood in policies has been
recently called for by industry and consumer representatives.
An example of a standard definition is as follows:
Flood means the covering of normally dry land by water that
has escaped or been released from the normal confines of:
A. any lake, or any river, creek or other natural
watercourse, whether or not altered or modified; or
B. any reservoir, canal, or dam.
· Option 2B: Apply a standard definition of flood for riverine
flooding (category B) to insurance policies covering small
businesses and strata title complexes, as well as HBHC
insurance policies. This option uses the same definition as
Option 2A, but extends it to include insurance policies
applying to small businesses and strata title complexes.
· Option 3A: Apply an alternative definition of flood
covering categories A and B to HBHC insurance policies.
This definition would include flood occurring as a result of
storm (category A), as well as riverine flood (category B).
Option 3A would seek to ensure consumers have a clear
understanding that they will be covered for inundation
occurring from both `bottom-up' (riverine) and `top-down'
(storm) water sources.
An example of this definition is as follows:
Damage caused by water that has escaped, been released, or
originated from the confines of:
A. any lake, or any river, creek or other natural
watercourse, whether or not altered or modified;
B. and reservoir, canal, or dam; and
as the result of storm including:
C. cyclones, tornadoes, windstorms, rainwater, hail or
snow.
· Option 3B: Apply an alternative definition of flood
covering categories A and B for small businesses and strata
title complexes, as well as HBHC insurance policies. This
option uses the same definition as Option 3 but extends it to
include insurance policies applying to small businesses and
strata title complexes.
33
Insurance Contracts Amendment Bill 2011
· Option 3C: Offer categories separately under an alternative
definition of flood covering categories A and B for small
businesses and strata title complexes, as well as HBHC
insurance policies. Using the same categories of flood as
those contained in 3A, insurers would have the choice to offer
cover for one or both of the two categories of flood.
· Option 4A: Apply an alternative definition of flood
covering categories A, B and C to HBHC insurance
policies. This definition would take in all types of inundation
and would seek to ensure that consumers have a clear
understanding of the cover offered by all insurers offering
insurance for flood damage.
An example of this definition is as follows:
Damage caused by water that has escaped, been released, or
originated from the confines of:
A. any lake, or any river, creek or other natural
watercourse, whether or not altered or modified;
B. any reservoir, canal, or dam;
C. the ocean, sea or estuaries; or
as the result of storm including:
D. cyclones, tornadoes, windstorms, rainwater, hail or
snow.
· Option 4B: Apply an alternative definition for flood
covering categories A, B and C for small businesses and
strata title complexes, as well as HBHC insurance policies.
This option uses the same definition as Option 4A, but extends
it to include insurance policies applying to small businesses
and strata title complexes.
· Option 4C: Offer components separately for an alternative
definition for flood covering categories A, B and C for
small businesses and strata title complexes, as well as
HBHC insurance policies. Using the same categories of
flood as those contained in Option 4A, insurers would have the
option to select which categories they wished to offer cover
for.
34
Regulation impact statement
Other options
Consumer education program/campaign
3.36 Consideration was initially given to an education program/
campaign to inform consumers of the benefits of understanding particular
terms such as flood in insurance policy disclosure documentation.
3.37 A number of benefits may potentially arise when considering an
educational program/ campaign. In particular these efforts may encourage
consumers to:
· ask questions regarding particular terms;
· seek advice when they fail to understand particular jargon/
terminology; and
· become more actively informed in relation to their decision
making process.
3.38 Although, an educational program/campaign may potentially
have benefits, it was determined that an educational program/ campaign
would not meet the Commonwealth's objectives. For the reasons outlined
below, this option was not considered further.
3.39 The breadth of any educational program would need to be
significant in order to address issues such as financial literacy and
consumer engagement. An educational program/ campaign that merely
encourages consumers to read their insurance policy would be of little
benefit. Any success of such a program/campaign would require
consumers to read and understand their policy and other relevant
documentation on an ongoing basis.
3.40 There are also concerns about the duration of a successful
education program/campaign. As most insurance policies have relatively
short durations (usually one year), it will be difficult to effectively engage
consumers as to the benefits of familiarising themselves with the detail of
their policy documents each time they are required to renew or update
them. While it is recognised that the adverse outcomes experienced by a
number of consumers who had not read their policy documents and were
subsequently affected by recent natural disasters may prompt consumer
engagement in the short term, it is not realistic to presume that this kind of
momentum is sustainable in the longer term.
35
Insurance Contracts Amendment Bill 2011
3.41 The effectiveness of an educational campaign/ program as a
standalone option has also been questioned. In a recent ASIC report into
financial literacy and behavioural change12, ASIC stated that:
`while raising people`s level of financial knowledge forms the basis
of many financial literacy initiatives around the world, there is a
growing body of research suggesting that knowledge is only one
factor when considering how to help people make positive financial
decisions'
3.42 It may be possible for a targeted education note to be provided
with insurance contracts. The provision of advice to consumers that the
inclusion of flood cover varies between insurance providers and their
products may be a useful tool to encourage consumers to familiarise
themselves with the detail of any insurance product they are considering.
In addition, the provision of instructions to consumers directing them to
read the product disclosure statement and any other relevant material
and/or ask questions of the insurer to satisfy themselves that they have an
appropriate policy for their needs may contribute to a reduction in
consumer confusion.
3.43 However, the success of any education campaign is expected to
be significantly limited where consumers are unable to rely upon a
standard definitional approach adopted by all insurers who choose to offer
flood cover. The different approaches taken in policies to flood and
related terms will still make it difficult for consumers to understand
whether they have cover for flood and may still lead to underinsurance for
flood risk.
Additional standard definitions
3.44 It may be possible to consider the introduction of standard
definitions for other terms such as fire, in insurance policies. However
flood has unique characteristics that will benefit by it being viewed in
isolation as far as a standard definition is concerned.
· The `unique characteristics' referred to above are based on
the different applications of the term in insurance policies.
While some consumers may define the term in a similar
12 Report 230 `Financial literacy and behavioural change' released March 2011,
http://www.financialliteracy.gov.au/media/218309/financial-literacy-and-behavioural-
change.pdf
36
Regulation impact statement
manner to that provided in the Macquarie Dictionary13, when
used in a technical manner -- as with insurance policies, the
term may be given different meanings. Insurers have the
ability to allocate their own definition of the term which may
lead to consumer confusion about what is meant by the term.
· There is no evidence that the application of different
meanings for the same term has been a problem in other
instances. However, as provided in response to the
Government's consultation paper and in responses to the
Queensland Floods Commission of Inquiry14, there is
anecdotal evidence to support the assertion that there is
consumer confusion surrounding the meaning of the term
flood.
3.45 The uniqueness of the way the term flood is addressed, together
with the severe impact of recent events and the Government's
commitment to ensuring consumers do not face similar detriments in the
future, requires immediate attention given to this matter. Any expansion
of a standard definition to include terms other than flood is beyond the
scope of this RIS.
Assessment of options
Option 1 -- Keep the current requirements (Status quo)
3.46 Under Option 1 insurers will continue to provide customers with
insurance cover based on a definition of flood determined by the
individual insurer.
3.47 The standard cover regime in section 35 of the IC Act will
continue to ensure that exclusions and limitations which an insured might
not expect are brought to the insured's notice before the contract of
insurance is entered into.
13 noun 1. a great flowing or overflowing of water, especially over land not usually
submerged. www.macquariedictionary.com.au/ viewed 8 September 2011
14 See paragraph 4.34
37
Insurance Contracts Amendment Bill 2011
Impacts
Consumers
3.48 The status quo is described in some detail in the `Problem'
section of the regulatory impact statement, above. The following key
features are noted:
· There is a concern that the status quo position is confusing
for consumers and does not adequately inform them of the
level or type of flood insurance they are covered for; and
· The different approaches taken in policies to flood and
related terms may cause potential confusion for many
consumers, makes product comparison difficult and may lead
to underinsurance for flood risk. It is unclear to what extent
this is the case given the lack of data.
Industry
3.49 Under Option 1 there will be no costs for insurers or related
entities as there will be no change to the way they currently conduct
business.
3.50 The current confusion surrounding the definition of the term
flood in insurance policies is seen to lead some consumers to make poor
decisions regarding their insurance cover. This, in turn, is leading to an
increasing amount of ill-will towards insurers.
Commonwealth
3.51 Under Option 1, there will be no change in either benefits or
costs regarding the current use of the term flood in insurance policies.
38
Regulation impact statement
Table 3.1 Option 1 impact assessment
Benefits Costs
Consumers No change Some policyholders may
continue to have claims
denied or find they do not
have adequate coverage.
Product comparisons may
still be difficult.
Industry No change No change
Commonwealth No change No change
Options 2, 3 and 4 -- Introduce a standard definition of flood
General Impact
3.52 The benefits expected as a result of the introduction of a
standard definition of the term flood in insurance policies include:
consumers having the ability to access information on the type and level
of flood insurance cover on offer. Access to information may allow
consumers to more easily make comparisons between different insurance
products available.
· It should be noted that the introduction of a standard
definition of flood will not necessarily result in a greater
number of consumers being insured. However, it will ensure
that consumers are in possession of the information that
could provide them with a clear understanding of what they
are and are not covered for in relation to flood.
3.53 It is expected that in addition to this, consumers may also benefit
from increased competition within the insurance industry as they will be
in a position to compare different insurance products which they can be
certain use an identical definition of flood. It is a widely- held principle
that by providing consumers with the ability to compare like with like, in
this case insurance policies containing a standard definition of flood (as
either an included or excluded feature), they will have the opportunity to
possess an improved understanding of what insurance providers are
offering them. The disclosure regime introduced by the Financial
Services Reform Act 2001 and now contained in Chapter 7 of the
Corporations Act 2001 introduced a consistent and comparable disclosure
regime for financial products and services. As noted by the then
Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP, the
introduction of this standardised disclosure regime enables consumers to
compare `apples with apples' -- to analyse and understand competing
products and services.
39
Insurance Contracts Amendment Bill 2011
3.54 However in order to maximise the potential benefits available to
consumers, the following issues must be considered:
· What type of inundation is to be included in a standard
definition of the term flood?
· Will a standard definition apply to only HBHC insurance
policies or will it be extended to include small businesses and
strata titles/bodies corporate?
· What type of inclusions will permit consumers to access and
afford the relevant insurance?
- Once relevant regulations are made it is expected insurers
will incorporate the standard definition of flood into
existing policies as they come up for renewal. Any
changes to existing policies (as they relate to the
introduction of a standard definition of flood) must be
brought to the attention of insureds. This will provide
them with the opportunity to ascertain whether the
product offered by their insurer meets their needs.
- The affordability and availability of flood insurance are
issues being addressed by the NDIR and are outside the
scope of this RIS.
· Will insurers be required to use this definition in all instances
or will they be able to replace the term flood with similar
terms, thus enabling them to avoid the requirements of a
standard definition?
- In the event a standard definition of flood is introduced,
use of the term flood will be reserved only for references
as defined in the regulations. Insurers will not be
permitted to substitute other terms to replace flood and
thus provide alternative definitions.
3.55 The introduction of a standard definition of the term flood has
received broad support from both industry and consumer representatives.
However, any amendments that would see industry required to change the
products they offer would impose compliance costs.
3.56 The specific amounts would be difficult to calculate and are
expected to vary between insurers depending on various factors including:
their size; the type of insurance policies changes are made to; and the time
it would take to effect change across all relevant policies. The broader the
definition, the greater the implications for reinsurance programmes which
40
Regulation impact statement
may impact on premiums and the potential for products to be removed
from the market.
· In its consultation paper `Reforming flood insurance --
Clearing the waters', the Commonwealth sought industry
and consumer views on the impacts of the introduction of a
standard definition. Responses to the paper did not provide
data indicating the impact of the proposed measure beyond
noting that there could be upward pressure on premium costs.
· In addition to this, data to provide greater certainty about the
precise number of consumers who would be impacted by this
measure and any potential financial costs and benefits
resulting from it was sought from the NDIR but data was
unavailable.
· It should be noted that any reference in this RIS to costs
and/or benefits of this measure being `unquantifiable' refer to
Treasury's lack of access to data (as outlined above).
3.57 The introduction of a standard definition of flood will not
guarantee insurers offer this type of cover. Further, it will not assist
consumers in assessing the risk of flood in their specific location. This
can only be achieved through the availability of appropriate flood
mapping data that can be accessed by both consumers and insurers. This
issue is being considered by the NDIR.
Option 2A -- standard definition for riverine flooding (category B) for
home building and home contents insurance policies
3.58 Under Option 2A, a standard definition of the term flood for
riverine flooding (category B) would apply to HBHC insurance policies.
The reported consumer confusion in relation to inundation risk is most
commonly related to riverine flooding (category B), particularly when that
category is excluded.
41
Insurance Contracts Amendment Bill 2011
Impacts
Consumers
3.59 Based on evidence provided in submissions to the Government's
consultation paper `Reforming flood insurance -- Clearing the waters'
and to the inquiries outlined this RIS, a standard definition of the term
flood for riverine flooding (category B) would be an effective way of
reducing consumer confusion regarding what is and is not included in
HBHC insurance policies. A clear understanding of what insurance
providers are willing to insure against would provide consumers with
certainty when entering into a contract with an insurance provider.
3.60 While this will mean that categories A and C will remain
without standard definitions, consumer and industry advice suggests that
these categories are not considered to be main causes of consumer
confusion. Standardising the definitions of these categories of flood may
reduce product innovation and competition.
3.61 The benefits of a standard definition (category B) are expected
to include:
· a reduction in consumer confusion regarding what is and is
not included in insurance policies;
· avoiding situations where neighbouring properties, affected
by the same inundation event, receive different claims
assessments because the policies covering them use different
definitions of flood; and
· improvements in consumers' ability to evaluate potential
insurance policies and compare between different insurers,
which may lead to an increase in price competition across the
insurance industry.
3.62 These benefits cannot be quantified (as defined in paragraph
3.56).
3.63 Although the introduction of a standard definition of flood will
increase the opportunity for consumers to improve their understanding of
what an insurance product offers in terms of flood cover, there is no
guarantee that consumers will take advantage of this. The onus will
remain on the individual consumer to ensure they are fully informed of the
features of any insurance product purchased.
3.64 Further, the introduction of a standard definition of flood will
not necessarily reduce the time taken by insurers to process claims.
42
Regulation impact statement
Delays are generally due to the complexity and size of the event itself
rather than the complexity of any definition currently used.
3.65 The costs to the consumer of a standard definition (category B)
are:
· the potential increase in premiums from increased
compliance costs and the possible increase in the cost of
reinsurance; and
· the possibility that some flood insurance products will be
removed from the market.
3.66 There are no quantifiable costs to consumers available (as
defined in paragraph 3.56).
Industry
3.67 The benefits to industry include that it may improve the
reputation of insurers thereby encouraging consumers to purchase
insurance.
3.68 There are no quantifiable benefits available (as defined in
paragraph 3.56).
3.69 The costs to the industry include:
· financial costs associated with the requirement for insurers to
amend existing policies; and
· potential increases in reinsurance costs which may be passed
on to consumers.
- Where reinsurance costs are deemed by insurers to be too
high and effected products commercially unviable, they
may be withdrawn from the market.
3.70 There are no quantifiable costs to industry available (as defined
in paragraph 3.56).
3.71 However, it should be noted that the creation of a standard
definition does not mean that all policies will cover the defined flood risk.
Insurers will continue to make commercial decision about the levels of
cover offered in their products.
3.72 Compliance costs to industry are expected to be reduced by a
two year transition period commencing from when the regulations
43
Insurance Contracts Amendment Bill 2011
specifying the definition are made. Industry has indicated that a two year
transition period will reduce uncertainty and alleviate concerns about the
impact of the measure on the commercial interests of insurers. As
insurance policies are updated on an annual basis, a two year transition
period will allow policies to lapse and the definition of flood to be
adjusted along with any other changes to terms and conditions with
minimal cost.
Commonwealth
3.73 The Commonwealth will bear the costs associated with the
consultation, implementation and regulation of this option.
Table 3.2 Option 2A impact assessment
Benefits Costs
Consumers A universal set of words Potential increase in
defining flood may be an premiums if insurers pass on
effective way of reducing the increased costs of
consumer confusion reinsurance.
regarding what is and is not Possible removal of some
included in insurance flood insurance products from
policies. the market.
May improve consumers'
ability to evaluate this
particular feature in potential
insurance policies.
Is considered relatively
simple and is expected to be
capable of being understood
by the majority of policy
holders.
Industry May improve the reputation Possible costs associated with
of insurers and encourage having to amend policies to
greater willingness of reflect change in definition.
consumers to purchase Additional reinsurance costs
insurance. may be incurred and may be
passed on to consumers.
Commonwealth Legislative amendments will
be required. ASIC expected
to administer the standard
definition in line with its
current responsibilities under
the IC Act.
44
Regulation impact statement
Option 2B -- standard definition of flood for riverine flooding (Category
B) for home building and home contents, small businesses and strata
title/bodies corporate insurance policies
3.74 Under Option 2B, a standard definition of the term flood for
riverine flooding (category B) would apply to HBHC, small business and
strata title insurance products.
Impacts
Consumers
3.75 It is expected that the same benefits broadly apply to option 2B
as apply to option 2A.
3.76 However, it is expected that an additional benefit of option 2B
compared to option 2A is that extending the standard definition to include
small businesses and strata title/bodies corporate will ensure that a larger
number of policy holders benefit from an increase in clarity over what is
and is not covered by insurance policies.
3.77 In relation to insurance policies for small business and strata
title customers, insurance decisions are made either directly or through a
third party agent such as an insurance broker.
3.78 Treasury has sought data from the National Insurance Brokers
Association, the Australian Prudential Regulation Authority (APRA) and
ASIC on the approximate number or percentage of small businesses and
strata customers which access brokers when purchasing insurance policies
but the data are unavailable. The lack of data makes it difficult to
determine the magnitude of benefits associated with Option 2B.
3.79 However APRA has identified certain trends which may give an
indication as to the likelihood of sub-groups of small businesses and strata
title customers that may access a broker when purchasing insurance.
APRA notes that:
· Across the spectrum of small and medium enterprises (SME),
micro and small businesses are less likely to use insurance
brokers than medium sized SMEs when purchasing
insurance.
· For strata policies, company and community title properties,
body corporate administered properties (larger blocks of
units/apartments) are likely to use an insurance broker.
45
Insurance Contracts Amendment Bill 2011
3.80 In general terms, third party agents such as insurance brokers are
under a duty at common law to arrange a satisfactory level of cover.
Where the consumer (small businesses and strata title customers) engages
a broker to arrange cover for them, responsibility for assessing the
appropriate sum insured may pass to the broker. Brokers are more likely
to have an expert knowledge of the industry and the tools available to
estimate rebuilding costs.
Industry
3.81 It is expected that as with Option 2B the benefits to industry
include that it may improve the reputation of insurers thereby encouraging
consumers to purchase insurance.
3.82 An additional benefit of option 2B compared to option 2A is
covering small businesses and strata title/body corporates will enable
industry to streamline the way they handle a more broad range of clients.
There are no quantifiable benefits to industry available (as defined in
paragraph 3.56).
3.83 Some industry groups support a broader category of policy
holders including body corporate/strata insurance and small business
insurance would benefit from a standard definition of flood. They claim
that this proposal would not force insurers to offer flood cover to bodies
corporate or small businesses, but it would help these consumers to
understand the cover offered by their insurance policy and to consider
what risks they need cover for.
3.84 They also argue that an extension of the proposed standard
definition to a broader class of premises should be undertaken as it is
incorrect to assume that owners and occupants of non-residential premises
are necessarily better informed regarding inundation risk.
3.85 However, some industry groups oppose extending the standard
definition to small business and strata title on the basis that underwriters
need flexibility to decide what aspects of flood cover can be extended to
commercial/industrial/rural zoning. Removing this flexibility may have
the effect of reducing the ability for insurers to provide bespoke and
negotiated flood coverage for commercial premises. However, insurers
may choose to employ the standard definition of flood in their commercial
policies as a matter of consistency and simplicity
3.86 In addition, business policy holders are more likely than
homeowners to use the services of insurance brokers for advice and are
less likely to be confused by language in policies. In this instance, the
knowledge of the broker is deemed to be the knowledge of the insured.
46
Regulation impact statement
3.87 As with option 2A, the costs to the industry are expected to
include:
· financial costs associated with the requirement for insurers to
amend existing policies; and
· potential increases in reinsurance costs that may be passed on
to consumers.
- Where reinsurance costs are deemed by insurers to be too
high and effected products commercially unviable, they
may be withdrawn from the market.
3.88 There are no quantifiable costs to industry available (as defined
in paragraph 3.56).
3.89 However, it is possible that an additional cost for industry
compared with Option 2A is that a large amount of cover purchased is
regarded as wholesale by the Corporations Act. To impose a `retail'
definition over a `wholesale' regulatory regime would potentially add
complexity as indicated by Suncorp in their submission to `Reforming
Flood insurance -- Clearing the waters.15
Commonwealth
3.90 As with Option 2A the Commonwealth will bear costs
associated with the consultation, implementation and regulation of this
option.
Table 3.3 Option 2B impact assessment
Benefits Costs
Consumers A larger number of policy Potential increase in
holders may benefit from an premiums if insurers pass
increase in clarity over what is on the increased costs of
and is not covered within their reinsurance.
insurance policies. Possible removal of some
A universal set of words flood insurance products
defining flood may be an from the market.
effective way of reducing
consumer confusion regarding
what is and is not included in
15 See Suncorp submission to `Reforming flood insurance - Clearing the waters'
http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1995 last viewed
8 September 2011
47
Insurance Contracts Amendment Bill 2011
insurance policies.
Benefits Costs
Consumers (continued) May improve consumers'
ability to evaluate this
particular feature in potential
insurance policies.
Is considered relatively simple
and is expected to be capable
of being understood by the
majority of policy holders.
Industry Insurers may be able to By imposing a `retail'
streamline the way they definition over a
handle a more broad range of `wholesale' regulatory
clients. regime there is the
May improve the reputation of potential for an added layer
insurers and encourage greater of regulatory complexity.
willingness of consumers to Potential costs associated
purchase insurance. with having to amend
policies to reflect change in
definition.
Additional reinsurance
costs may be incurred and
may be passed on to
consumers.
Commonwealth Legislative amendments
will be required. ASIC
will administer the
standard definition in line
with its current
responsibilities under the
IC Act.
Option 3A -- An alternative definition of flood covering categories A and
B in home building and home contents insurance policies
3.91 Under Option 3A an alternative definition of flood would apply
which would cover to category A (stormwater/rainfall runoff) and
category B (riverine flooding) and would apply to HBHC insurance
products.
3.92 Stormwater/rainfall runoff and riverine flooding when
considered together would cover policy-holders for two common forms of
water inundation. A possible advantage of this approach would be that it
may remove uncertainty relating to the way the two types of inundation
interact and any difficulty establishing the source of any water inundation
experienced.
48
Regulation impact statement
3.93 It should be noted that insurers will have the choice of whether
or not to offer cover for this definition of flood.
Impacts
Consumers
3.94 Some policies currently on the market may contain unusual
definitions of storm or flash flood as a basis for limiting cover. The main
benefit of option 3A is that it may reduce consumer confusion as
policyholders with policies containing flood cover will be insured for both
stormwater/rainfall runoff and riverine flooding. These benefits are not
quantifiable (as defined in paragraph 3.56).
3.95 The costs of option 3A are expected to include:
· the more elements there are in a definition, the greater the
complexity will be and the less likely that consumers will
understand the terms of their policies; and
· there is a risk that consumers may not realise they need flood
cover in order to be covered for storm damage and as a result
remain uninsured for this event.
3.96 These costs are unquantifiable (as defined in paragraph 3.56).
Industry
3.97 The costs to industry are expected to be:
· an increase in definitional complexity
- This may jeopardise individual insurer's reinsurance
programmes which may lead to an increase in premiums
or the withdrawal of products considered commercially
unviable; and
· having to amend policies to reflect the change in definition
(similar to Option 2A and 2B). This cost is expected to be
minimised by the transition period discussed in Option 2A.
3.98 These costs are unquantifiable (as defined in paragraph 3.56).
3.99 There are also expected to be costs to amend policies to reflect
the change in definition (similar to Option 2A and 2B) which will be
reduced by the transition period discussed in Option 2A. These costs are
unquantifiable (as defined in paragraph 3.56).
49
Insurance Contracts Amendment Bill 2011
Commonwealth
3.100 The Commonwealth will bear the costs associated with the
consultation, implementation and regulation of this option.
Table 3.4 Option 3A impact analysis
Benefits Costs
Consumers Where flood insurance is A standard definition could
offered to consumers they have little effect if consumers
would be covered for do not familiarise themselves
inundation occurring from with the detail of their
both `top-down' and policies including any
`bottom-up' water sources. technical meaning the term
flood may have.
An increase in the financial
burden imposed on insurers
might result in an increase in
premium costs and/or the
withdrawal of insurance
products affected by the
broader definition.
The more complex a
definition of flood the less
likely consumers will
understand the terms of, and
any exclusions contained
within their insurance
policies.
Industry Potential costs associated
with having to amend policies
to reflect change in definition.
An increase in definitional
complexity may jeopardise
individual insurer's
reinsurance programmes.
Commonwealth Legislative amendments will
be required. ASIC will
administer the standard
definition in line with its
current responsibilities under
the IC Act.
50
Regulation impact statement
Option 3B - An alternative definition of flood covering categories A and B
in home building and home contents, small businesses and strata
title/bodies corporate insurance policies
3.101 Under Option 3B, an alternative definition of flood applies
which would cover category A (stormwater/rainfall runoff) and category
B (riverine flooding) and would apply to HBHC, small business and strata
title insurance products.
3.102 It is expected that the benefits and costs as a result of Option 3B
are much the same as those discussed in Option 3A. However they are
likely to be experienced on a larger scale as it will be possible for a
broader range of policy types to be affected.
3.103 It should be noted that insurers will have the choice of whether
or not to offer cover for this definition of flood.
Impacts
Consumers
3.104 It is expected that the benefits for Option 3B will be similar to
Option 3A except that the there may be a larger number of consumers that
could expect to receive the benefits of an additional category of
inundation included in their insurance policies.
3.105 The costs for Option 3B are similar to 3A except that extending
this definition for flood to small business and strata title/bodies corporate
will impact on the ability to have tailor made policies (as is currently the
case).
3.106 The costs and benefits to consumers are unquantifiable (as
defined in paragraph 3.56).
Industry
3.107 The same types of costs to industry in relation to Option 3A
(increased premiums and withdrawal of products from the market) apply
to Option 3B except that the costs could be larger as the option includes a
greater number of policyholders (as it also extends to covering small
business and body corporate). These costs are unquantifiable (as defined
in paragraph 3.56).
51
Insurance Contracts Amendment Bill 2011
Commonwealth
3.108 The Commonwealth will bear the same types of costs as Option
3A.
Table 3.5 Option 3B impact analysis
Benefits Costs
Consumers Where flood insurance is A possible increase in the
offered to consumers they financial burden imposed on
would be covered for insurers is expected to result
inundation occurring from in an increase in premium
both `top-down' and costs and/or the withdrawal of
`bottom-up' water sources. A insurance products affected
broader range of consumers by the broader definition.
and categories of damage The more complex a
would be included. definition of flood the less
likely consumers will
understand the terms of, and
any exclusions contained
within their insurance
policies.
Industry An increase in definitional
complexity may jeopardise
individual insurer's
reinsurance programmes.
Commonwealth Legislative amendments will
be required. ASIC will
administer the standard
definition in line with its
current responsibilities under
the IC Act.
Option 3C -- Offer categories separately under an alternative definition of
flood covering categories A and B for small businesses and strata title
complexes, as well as HBHC insurance policies
3.109 Under Option 3C, an alternative definition of flood would apply
to HBHC, small business and strata title insurance products. This option
would include standard definitions for two categories of flood (riverine
(Category B) and stormwater/rainfall runoff (Category A)). Insurers
would have the choice to offer cover for none, one or both of the two
categories.
52
Regulation impact statement
3.110 It should be noted that insurers will have the choice of whether
or not to offer cover for this definition of flood.
Impacts
Consumers
3.111 The costs of option 3C are expected to be similar to option 3B.
However, there may be an additional cost with Option 3C, as providing
individual insurers the discretionary power to determine which categories
of flood they offer cover for may increase complexity, reduce
comparability, continue to confuse consumers and may result in
inappropriate insurance cover being purchased by consumers.
Industry
3.112 The costs associated with Option 3C are likely to be similar to
3B.
Commonwealth
3.113 The Commonwealth will bear the same types of costs as Option
3A. It is expected that an additional cost to Commonwealth relative to
option 3B and option 2B is that it will fail to achieve the objectives of the
Government, namely to reduce consumer confusion. The introduction of
a series of definitions whereby the insurer has the discretion to offer or
withdraw categories of inundation insurance is unlikely to improve
consumers' understanding of what they are or are not insured for.
Table 3.6 Option 3C impact analysis
Benefits Costs
Consumers Where insurers choose to The more complex a definition
cover both riverine flooding of flood the less likely
and storm water/rain runoff consumers will understand the
consumers would be covered terms of, and any exclusions
for inundation occurring contained within their
from both `top-down' and insurance policies. This
`bottom-up' water sources. complexity and associated
A broader range of confusion could be magnified
consumers and categories of when viewed in light of the
damage would be included. fact that individual insurers
will have the discretionary
power to determine which
categories of flood they offer
cover for, thus removing the
consumer's ability to compare
53
Insurance Contracts Amendment Bill 2011
Benefits Costs
Consumers (continued) at a glance insurance products.
A possible increase in the
financial burden imposed on
insurers is expected to result
in a potential increase in
premium costs and/or the
withdrawal of insurance
products affected by the
broader definition.
Industry An increase in definitional
complexity may jeopardise
individual insurer's
reinsurance programmes.
The insurance industry may
face reputational risks for not
providing consumers with
insurance covering the same
categories of water inundation.
Commonwealth Legislative amendments will
be required. ASIC will
administer the standard
definition in line with its
current responsibilities under
the IC Act.
Option 4A - An alternative definition of flood including categories A, B
and C in home building and home contents insurance policies
3.114 Under Option 4A an alternative definition of flood applies which
would cover category A (stormwater/rainfall runoff), category B (riverine
flooding) and category C (sea inundation) and would apply to HBHC
insurance products. A possible advantage of this approach is that it would
ensure all forms of inundation risk are covered.
3.115 It should be noted that insurers will have the choice of whether
or not to offer cover for this definition of flood.
Consumers
3.116 The main benefit of Option 4A is expected to be that if the
incidence of cyclones and sea related inundation increases there may be
additional support for a definition applicable to category C inundation.
3.117 The costs with option 4A are expected to include:
54
Regulation impact statement
· that more elements there are in a definition, the greater the
complexity and the less likely that consumers will understand
the terms of their policies;
· potential increases in compliance and reinsurance costs
which may be passed on to consumers.
- Where reinsurance costs are deemed by insurers to be too
high and effected products commercially unviable, they
may be withdrawn from the market.
- The increase in premiums and withdrawal of products
from the market are likely to be greater under this option
as the definition is the broadest.
3.118 There are no quantifiable costs to consumers available (as
defined in paragraph 3.56).
Industry
3.119 It is anticipated that standardising a definition for category B
(riverine) flooding may resolve any residual confusion regarding category
A inundation.
3.120 However, category C inundation (which is not deemed to be the
result of rainfall), has been substantially defined through case law. By
grouping it with categories A and B flood, there is the risk of an increase
in consumer confusion.
· The insurance industry's representative body has indicated
that there is no compelling evidence to support an increased
level of definitional complexity and it brings the risk that
individual insurer's reinsurance programmes could be
jeopardised.
Commonwealth
3.121 The Commonwealth will bear the costs associated with the
consultation, implementation and regulation of this option.
55
Insurance Contracts Amendment Bill 2011
Table 3.7 Option 4A impact assessment
Benefits Costs
Consumers The incidence of category C A standard definition might
inundation (actions of sea), is have little effect if consumers
expected to increase and so do not familiarise themselves
the broadening of a definition with the detail of their
to include this type of policies including any
inundation could benefit technical meaning the term
consumers. flood may have.
An increase in the financial
burden imposed on insurers
could result in an increase in
premium costs and/or the
withdrawal of insurance
products affected by the
broader definition.
In the event that the incidence
of category C inundation
(actions of sea) rise, it is
possible that consumers could
be subject to additional
exclusions in insurance
policies.
The more complex a
definition of flood the less
likely consumers will
understand the terms of, and
any exclusions contained
within their insurance
policies.
Industry Category C inundation has
been successfully defined
through case law. Any
amendments to the way in
which it is dealt with may
jeopardise this agreed
definition and result in an
increase in consumer
confusion and additional
ill-will towards the insurance
industry.
An increase in definitional
complexity may jeopardise
individual insurer's
reinsurance programmes.
56
Regulation impact statement
Benefits Costs
Commonwealth Legislative amendments will
be required. ASIC will
administer the standard
definition in line with its
current responsibilities under
the IC Act.
Option 4B - An alternative definition of flood including categories A, B
and C for home building and home contents, small businesses and strata
title/bodies corporate insurance policies
3.122 Under Option 4B, an alternative definition of flood applies
which would cover category A (stormwater/rainfall runoff), category B
(riverine flooding) and category C (actions of sea) and would apply to
HBHC, small business and strata title insurance products.
3.123 The effects experienced as a result of the implementation of
Option 4B are expected to be much the same as those discussed under
Option 4A. However they are likely to be experienced on a larger scale as
it will be possible for a broader range of policy types to be affected.
3.124 It should be noted that insurers will have the choice of whether
or not to offer cover for this definition of flood.
Impacts
Consumers
3.125 The main impact of this option is expected to be the greater
number of consumers that could expect to receive the benefits of a wider
range of types on inundation being included in their insurance policies.
3.126 The costs for Option 4B are expected to be similar to Option 4A
except that extending this definition of flood to small business and strata
title/bodies corporate will impact on the ability for consumers to purchase
tailor-made policies (as is currently the case for small business and strata
title/bodies corporate).
Industry
3.127 The benefits and costs to industry are similar to Option 4B
except that they apply to a broader range of policies.
Government
57
Insurance Contracts Amendment Bill 2011
3.128 The Commonwealth will bear the same types of costs as Option
4A.
Table 3.8 Option 4B impact assessment
Benefits Costs
Consumers The inclusion of A standard definition might have
category C inundation limited effect if consumers do not
(actions of sea), is familiarise themselves with the detail
expected to increase and of their policies including any
so the broadening of a technical meaning the term flood may
definition to include this have.
type of inundation would An increase in the financial burden
benefit consumers. imposed on insurers could result in an
A broader range of increase in premium costs and/or the
consumers and withdrawal of insurance products
categories of damage affected by the broader definition.
would be included. The more complex a definition of
flood the less likely consumers will
understand the terms of, and any
exclusions contained within their
insurance policies.
Industry Category C inundation has been
successfully defined through case law.
Any amendments to the way in which
it is dealt with may jeopardise this
agreed definition and result in an
increase in consumer confusion and
additional ill-will towards the
insurance industry.
An increase in definitional complexity
may jeopardise individual insurer's
reinsurance programmes.
Commonwealth Legislative amendments will be
required. ASIC will administer the
standard definition in line with its
current responsibilities under the IC
Act.
Option 4C -- Offer categories separately under an alternative definition of
flood covering categories A, B and C for small businesses and strata title
complexes, as well as HBHC insurance policies
3.129 Under Option 4C, an alternative definition of flood applies
which would cover category A (stormwater/rainfall runoff), category B
(riverine flooding) and category C (actions of sea) would apply to HBHC,
small business and strata title insurance products.
58
Regulation impact statement
3.130 Insurers would have the choice to offer cover for none, one, two
or three of the categories.
Impacts
Consumers
3.131 The costs of Option 4C are expected to be similar to Option 4B.
However, there is additional cost with Option 4C, as providing individual
insurers the discretionary power to determine which categories of flood
they offer cover for may increase complexity, reduce comparability,
continue to confuse consumers and may result in the purchase of
inappropriate insurance cover by consumers.
Industry
3.132 The benefits and costs associated with Option 4C are likely to be
similar to 4B. Additional costs are that the standardising of terms across
all categories of inundation risk may have implications for competition
and product innovation and may expose insurers to reputational risks for
not providing consumers with insurance covering the same categories of
water inundation.
Government
3.133 The Commonwealth will bear the same types of costs as Options
4A and 4B.
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Insurance Contracts Amendment Bill 2011
Table 3.9 Option 4C impact analysis
Benefits Costs
Consumers The inclusion of The more complex a definition of
category C inundation flood the less likely consumers will
(actions of sea), is understand the terms of, and any
expected to increase and exclusions contained within their
so the broadening of a insurance policies. This complexity
definition to include this and associated confusion is magnified
type of inundation may when viewed in light of the fact that
benefit consumers individual insurers will have the
depending on insurers discretionary power to determine
choosing to offer flood which categories of flood they offer
insurance covering cover for, thus removing the
category C. consumer's ability to compare at-
A broader range of a-glance insurance products.
consumers and A standard definition might have
categories of damage limited effect if consumers do not
would be included. familiarise themselves with the detail
of their policies including any
technical meaning the term flood may
have.
An increase in the financial burden
imposed on insurers could result in an
increase in premium costs and/or the
withdrawal of insurance products
affected by the broader definition.
Industry Category C inundation has been
successfully defined through case law.
Any amendments to the way in which
it is dealt with may jeopardise this
agreed definition and result in an
increase in consumer confusion and
additional ill-will towards the
insurance industry.
An increase in definitional complexity
may jeopardise individual insurer's
reinsurance programmes.
The insurance industry may face
reputational risks for not providing
consumers with insurance covering the
same categories of water inundation.
60
Regulation impact statement
Benefits Costs
Commonwealth Legislative amendments will be
required. ASIC will administer the
standard definition in line with its
current responsibilities under the IC
Act.
Consultation
Government consultation with insurance industry
3.134 The Government met with the insurance industry on numerous
occasions. Many of these meetings have involved the Assistant Treasurer
and Minister of Superannuation and Financial Services.
3.135 14 January 2011 -- 1st meeting with insurance industry heads,
and Qld government in Brisbane. This meeting focused on immediate
response issues.
· 27 January 2011 -- ICA issues 10 point plan in response to
natural disasters. Calls for standard definition and improved
disclosure.
· 3 February -- 2nd meeting with the full ICA Board.
- The Government and the ICA discussed the 10 point plan
issued by the ICA.
- The discussion included consideration of standard
definition and one page key facts statement.
· 18 February 2011 -- 3rd meeting with the full ICA Board.
- The Govt and ICA reached in-principle agreement at this
meeting to work towards a standard definition and one
page key facts statement.
· 4 March 2011 -- 4th meeting with the full ICA Board.
- Further consideration of the details around a standard
definition and one page key facts statement.
- This conversation assisted the Government in developing
`Reforming flood insurance: Clearing the Waters', the
consultation paper containing a proposal in relation to a
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Insurance Contracts Amendment Bill 2011
standard definition and one page key facts statement and
seeking submissions.
· 5 April 2011 -- Government released `Reforming flood
insurance: Clearing the Waters' at a public forum in
Ipswich.
- This forum was jointly attended by the Minister, the ICA
and Qld Legal Aid.
- It was attended by hundreds of local people affected by
the floods and included many representations in relation
to consumer confusion in relation to flood coverage.
Many people thought that they were covered for flood and
weren't.
· 5 April 2011 -- ICA publicly supports a standard definition
and one page key fact statement.
· 16 May 2011 -- ICA lodged submission to Reforming flood
insurance: Clearing the Waters. Supportive of both standard
definition and one page key facts statement.
· 19 May 2011 -- ICA publicly reiterates its support for
standard definition.
· 14 July 2011 -- ICA makes submission to the NDIR.
Reforming flood insurance -- Clearing the Waters
3.136 On 4 April 2011, the Government released a consultation paper
Reforming flood insurance -- Clearing the waters in order to engage the
community and provide suggestions for improving the regulatory
framework and other aspects of Australia's insurance market.
· The consultation paper contained two key proposals for
consideration:
- To introduce a standard definition (in plain English) of
flood across HBHC insurance policies in order to ensure
HBHC insurance policies are more easily understood, so
consumers aren't surprised when they try to make a claim.
Under the proposal, the term flood would only appear in
an insurance policy if it is defined in the standard meaning
of the term.
62
Regulation impact statement
- The introduction of a single page KFS for HBHC
insurance policies, to allow consumers to see at a glance,
the key elements of the policy -- what is covered and
what is not.
3.137 Several submissions were received from interested stakeholders
and of these 13 submissions were made public and can be found on the
Australian Treasury website: www.treasury.gov.au. Submissions
indicated a broad level of support for the adoption of a standard definition
of flood and a KFS. Submissions made a number of constructive
observations and suggestions in response to the questions in the paper.
Consumer Comments
3.138 Consumer groups indicated broad support for the introduction of
a standard definition of flood in insurance contracts. It was widely held
that:
· concerns regarding consumer confusion about flood are still
valid;
· a standard definition will help consumers compare insurance
products and select insurance coverage that most closely suits
their needs;
· improvements to consumer education on what individual
insurance policies offer will reduce the incidence of under-
insurance; and
· a definition should use language that the majority of
consumers use in their everyday lives.
Industry Comments
3.139 Similarly, industry groups have indicated on balance support for
the introduction of a standard definition of flood. In regard to the release
of the discussion paper Reforming Flood Insurance -- Clearing the
Waters, industry groups have indicated that:
· they welcome the release of the paper;
· they understand that the Australian community would like
improved clarity on the availability of flood insurance and
how it works;
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Insurance Contracts Amendment Bill 2011
· they have released a 10 point plan16 to tackle disasters;
· the adoption of a standard definition for flood is a suitable
means of removing consumer confusion regarding the
meaning of the term flood;
· the introduction of a standard definition of flood will not
guarantee insurers offer this type of cover;
· a realistic transition period is needed for insurers to amend
their policy documents and remove references to the terms
flood and `flooding' as used previously. Industry indicated a
two year transition period would be appropriate; and
· the adoption of any standard definition of flood will not assist
consumers in assessing the risk of flood in their specific
location. This can only be achieved through the availability
of appropriate flood mapping data that can be accessed by
both consumers and insurers.
3.140 Insurers have indicated that the introduction of a standard
definition of flood will have an impact on the pricing of insurance. It is
expected that the broader the definition is, the greater the directional
pressure on pricing will be.
· As noted previously, the Government has previously sought
the views of industry and consumer groups on the impacts
the introduction of a standard definition of flood might have
on the price of insurance. Information provided by these
groups did not include data indicating the impact of the
proposed measure beyond noting that there could be upward
pressure on premium costs.
3.141 Further to this, efforts were made by Treasury to collect data from
the NDIR which might provide greater certainty about the precise number
of consumers who would be impacted by this measure and any potential
financial costs and benefits resulting from it but the data was unavailable.
3.142 In submissions to the discussion paper Reforming Flood
Insurance -- Clearing the Waters issues have been raised in the context of
Residential Strata Insurance Policies and small businesses (including but
not limited to, showrooms, factories and warehouses). Opposition and
16 Industry Continues Work on Flood Reforms, 5 April 2011, viewed 18 July 2011,
http://www.insurancecouncil.com.au/Portals/24/Media%20Centre/2011%20Media%20Rele
ases/ICA%20Media%20Release%20Flood%20Insurance%20050411.pdf
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Regulation impact statement
support to an expansion of the parties to be covered by a standard
definition of flood was noted. In this regard, the following statements
have been made by certain industry groups:
Opposing views
· There are an increasing number of commercial developments
approved on flood prone land unsuitable for residential
zoning.
- Underwriters need flexibility to decide what aspects of
flood cover can be extended to
commercial/industrial/rural zoning. Removing this
flexibility may have the effect of reducing the ability for
insurers to provide bespoke and negotiated flood coverage
for commercial premises.
- There needs to be flexibility for insurers to create special
flood definitions for commercial policies. Insurers may
choose to employ the standard definition of flood in their
commercial policies as a matter of consistency and
simplicity.
· Business policy holders are more likely than homeowners to
use the services of insurance brokers for advice and are less
likely to be confused by language in policies. In this
instance, the knowledge of the broker is deemed to be the
knowledge of the insured.
Supporting views
· A broader category of policy holders including body
corporate/strata insurance and small business insurance
would benefit from a standard definition of flood.
- This proposal would not force insurers to offer flood
cover to bodies corporate or small businesses, but it would
help these consumers to understand the cover offered by
their insurance policy and to consider what risks they
need cover for.
· An extension of the proposed standard definition to a broader
class of premises should be undertaken as it is incorrect to
assume that owners and occupants of non-residential
premises are necessarily better informed regarding
inundation risk.
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Insurance Contracts Amendment Bill 2011
· A standard definition of flood would ideally be included in
KFS and in Policy Disclosure Statements.
Conclusion and Recommended Option
3.143 Anecdotal evidence suggests that the number of different
definitions of flood is causing confusion amongst consumers. It is
possible that this is causing sub-optimal insurance outcomes in some
situations. However, based on the information to date and consultations it
is unclear how many sub-optimal outcomes.
3.144 Nevertheless, the preferred Option is Option 2B. A standard
definition of flood as outlined in Option 2B could reduce consumer
confusion regarding what is and is not included in insurance policies and
avoid situations where neighbouring properties, affected by the same
inundation event, receive different claims assessments because the
policies covering them use different definitions of flood.
3.145 Option 2B may improve consumers' ability to evaluate potential
insurance policies and compare `like' products between different insurers,
which may lead to an increase in price competition across the insurance
industry and provide greater certainty for insurers about what they provide
cover for.
3.146 Further, limiting a standard definition to riverine flood is
expected to be a more financially viable option for insurers compared to
Options 3A, 3B, 3C, 4A, 4B and 4C. The risk of insurers encountering
difficulties securing reinsurance is expected to be reduced. This in turn
will provide greater certainty to all stakeholder groups that affordable
insurance products will continue to be available to consumers.
3.147 Option 2B aims to ensure that all relevant consumers may
benefit from reduced consumer confusion by covering HBHC, strata title
and small business insurance policies. There is little to distinguish
individual property owners from those consumers who purchase insurance
for property owned as part of a body corporate or similarly, a small
business. In addition, insurers will be able to streamline the way they
handle a broader range of clients. However, there are no data available on
the number of small business and strata title customers that access
insurance brokers and the extent to which they are confused about the
definition of a flood, making it unclear to quantify the benefits of Option
2B.
3.148 There are expected to be compliance costs faced by industry as a
result of the introduction of a standard definition of flood including
66
Regulation impact statement
having policies rewritten and reassessed. It is unclear how large these
costs will be as industry did not provide estimates of costs when
consulted. However, industry has indicated that a two year transition
period will reduce uncertainty and alleviate concerns about
implementation of the measure on the commercial interests of insurers.
The full costs and benefits will only be determined once detail has been
specified in the Regulations
3.149 Insurers have indicated that a standard definition could result in
re-pricing of policies or in products being withdrawn. However, they
have not provided any data to determine the magnitude of re-pricing or the
extent of products that are likely to be withdrawn from the market.
3.150 In conclusion, there is anecdotal evidence to suggest that there
would be benefits with prescribing a standard definition of flood as
outlined in Option 2B. However, this option entails costs. Given that
there is no data on the costs or benefits of all the options it is unclear
whether Option 2B would provide the highest net benefit.
Implementation and review
Implementation
Changes to the Insurance Contracts Act 1984
3.151 The legislative framework for a standard definition of flood will
be introduced by amendments to the IC Act and new regulations will be
required to establish the content and format once the framework is
introduced.
3.152 The framework for a standard definition of flood (together with
the framework for a one page fully prescribed KFS) is expected to be
introduced to Parliament in November 2011 as part of a package of
amendments to the IC Act. Regulations will be made as soon as possible
after the ICA Bill receives Royal Assent.
3.153 There will be a two year transition period which will commence
from the date the regulations are made. It is envisaged that a two year
period will provide sufficient time for individual insurers to calculate the
impact the proposed changes will have on their businesses; make the
necessary amendments; and notify policy holders.
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Insurance Contracts Amendment Bill 2011
Consultation on the regulations covering the wording and format of the
standard definition
3.154 A significant amount of consultation has already occurred on the
wording and format of a standard definition of flood, with industry and
consumer representatives indicating broad support for the preferred
definition provided in this RIS. Further consultation will take place on the
final wording and format of a standard definition of flood.
· Evidence provided in the form of submissions to the
Government's consultation paper `Reforming flood insurance
-- Clearing the waters' suggests that support for the wording
provided in this RIS is widespread amongst respondents to
the consultation paper. Based on this support it is unlikely
the wording of the definition will vary considerably beyond
the definition provided in Option 2B.
3.155 Consultation is expected to occur in conjunction with the
consultation process undertaken for the KFS. In addition, any
consultation undertaken on this matter will be designed to ensure the
Government's objectives are met.
3.156 The precise format of the consultation process will be
determined once the legislative framework for a standard definition of
flood has been introduced. It is expected that comments will be sought
from relevant stakeholders via the provision of formal submissions and/or
discussion.
Review
3.157 The effectiveness of the proposed measure and legislative
amendments will be formally monitored by ASIC. It is expected that the
effectiveness and impact of the introduction of a standard definition of
flood will be reviewed a few years after the transition period has ended.
The time between the commencement of relevant regulations and any
review of the operation of the regulations must allow for industry and
consumer groups as well as Government to have gathered sufficient data
so as to contribute to a meaningful assessment of the success of the
measure.
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Chapter 4 Regulation impact statement
KEY FACT SHEET FOR HOME BUILDING AND HOME
CONTENTS INSURANCE POLICIES
Background
4.1 In recent times there has been a significant increase in natural
disasters. In 2009, the Black Saturday Bushfires spread across over
450,000 hectares in Victoria. In 2010-2011, areas of Queensland,
New South Wales and Victoria all experienced severe flooding.
Queensland also suffered the effects of Cyclone Yasi.
4.2 A substantial proportion of the cost of losses resulting from
natural disasters is met by insurance. On 28 June 2011, the Insurance
Council of Australia (ICA) indicated that, in relation to the Queensland
floods and Cyclone Yasi, in excess of 99 per cent of claims had been
assessed and determined. ICA member companies had received an
estimated $3.64 billion in claims, with 68,300 claims due to Cyclone Yasi,
and 56,200 due to the 2011 Queensland flood event.17
4.3 These catastrophic events highlight the importance of insurance
and making sure that individuals, families, communities and governments
have effective insurance cover in place to guard against and recover from
disasters.
4.4 In particular, these recent events have shown the extent of
underinsurance, with up to half of the homeowners and many businesses
affected by the floods being underinsured18 and the difficulties faced by
people affected by natural disasters that do not have insurance or do not
have the right type of insurance.
4.5 The recent events have also highlighted that there may be some
confusion around flood insurance and what is covered when a flood
occurs within the community.19 A number of households have suffered
17 ICA, `Insurance Claim Payments on the Increase', media release, 28 June 2011
18 Insurance News.com.au, `fortnightly premiums payments - why not'
http://www.insurancenews.com.au/analysis/fortnightly-premium-payments-why-not
19 JVIB News `Time for a change - calls to review `flood' definitions'
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Insurance Contracts Amendment Bill 2011
hardship as a result of underinsurance and in some cases no insurance, for
the flood event.
4.6 On 4 March 2011, in response to the escalating number of natural
disasters, the Hon Bill Shorten, MP Assistant Treasurer and Minister for
Financial Services and Superannuation announced an independent review
into disaster insurance in Australia. The Natural Disaster Insurance
Review (NDIR)20 has been tasked with looking at the broad issues relating
to insurance in the context of the long term funding of disaster relief.
Issues such as affordability and availability of flood insurance are being
addressed by the NDIR and are outside the scope of this Regulation
Impact Statement (RIS).
4.7 On 5 April 2011, as a first step in reforming flood insurance, the
Hon Bill Shorten, MP Assistant Treasurer and Minister for Financial
Services and Superannuation released a consultation paper `Reforming
flood insurance -- Clearing the waters'.21 The consultation paper was
released to engage the community on some particular suggestions for
improving the regulatory framework for flood insurance and other aspects
of Australia's insurance market.
4.8 The consultation paper contained two key proposals designed to
improve clarity for consumers in relation to insurance policies and in
particular, the cover provided for various types of flood, these include a
standard definition of a flood and a Key Facts Sheet (KFS), which would
outline the key information in relation to Home Building, Home Contents
and Home and Contents insurance policies (HBHC). This RIS covers the
KFS proposal.
4.9 On 2 June 2011 the Standing Committee on Social Policy and
Legal Affairs22 commenced an inquiry into, and report on, the operation of
the insurance industry with specific reference to extreme weather and
disaster events.
4.10 In addition to the actions of the Commonwealth Government
(the Commonwealth) the Victorian and Queensland governments have
also responded to the recent natural disasters with the establishment of the
Review of the 2010-2011 Flood Warnings and Response23 in Victoria and
20 The terms of reference of the NDIR can be found on the National Disaster Insurance Review
website: http://www.ndir.gov.au
21 The `Reforming flood insurance: Clearing the waters' consultation paper can be found at:
http://www.treasury.gov.au/contentitem.asp?ContentID=2039&NavID=037Archive
22 Standing Committee on Social Policy and Legal Affairs website:
http://www.aph.gov.au/house/committee/spla
23 Information on the review can be found at: http://www.floodsreview.vic.gov.au
70
Regulation impact statement
the Independent Commission of Inquiry into Queensland floods in
Queensland.24
Current Regulation
Pre-contractual disclosure
4.11 The key laws governing pre-contractual disclosure for insurance
are:
· the `standard cover' rules in section 35 of the IC Act for
certain types of prescribed household/personal contracts; and
· Product Disclosure Statement (PDS) rules for retail
customers (under the Corporations Act 2001 (Corporations
Act)).
Section 35 of the Insurance Contracts Act 1984 -- standard cover
4.12 Section 35 of the IC Act provides that standard cover (that is,
minimum levels of cover for prescribed events) will be deemed to be
included in certain classes of prescribed insurance policies, including
home buildings insurance and home contents insurance (other than cover
notes and renewals). The standard cover terms and conditions are set out
in the Insurance Contracts Regulations 1985 (ICR).
4.13 By way of example, the Regulations state that standard cover in
respect of home contents insurance includes loss that is:
... caused by or results from -- ... storm, tempest, flood, the action of
the sea, high water, tsunami, erosion or landslide or subsidence ...
4.14 If an insurer seeks to limit or exclude its liability in respect of
the standard cover, then the insurer must prove that:
· it `clearly informed' the consumer of the limitation or
exclusion in writing before the contract was entered into (or
within 14 days if provision before the contract was not
reasonably practicable, e.g. telephone sales); or
· the consumer knew of the limitation or exclusion; or
· a reasonable consumer in the circumstances could be
expected to have known of the limitation or exclusion.
24 Information on the Commission can be found at: http://www.floodcommission.qld.gov.au
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Insurance Contracts Amendment Bill 2011
4.15 If the insurer is unable to prove anyone of these three conditions,
then the insurer will be liable to make good any losses suffered by a
consumer that were caused by, or resulted from, any of the standard
events (construed in accordance with their ordinary meanings) up to a
maximum limit (usually $2 million).
4.16 There have been a number of court and dispute resolution cases
in relation to the interpretation of `clearly inform', which illustrate that
although there could be various means to inform, provision to the insured
of a policy document containing exclusions is sufficient, unless there are
exceptional circumstances (for example, if the provisions in the policy are
particularly confusing or complex). The court decision most cited on this
issue Hams & Ors v CGU Insurance Limited [2002] NSWSC 273 (Hams)
includes the following passage:
`a fair reading of s35(2) does not warrant the conclusion that the
result need go further than to provide for the relevant exclusion in
the policy wording in clear and unambiguous language and in a
manner which a person of average intelligence and education is
likely to have little difficulty in finding and understanding if that
person reads the policy in question'.25
4.17 In practice, the standard cover regulations are often rendered
non-applicable by the provision to the insured of a policy document
(usually contained within a PDS), thereby satisfying the requirement to
`clearly inform' the consumer. In a case where such a policy document
was provided, the protection offered by section 35 would only be
available if the terms in the policy were particularly complex or
confusing.
4.18 A common view held by consumer groups26 is that a large
proportion of policy holders do not read in detail the policy documents
they receive from their insurers so the protection offered by section 35 is
not, in practice, a very effective tool to ensure that consumers are
informed about their cover.
Chapter 7 of the Corporations Act 2001 -- Financial services disclosure
4.19 Chapter 7 of the Corporations Act provides that clients are
required to be issued a PDS when committing to a policy. The key
criterion for this obligation to apply in relation to general insurance
25 Hams & Ors v CGU Insurance Limited [2002] NSWSC 273
26 Joint submission to Reforming Flood Insurance: Clearing the Waters discussion paper, 13
May 2011, http://www.legalaid.vic.gov.au/xfw/rc_Joint_Submission_-
_Reforming_Flood_Insurance_-_May_2011.pdf
72
Regulation impact statement
products is that the client is a retail client, as defined in section 761G of
the Corporations Act. Section 761G provides that :
· the acquirer of the product must be either an individual or a
small business (fewer than 20 employees or 100 for
manufacturing businesses); and
· the insurance product is within one of the following classes
of insurance prescribed by the legislation and as defined in
the regulations:
- motor vehicle insurance;
- home building insurance;
- home contents insurance;
- sickness and accident insurance;
- consumer credit insurance;
- travel insurance;
- personal and domestic property insurance; or
- another kind of general insurance product prescribed in
the regulations (currently including medical indemnity
insurance).
4.20 In general terms the PDS requirements apply to contracts
prescribed for standard cover purposes under the IC Act, and some other
classes of insurance.
4.21 Corporations Regulation 7.9.15E requires a PDS for a retail
insurance product to contain both the policy terms (other than the policy
schedule), and any information that would be required under sections 35
and 37 of the IC Act.
4.22 A consequence of this requirement is that, for those general
insurance products subject to PDS requirements, the `clearly inform'
requirements in sections 35 and 37of the IC Act are supplemented by a
`clear, concise and effective' requirement which applies generally under
the Corporations Act to material in PDS documents.
Additional Comments on Current Financial Product Disclosure
4.23 In general, under the Corporations Act, a retail client must
receive a PDS before acquiring a financial product. The PDS document
sets out the significant features of a financial product, including its risks,
benefits and cost.
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Insurance Contracts Amendment Bill 2011
4.24 The broad objectives of a PDS are to help consumers compare
and make informed choices about financial products. To achieve these
objectives, the legislation requires that all information contained in a PDS
must be worded and presented in a clear, concise and effective manner.
While ensuring increased disclosure for retail investors the requirements
regarding the format of PDS are considerably flexible. This flexibility can
however lead to significant increases in the size and complexity of PDSs.
4.25 In order to overcome the adverse outcomes that may arise as a
result of this flexibility, providers of simple financial products are
required to issue shorter PDSs. The shorter PDS regime currently applies
to First Home Saver Accounts, margin loans and from 23 June 2011 will
apply to simple Managed Investment Schemes (MIS) and superannuation
products. However, it does not apply to general insurance policies. The
shorter PDS regime has been introduced to ensure that key information is
provided in clear way to allow retail investors to make effective financial
decisions. The shorter PDS regime uses an `incorporated by reference'
mechanism to ensure that all additional information to the key information
provided in the shorter PDS is provided when or where required.
4.26 More recently, a single page format for providing consumers
with key information has been considered to be an appropriate way of
ensuring that retail investors are able to make more informed and timely
financial decisions. Although concerns have been raised that a new single
page document outlining the key information in respect to a financial
product or service could be taken as a substitute for a more comprehensive
form of disclosure (a PDS or a shorter PDS), both industry and consumer
groups see the merit in the single page format.27
The problem
Summary
4.27 Currently, some consumers may find it difficult to easily access
key information within their insurance policies. This may lead to some
confusion in relation to what is and what is not covered under HBHC
insurance. In this regard, the PDS rules for general insurance, as currently
implemented, may not be as effective as they could be for informing
27 Insurers back flood definition but wary of `key facts',
http://www.insurancenews.com.au/local/insurers-back-flood-definition-but-wary-of-key-
facts
74
Regulation impact statement
consumers about HBHC insurance policies, and enabling comparisons
between these policies.
4.28 If key information about policies is not readily accessible to
consumers, there is potentially a greater risk of consumers acquiring
insurance that does not fully match their requirements. This may result in
consumers facing adverse outcomes when seeking to claim the
replacement of, or financial remuneration for, property damaged as a
result of unforseen events.
4.29 It should be noted that there are a number of uncertainties
surrounding the identification and magnitude of the problem due to the
lack of data.
Current situation
Confusion/uncertainty surrounding insurance created due to the lack of
accessibility of information
4.30 The difficulty in accessing key information regarding HBHC
policies may cause confusion and uncertainty.
4.31 Due to the lack of empirical research into consumer
understanding and confusion in respect to financial products the potential
magnitude of the impact of consumer confusion cannot be fully captured
at this time. However, one area where reliable data has been collected is
on disputed claims.
4.32 It is important to note that the data provided in relation to
disputed claims should be only seen as one part of the potential overall
magnitude of the potential problem.
4.33 In Australia, most financial service providers have their external
disputes resolved by the Financial Ombudsman Services (FOS). FOS's
independent dispute resolution processes covers complaints about
financial services including general insurance28, life insurance and FOS is
an independent, national body which offers an information service for
consumers on general insurance as well as providing free help to
consumers who have disputes with their general insurance providers.
28 General insurers in Australia also operate under a code of practice that is monitored by the
Financial Ombudsman Service (FOS). Under the code of practice insurers have 10 business
days from lodgement of all required claims materials in which to communicate an initial
assessment of your claim. There are options under the code of practice for consumers if this
timeline is not met.
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Insurance Contracts Amendment Bill 2011
4.34 Prior to its merger with Banking and Financial Services
Ombudsman and Financial Industry Complaints Service to form FOS in
2008 the Insurance Ombudsman Service (IOS) provided the independent
dispute resolution processes for disputes of general insurance policies.
4.35 In the General Insurance Code of Practice: Overview of the
2007-2008 Financial Year29, which is released by the IOS, statistical data
is provided on its internal dispute resolution monitoring of both new
business and renewals (refer table 4.1).
4.36 In this regard, the data in relation to home building and contents
insurance policies, which are combined under the heading of total home in
the table 4.1 below, for the 2007-2008 financial year indicates that there
were 11,363,851 new business and renewals of HBHC insurance policies.
Of the new and renewed insurance policies a total number of 1,029,971
claims were made. The data indicates that of the 1,029,971 claims made
33,672 were rejected by members.
4.37 The total number of new business and renewal HBHC insurance
policies represent, 36.27 per cent of the entire number of personal
insurance policies in the general insurance market. This figure indicates
the importance consumers place on ensuring they have HBHC insurance
cover when looking at other types of general insurance policies.
4.38 Claims made in relation HBHC make up 32.47 per cent of the
entire number of claims across the personal insurance policy market, thus
indicating that consumers are likely to depend more on insurance cover
for their HBHC needs than for other types of general insurance policies.
However, motor vehicle insurance has percentages equivalent to those of
HBHC insurance policies.
4.39 There were 4312 insurance claims made in relation to HBHC
policies taken to internal dispute resolution which represented
73.41 per cent of the total disputes taken to internal dispute resolution.
Buying insurance was the next most common reason with employee, code
and catastrophe/disaster issues representing only a small proportion of the
overall reasons.
29 General Insurance Code of Practice: Overview of the 2007-2008 Financial Year can be
found at:
http://www.fos.org.au/centric/home_page/publications/general_insurance_code_of_practice
_yearly_overview.jsp
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Regulation impact statement
Table 4.1 General Insurance Code of Practice: New business &
renewals, claims and rejected claims statistics
Total New Total Total Internal Disputes Total Disputes Disputes Total
Business Claims Rejected 1 2 3 4 5 6 Received found in found in Received
& Claims Favour of Favour of Disputes
Renewals Authorise Employee Buying Insurance Respondi Other Code Customer
(in force as d s Claims ng to Relating Member
20/08/200 Represen Catastrop to Code
8) tivies hes &
Disasters
Totals
Grand Total for Personal & 36,092,906 3,675,105 78,306 20 630 3,343 14,706 100 179 18,978 11,929 7,115 19,044
Commercial
Total Personal 31,334,975 3,172,539 69,433 14 619 3,300 13,768 100 172 17,973 11,274 6,783 18,057
Total Commercial 4,757,931 502,566 8,873 6 11 43 938 0 7 1,005 655 332 987
Personal Classes
Total Motor 11,602,411 1,600,237 9,212 6 344 2,077 6,144 5 73 8,649 5,382 3,322 8,704
Total Home 11,363,851 1,029,971 33,672 6 254 1,120 4,312 93 89 5,874 3,992 1,858 5,850
Travel Personal 3,505,105 189,922 16,208 1 7 39 2,369 0 3 2,419 1,244 1,261 2,485
Consumer Credit 926,455 21,325 3,606 0 0 7 60 0 0 67 46 20 66
Total Sickness 417,185 54,082 622 1 0 3 200 0 0 204 118 76 194
Total Valuables 925,881 42,510 2,090 0 0 3 54 0 4 61 47 17 64
Pleasure craft 323,925 10,930 172 0 0 3 80 0 0 83 31 24 75
4.40 In the IOS 2007-2008 Annual Report30, the IOS provided
statistical information regarding consumer disputes. The following tables,
which have been taken from that report, provide some additional insight
into potential issues regarding HBHC insurance policies.
30 Insurance Ombudsman Services (IOS) 2007-2008 Annual Report can be found at:
http://www.fos.org.au/centric/home_page/publications/annual_reports_archive.jsp
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Insurance Contracts Amendment Bill 2011
Table 4.2 Reasons why member denied liability
Cancel of Disclo Exclusion/ Failure to Fraudulent GI No No Non- Not Other Premium Quantum Sales & Service/ Third Total 2007- 2006-
insurance sure Condition offer Claim product policy proof disclosure covered & no Marketing handling party 2008 2007
contract issues insurance advice contract of on by claims of compl
loss proposal policy bonus
changes
Risks 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 2 0 1
Caravan/ 0 0 6 0 0 0 0 0 0 0 0 0 3 0 0 0 9 0.4 0
Campervan
Consumer 0 0 8 0 0 0 0 0 0 0 0 0 0 0 1 0 9 0.4 1
Credit
Home 5 1 476 1 5 0 11 0 7 38 0 2 54 1 3 0 604 28 21
Buildings
Home 0 0 148 1 8 0 2 1 5 24 0 0 31 0 1 0 221 10 12
Contents
Marine- 0 1 9 1 0 0 0 0 1 0 0 0 0 0 0 12 0.6 1
Pleasure
Medical 2 0 2 0 0 0 0 0 0 0 0 2 0 0 0 6 0 0
Industry
Motor 5 9 324 4 101 1 59 0 82 8 0 8 88 2 12 0 703 32 35
Vehicle
Motor 0 0 2 0 0 0 0 0 0 0 0 0 3 0 1 35 41 2 2
Vehicle TP
Other 0 0 8 0 0 0 0 0 0 0 0 2 1 0 0 0 11 0.5 0
Personal 0 1 75 0 0 0 1 0 2 2 0 0 1 2 0 0 84 4 4
Activity/
Sickness
Small 1 1 62 0 0 0 1 0 1 4 0 0 11 0 0 0 81 4 3
Business
Strata Title 0 0 25 0 0 1 0 0 0 0 0 0 1 0 0 0 27 1 2
Travel 0 0 335 3 4 0 4 0 0 3 1 1 7 0 2 0 360 16.5 18
Total 13 13 1481 10 119 2 78 1 98 79 1 15 200 5 20 35 2170 100 100
Percentage 1 1 68 0 5 0 4 0 5 4 0 1 9 0 1 2 100
4.41 When considering the data in table 4.2 (Reasons why member
denied liability) exclusions/conditions was the main area of
contention/dispute with 478 of the 604 claims for home buildings and 148
of the 221 claims for home contents being rejected. This represented
75.88 per cent of all of the areas of where members denied liability. The
other two main areas of contention, but to a significantly lesser extent, can
be seen to be disputed over what is not covered by the policy and quantum
of the claim/payout.
4.42 Although there is no available data regarding the particular
issues surrounding the reasons why members denied liability, anecdotal
evidence31 suggests that the main reasons were due to the fact that the
insureds had thought they had a basis for making the claim.
31 Ministerial correspondence
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Regulation impact statement
Table 4.3 Summary of outcomes by policy type
In favour of In favour of Settled Rejected Withdrawn by Supp det. case Total
applicant member applicant
per cent per cent per cent per cent per cent per cent
All Risks 0 0 1 50 0 0 1 50 0 0 0 0 2
Caravan/ Campervan 2 33 4 66 0 0 0 0 0 0 0 0 6
Consumer Credit 1 9 8 72 2 0 0 0 0 0 0 0 11
Home Buildings 140 26 324 60 68 12 2 0 0 0 4 0 538
Home Contents 40 18 138 65 29 13 3 1 1 0 0 0 211
Marine-Pleasure craft 2 16 8 66 2 16 0 0 0 0 0 0 12
Medical Industry 1 50 1 50 0 0 0 0 0 0 0 0 2
Motor Vehicle 192 28 379 55 93 13 17 0 2 0 0 0 683
Motor Vehicle TP 14 36 20 52 4 10 0 0 0 0 0 0 38
Other 3 20 9 60 3 20 0 0 0 0 0 0 15
Personal Activity/ Sickness 32 41 30 38 15 19 0 0 0 0 0 0 77
Small Business 24 34 39 55 6 8 0 0 0 0 1 0 70
Strata Title 7 35 8 40 5 25 0 0 0 0 0 0 20
Travel 77 21 217 61 57 16 2 0 0 0 0 0 353
Total 535 26 1,186 58 284 13 25 1 3 1 5 0 2,038
4.43 Table 4.3 (Summary of outcomes by policy type) clearly shows
that the vast number of the disputes referred to the IOS are found in the
favour of the insurers. In this regard only 26 per cent of consumer in
respect of home buildings and only 18 per cent of consumer in respect of
home contents were found in the favour of the consumer (applicant).
4.44 Although there is no available data on the exact reasons why
consumers referred disputes to the IOS, it is considered that there is a high
likelihood that they were of belief that they have a legitimate basis for
doing so. The IOS data suggests that consumers are incorrect in this
belief.
4.45 In summary, the data from the IOS demonstrates that:
· only a small number of consumers make insurance claims in
relation to the number of overall consumers holding HBHC
insurance policies;
· of all of the claims made only a small number were rejected;
· HBHC and Motor Vehicles are two areas where insurance
policies appear are most common and the areas in which
most claims are made;
· insurance claims are the most likely reason why disputes are
taken to internal dispute resolution;
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Insurance Contracts Amendment Bill 2011
· the main area of contention where members denied liability
was that of exclusions/conditions; and
· most but not all disputes referred to the IOS are found in
favour of insurers, even though it would be assumed that
consumers believed that their disputes were justified on the
basis that they believed they were covered for the claims they
were making.
While there may be a problem in relation to confusion in HBHC insurance
policies, particularly around exclusions/condition, the problem may be
seen to be small in absolute terms when considering claims where external
dispute resolution has taken place.
4.46 As stated in paragraph 4.31 above data in relation to consumer
understanding and confusion in respect to financial products and the
potential magnitude of the confusion cannot be fully captured at this time.
4.47 It is important to note that the nature of insurance is to protect
consumers from incurring a loss when an unforseen future event occurs.
It is only possible to establish the extent/magnitude of any problems
regarding confusion when an unforseen event occurs. Therefore any
issues for consumers regarding confusion that exist outside the context of
unforseen events are generally not able to be identified or reliably
measured.
Home Building and Home and Contents
4.48 In order to ensure consumers are informed regarding HBHC
insurance policies, consumers should read the policy's PDS, or at least be
familiar with the key information contained in the PDS.
4.49 However, as discussed in Australian Securities and Investment
Commission's March 2011 report `Financial literacy and behavioural
change'32, consumers are often overwhelmed by the sheer volume and
complexity of investment information available to them, including
disclosure material such as PDSs. The increasing length and complexity
of PDSs is also becoming a considerable obstacle for consumers when
making their financial decisions.
4.50 When consumers are informed at the time of making their
insurance decisions they are more likely to secure the correct amount of
32 Report 230 `Financial literacy and behavioural change' released March 2011,
http://www.financialliteracy.gov.au/media/218309/financial-literacy-and-behavioural-
change.pdf
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Regulation impact statement
cover. In an unpublished presentation to the Insurance Council, in 2010,
Inside Story presented their research findings into the insurance product
information needs of consumers. This research33 examined the level of
consumer understanding of PDSs for both motor vehicle and HBHC
insurance policies.
4.51 As part of their research Inside Story examined the way
consumers used or failed to use PDSs both before and after purchasing an
insurance policy. In this regard:
· 49 per cent of respondents indicated that they had never read
a PDS document before taking out a motor vehicle or HBHC
insurance policy. Of the respondents that had read a PDS
before entering into a policy, 5 per cent read the first few
pages only, 46 per cent went straight to particular sections,
30 per cent flicked through the majority of the document and
19 per cent read most or all of the PDS.
· 32 per cent of the respondents indicated that they had not
referred to a PDS document after taking out a motor vehicle
or HBHC insurance policy. Of the respondents that had
referred to a PDS after entering into a policy, 6 per cent read
the first few pages only, 43 per cent went straight to
particular sections, 36 per cent flicked through the majority
of the document and 15 per cent read most or all of the PDS.
4.52 These findings indicate that a number of consumers fail to
recognise the importance of reading their PDS or at least being aware of
the key information regarding their HBHC insurance policies both before
and after their purchase.
4.53 The issues surrounding the availability of information in, and the
useability of, PDSs have been highlighted in recent assessments regarding
the introduction of a shorter form PDS for a number of simple financial
products, such as the First Home Savers Account and the introduction of a
KFS for home loans.
4.54 The supporting material to the Corporations Amendments
Regulations 2010 (No. 5)34 states that:
33 Inside Story, 2010, an unpublished presentation to the ICA, `Consumer Insurance Product
Information Needs' project number 3259.
34 The supporting material to the Corporations Amendments Regulations 2010 (No. 5) is the
Regulation Impact Statement (RIS) for the introduction of the shorter PDS regulations for
superannuation products and MIS, which satisfied OPBR RIS requirements. A copy of the
supporting material to the Corporations Amendments Regulations 2010 (No. 5) may be
found at: www.comlaw.gov.au/Details/F2010L01585/Supporting%20Material/Text
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Insurance Contracts Amendment Bill 2011
`In recent years, there has been considerable discussion about the
overall effectiveness of current PDSs. A particular concern is that
the effectiveness of disclosure has been compromised by a
tendency for suppliers of financial products to provide excessive
information, generally over and above what the reasonable
consumer would need to make a product purchasing decision.
Disclosure documents can vary significantly in their length, design
and structure.'
4.55 In chapter 6 of the explanatory memorandum35 to the National
Consumer Credit Protection Amendment (Home Loans and Credit Cards)
Bill 2011 states that:
`studies also show that lengthy precontractual disclosure documents
do not assist consumers and instead overloads them with
information ... ... Consumers generally focus on the headline
information, such as amount repayable each month, interest rates
and whether insurance is required'
4.56 The inability for consumers to easily access key information can
be seen to be leading to increased levels of confusion, which in turn, is
leading to inappropriate decisions being made.
4.57 Confusion can be seen to exist whenever consumers are faced
with a large amount of information in relation to a particular decision or
action. While researchers currently differ on a precise definition for
consumer confusion36, the research indicates that three factors are
generally present when consumer confusion occurs. These factors are:
· a perceived similarity in the product or service;
· an overloading of information; and
· ambiguity surrounding the information being presented.
4.58 Research undertaken by Inside Story (as discussed above)
revealed that the current level of consumer understanding of PDSs for
motor vehicles and HBHC insurance policies was poor at the best.
35 Chapter 6 of the Explanatory Memorandum to the National Consumer Credit Protection
Amendment (Home Loans and Credit Cards) Bill 2011 contains that Regulation Impact
Statement (RIS). The Office of Best of Best Practice and Regulation indicated that the RIS
that was prepared prior to the final decision satisfied their requirements a copy of the RIS
can also be found at: http://www.ris.finance.gov.au/2010/12/21/competitive-and-
sustainable-banking-system-%E2%80%93-%E2%80%98key-facts%E2%80%99-document-
treasury/
36 `Towards a Conceptual Model of Consumer Confusion', Vincent-Wayne Mitchell,
Gianfranco Walsh and Mo Yamin.
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Regulation impact statement
4.59 In this regard, when respondents were asked `how easy is it to
understand the information in your HBHC insurance policy product
disclosure statement':
· Only 10 per cent indicated that they found that PDSs to be
very easy to understand.
· 40 per cent indicated that PDSs were somewhat easy to
understand.
· 24 per cent indicated that PDSs were neither easy nor
difficult to understand.
· 22 per cent indicated that PDSs were somewhat hard to
understand.
· 4 per cent indicated that they found PDSs to be very difficult
to understand.
4.60 In response to why PDSs were hard to understand, of the
relevant respondents:
· 52 per cent indicated that the use of big words and jargon
needed to be simpler.
· 42 per cent indicated that PDSs were too detailed,
longwinded and contained too much information.
· 8 per cent indicated that the fine print was confusing,
complicated and contradictory.
· 7 per cent indicated that the information contained in PDSs is
not clear or understandable.
4.61 When looking at these findings, it is clear that some consumers
are not able to access or effectively understand all of the information in
PDSs covering HBHC insurance policies. This is particularly the case
when looking at the wording and length of PDSs.
4.62 In 2000, the Australian Securities and Investments Commission
(ASIC) released a report `Consumer understanding of flood insurance'
outlining areas where improvements in disclosure in respect of flood
insurance should be made.37 The report identified the types of problems
faced by consumers, undertook an analysis of the relevant disclosure
documentation and reviewed a number of external dispute resolution
scheme panel determinations.
37 ASIC, Report 7 `Consumer understanding of Flood Insurance' ,
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/floodreport.pdf/$file/floodreport
.pdf
83
Insurance Contracts Amendment Bill 2011
Problems faced by consumers
· Consumers often have a limited understanding of the level of
flood cover they have in their HBHC insurance policy.
· Consumers are not always aware of the requirement to have
additional cover for flood damage as part of their HBHC
insurance policy.
· Policy documentation can be confusing and ambiguous in its
language with technical meanings often given to common
words.
· Consumers are not always aware of the distinction between
the types of damage and whether they are covered.
· The assessment of claims for flood damage is often more
complex than for other events covered by HBHC insurance
policies.
Analysis of the relevant disclosure documentation
· Document format -- a policy may be comprised of a number
of documents, requiring the consumer to read a number of
different documents (including the application, schedules,
endorsements, the insurance contract and the Product
Disclosure Statement (PDS)).
· Type of policy -- the structure of the policy may, in some
instances, make it harder for a consumer to work out the
extent of their home and contents insurance coverage.
· Definitions and terms -- participants in the insurance
industry currently use differing definitions for key words,
making it harder for consumers to make effective
comparisons between HBHC insurance policies. Key terms
are not always defined at the start of the relevant policy
documentation making it harder for consumers to fully
understand their cover.
External resolution scheme panel determinations
· There are examples of the effect of layout and presentation of
a document affecting a consumer's ability to understand the
terms of the policy:
`The policy document is somewhat cluttered in its
appearance. It explains that flood is excluded from home
building cover at page17 of a 40 page document and at page
21 it explains that contents cover excludes flood. The
definition of flood appears at page 8. Whilst an insured's
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Regulation impact statement
attention is not immediately arrested by these references
there is nothing confusing about them. The policy is
reasonably well indexed. The Panel is thus of the opinion
that the policy document satisfies the statutory requirement
to clearly inform'.38
· The effect that prominence given to particular items in a
policy document can have on the statutory requirement to
clearly inform:
`In this case the reference in the policy to the exclusion of
flood first appears at page 13 of the policy document. It is
not highlighted and is not particularly prominent. However,
the term appears in the definition section and appears under
the part of the policy that identifies what is not covered by
the policy. The index draws attention to three entries of the
term. Although the term could have been more prominently
identified within the policy a person looking to see if flood
is covered would have no difficulty in finding the answer.
In the Panel's opinion, the insurer has satisfied its
obligations pursuant to Section 35 of the Act'.39
4.63 ASIC's report illustrated that whilst from a legal position the
statutory requirement to clearly inform may be satisfied, the current
requirements under the IC Act and Corporations Act do not address the
confusion experienced by consumers when looking at HBHC insurance
policies. Recent experience in natural disasters demonstrates that
confusion surrounding HBHC insurance policies in this context still
exists.
Cooling off period
4.64 Another area of confusion/uncertainty surrounding HBHC
insurance policies is that of the cooling off period.
4.65 In order to provide consumers with protection after an HBHC
insurance contract is entered into, insurers are required to provide a
sufficient time period for the consumer to consider the policy, or have an
adequate cooling off period in respect to the policy.
4.66 The cooling off period provides consumers with the time to fully
consider their decisions free from any pressure or impulse. This allows
consumers to evaluate all of the key information in relation to the
particular policy.
38 IEC Determination Referral No 299 047 211
39 IEC Determination Referral No 299 047231
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Insurance Contracts Amendment Bill 2011
4.67 In essence the cooling off period gives a consumer with the
ability to think over the advantages and disadvantages of a policy to
ensure they have obtained the appropriate policy for their requirements.
4.68 In an examination of five HBHC insurance providers the length
of the cooling off period provided by the particular HBHC insurance
policy was found between pages 5 and 47 of the PDS.40
4.69 The qualitative findings of the research undertaken by Inside
Story indicate that when taking out car or home insurance 28 per cent of
respondents were unaware that there was a legal cooling off period during
which time they could cancel their policy at no cost if they were not happy
with their decision.
4.70 The remaining 72 per cent of respondents indicated that they
were aware there was a legal a cooling off period. However the length of
the cooling off was thought to range from 7 to 30 days41 with 25 per cent
of respondents correctly identifying the legal cooling off period provided
under the Corporations Act of 14 days.
Adverse outcomes arising as a result of confusion/uncertainty
4.71 The main adverse outcomes that can be seen to arise as a result
of confusion surrounding HBHC insurance policies are of a financial
nature.
4.72 In a recent unpublished report42 into a better PDS regime, it was
noted that although, from the industry's perspective, the risk of consumers
making poor decisions was relatively small, consumers still make
seemingly `poor' choices in relation to their insurance.
40 On page 21 of NRMA's PDS `Home Insurance Buildings and Content Product disclosure
statement and policy booklet', on page 5of youi's PDS `Home Product Disclosure
Statement', on page 47 of ANZs PDS `ANZ Home Insurance Product Disclosure Statement
and Policy Document', on page 7 of CommInsure's PDS `CommInsure Home Contents
Product Disclosure Statement (PDS) and on page 11 Westpac's PDS `Love is. A hot bath. A
good book. Your sofa.' Home and Contents Insurance Product Disclosure Statement and
policy wording.
41 Currently the IC Act requires any document required to be provided to the policy holder, to
be provided either personally or to the policy holder's postal address. Therefore, although
78 per cent of respondents indicated that they were aware of the legal cooling off period a
number of consumers may still be under the belief that if they fail to receive the disclosure
documentation for their policy within 7 days, the cooling off period would not be able to be
relied upon.
42 The Allen Consulting Group, 2009, unpublished draft report to the ICA `A better Product
Disclosure Statement Regime'
86
Regulation impact statement
4.73 These poor decisions were generally seen to be made in relation
to:
· insufficiencies in the sum insured to cover replacement costs;
· failure to take into account other incidental costs in the sum
insured; and
· failure to cover for specific risks such as flood.
4.74 These poor decisions can potentially lead to financial
distress/difficulty for the affected consumers in both the short and long
term. In this regard, when discussing the recent Queensland floods43,
Legal Aid Queensland indicated that many of their clients were unaware
that there were limitations to their home insurance cover and did not
understand their insurance policies. Some clients discovered that although
their claims were accepted, the fine print in their insurance policies
limited their pay-outs to capped amounts which represented a decrease in
the sum available for re-building.
4.75 It is important to note that when looking at reasons why
consumers may make poor decisions in relation to their insurance cover,
other factors may also play a role. These include confusion about the
policy, poor assessment of their individual risks' and poor assessment of
their likely damage in the event of an event occurring.
Current regulation and its effectiveness
4.76 As outlined previously, HBHC insurance policies are regulated
by the IC Act. Section 35 of the IC Act prescribes the minimum statutory
requirements for the cover provided under the policy, one of which is the
provision of flood cover.
4.77 However, insurers are able to derogate from the prescribed
minimum terms by offering a lower level of cover provided they `clearly
inform' the derogation to the customer before the consumer commits to
the policy.
4.78 In addition to the requirement to `clearly inform' any
derogations under the IC Act, the Corporations Act requires insurers to
provide consumers with a PDS for each policy. The PDS is required to
contain both the policy terms (other than the policy schedule), and any
43 Legal Aid Queensland, `Preliminary submission to Queensland Floods Commission of
Inquiry re paragraph 2(b) of the Terms of Reference', submission, 4 April 2011
87
Insurance Contracts Amendment Bill 2011
information that would be required under sections 35 and 3744 of the
IC Act.
4.79 The insurance provider must also ensure that the consumer has
adequate time to read and fully understand the policy before committing,
or the provider must have an adequate cooling off period45 in respect to
the policy.
4.80 Although there is some standard content for insurance contracts
the format of the relevant documentation can vary significantly. These
variations can lead to situations where the wording of the documents can
be confusing and ambiguous especially when it comes to derogations such
as exclusions for specific types of flood or floods in general.
4.81 The requirements for pre-contractual disclosure should help to
prevent policyholders being `surprised' by exclusions or conditions.
However, although the current requirements provided under the IC Act
and Corporations Act go some of the way to preventing consumers being
surprised, gaps still remain evident.
4.82 It is common for consumers to find themselves in situations
where they are totally unaware that they are not covered for certain events
or are only covered for certain events such as particular types of flood.
The practical limitation that can be seen to arise in relation to
pre-contractual disclosure has been recently commented on by the Chair
of the Claims Review Panel of the then Insurance Ombudsman Service
when he remarked that:
`The fundamental principle relevant to all insurance disputation on
which all parties agree is that no-one ever reads the policy before a
claim is made.'
44 Section 37 of the IC Act relates to the notification of unusual terms. For `non-prescribed'
types of contracts (which would include, for example, commercial buildings and contents),
there is no standard cover regime. However, insurers still need to `clearly inform' policy
holders in writing, before a contract is entered into, of the effect of any terms `of a kind that
are not usually included in insurance contracts that provide similar insurance cover'. Failure
to clearly inform an insured of such a clause (for example, an unusual exclusion or
limitation) means the insurer is not permitted to rely on it later. Section 37 only applies to
provisions `not usually included in contracts of insurance that provide similar cover'. So, if
an exclusion or limitation is generally used in relation to the type of cover concerned,
section 37 offers no protection even if the insured was not clearly informed of the term.
45 The Cooling off Period for Retail Clients (as defined in the Corporations Act 2001)
88
Regulation impact statement
Conclusion
4.83 Some consumers may find it difficult to access key information
on particular policies. This may be seen to occur cross all types of
insurance policies but HBHC insurance policies appear to be of particular
concern.
4.84 The key points to note about the problem are that:
· there may be an amount of confusion regarding HBHC
insurance products in respect to:
- the extent of coverage (what is covered);
- the exclusions that exist (what is not covered); and
- other technical information such as the cooling off period.
· some consumers may find it hard to access the key
information regarding their HBHC insurance policies, as the
information contained in the PDSs may not be readily
accessible for some consumers.
· the current disclosure requirements for HBHC may not be
effective in providing consumers with the information they
require in order to make effective decisions regarding their
HBHC insurance policies; and
· if consumers make ineffective decisions regarding their
insurance needs, adverse outcomes may arise for both the
individuals affected and society as a whole.
4.85 While there may appear to be a problem in relation to confusion,
the magnitude of the problem cannot be clearly established through
empirical evidence. Therefore it must be recognised that, at this time, it is
not possible to conclude that any Option considered in this RIS will be
able to be seen to address the problem.
Objectives of Commonwealth Government action
4.86 The Commonwealth's aim is to assist consumers with
understanding the basic terms of their HBHC insurance policies
(combined and separate policies), including the nature of cover and any
key exclusions.
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Insurance Contracts Amendment Bill 2011
Options that may achieve the objectives
4.87 There are many possible options for providing consumer access
to key information and addressing confusion surrounding and regarding
HBHC insurance policies. However, no option will ever completely solve
this problem as there will always be some consumers that fail to fully
consider the impact of not taking the steps required to make effective
decisions regarding their insurance needs.
4.88 In addition, it is also important to note that as the magnitude and
the cause of the problem cannot be clearly established through empirical
evidence as discussed in paragraph 4.32 above, it is not possible to
conclude that any Option will address the problem and result in a net
benefit.
Option A: Maintain the Status Quo
4.89 Maintaining the status quo allows both consumers and industry
to continue to make decisions/operate in accordance with the current law.
While this option has no cost implications for the Commonwealth or
industry, it will not remove the current costs being felt by some
consumers. In this regard, some consumers may continue to be unable to
access the key information regarding their HBHC insurance policies,
which may result in these consumers having to face adverse outcomes
if/when an adverse event, such as a flood occurs.
Option B: Introduce a KFS
4.90 The introduction of a KFS will enable Government to meet its
objective by providing consumers with easy access to the basic terms of
the insurance policy, including the nature of cover and any key
exclusions.
4.91 This Option provides consumers with the key information on
HBHC insurance policies. The KFS can be used as a guide to help
consumers understand the different aspects of their HBHC insurance
policies both before and after purchase.
4.92 This may enable easier comparison between different insurance
policies and should also result in the chosen insurance policy better
reflecting the consumer's preferences/requirements.
4.93 When considering the introduction of a KFS a number of Sub
options can be considered. These include:
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Regulation impact statement
· Option B1 -- A fully prescribed one page KFS: to provide
consumers with a quick reference guide to enable a basic
understanding of the policy type and what the policy does
and does not cover.
· Option B2 -- A fully prescribed one page KFS that refers to
the PDS: to provide consumers with a quick reference guide
that can also be used as a mechanism for consumers to
become fully informed in relation to the policy type and what
the policy does and does not cover.
· Option B3 -- A partially prescribed KFS: to provide
consumers with a quick reference guide similar to those in
options B1 and B2. In addition, insurers will also be able to
include or exclude certain information they deem to be or not
be required by the consumer.
· Option B4 -- A non-prescribed document containing key
information in relation to HBHC insurance policies: to
provide customers with a document to be used as a guide
regarding the key information of the HBHC insurance policy.
The document will be based on a general framework
specified in the legislation but it will not be prescribed.
Other options
4.94 There are many possible options for providing consumer access
to key information and addressing confusion surrounding and regarding
HBHC insurance policies. However, no option will ever completely solve
this problem as there will always be some consumers that fail to fully
consider the impact of not taking the steps required to make effective
decisions regarding their insurance needs.
Consumer education program/campaign
4.95 Consideration was initially given to an education
program/campaign to inform consumers of the benefits of reading and
understanding the information contained in HBHC insurance policy PDSs.
4.96 There may be a number of benefits to consumers from an
education program/campaign including encouraging consumers to:
· ask questions about their insurance policies;
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Insurance Contracts Amendment Bill 2011
· seek advice when they fail to understand particular
jargon/terminology; and
· become more active in the decision making process.
4.97 Although, an educational program/campaign may have a number
of benefits, it was considered that it would not meet the Commonwealth's
objective to assist consumers with understanding the basic terms of the
insurance policy, including the nature of cover and any key exclusions.
For the reasons outlined below, this option was not considered further.
4.98 An educational program may not be able to provide all of the
key information in relation to all HBHC insurance policies currently in the
insurance market and may potentially be seen as a promotion campaign
for the insurance industry.
4.99 An educational program/campaign would need to be broad in
order to address issues such as financial literacy and consumer
engagement. A program/campaign that merely encourages consumers to
read their insurance policy may potentially be of little benefit. The
program/campaign may need to identify ways that consumers can
demonstrate that they have read and understood their policies and other
relevant documentation, on an ongoing basis.
4.100 There are also concerns about the duration of a successful
education program/campaign. As most insurance policies last for short
periods (usually one year), it may be difficult to effectively engage
consumers as to the benefits of familiarising themselves with the detail of
their policy documents each time they are required to renew or update
their policies.
4.101 While it is recognised that the recent adverse outcomes
experienced by consumers may prompt consumer engagement in the short
term, this momentum may not continue in the longer term.
4.102 The effectiveness of an educational campaign/program as a
standalone option has also been questioned. In a recent ASIC report into
financial literacy and behavioural change46, ASIC stated that:
`while raising people's level of financial knowledge forms the basis
of many financial literacy initiatives around the world, there is a
46 Report 230 `Financial literacy and behavioural change' released March 2011,
http://www.financialliteracy.gov.au/media/218309/financial-literacy-and-behavioural-
change.pdf
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Regulation impact statement
growing body of research suggesting that knowledge is only one
factor when considering how to help people make positive financial
decisions'
4.103 Finally, the introduction of educational program/campaign may
not improve the accessibility of the key information in PDSs or act as a
mechanism for improving the wording and format of disclosure
documents.
4.104 While an educational campaign/program may not meet the
Commonwealth's objectives on its own, it could be used together with
other measures to meet the Commonwealth's objectives.
A targeted educational note/warning
4.105 It may also be possible for a targeted education note to be
provided with insurance contracts. The provision of advice to consumers
that the HBHC insurance policy contain a number of exclusions and that
the PDS pertaining to the HBHC insurance policy should be read as it
may reduce consumer confusion.
4.106 Furthermore, a standard educational note provided with policies
may be less costly for industry (it must be noted that industry has not
confirmed this at this stage), and may remind consumers that terms differ
between policies, while leaving it to individual consumers to check the
terms that matter to them.
4.107 While a targeted approach may be a useful tool to encourage
consumers to familiarise themselves with the detail of any insurance
product, this option was considered to have limited benefit when used in
isolation from other measures.
4.108 In addition, a targeted note or warning would not improve the
accessibility of the key information in PDSs or improve the understanding
of the content of the PDS for some consumers.
4.109 However, it was recognised that the provision of instructions to
consumers directing them to read the product disclosure statement and any
other relevant material and/or ask questions of the insurer to satisfy
themselves that they have an appropriate policy for their needs may
contribute to a reduction in consumer confusion.
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Insurance Contracts Amendment Bill 2011
Inclusion in the Shorter PDS regime
4.110 When initially looking at the problems regarding confusion and
the ability for consumers to access key information, consideration was
given to including insurance policies in the Shorter PDS (SPDS) regime.
4.111 The SPDS regime has been designed to provide consumers with
a shorter document for simple financial products. The SPDS regime
currently applies to First Home Saver Accounts, margin loans and from
1 July 2012 will apply to simple Managed Investment Schemes (MIS) and
superannuation products.
4.112 When considering this option the objectives of the proposal
were, once again, carefully considered. It was recognised that the SPDS
regime would potentially be an option that may achieve the objectives.
4.113 A benefit from having HBHC insurance policies in the SPDS
regime is that consumers would have easier access to key information. In
this regard, consumers will be more likely to be able to access key
information in relation to HBHC insurance policies when the information
is contained in a 4-8 page document.
4.114 Another benefit of moving HBHC insurance policies into the
SPDS regime is that it may be less costly for industry than other options
as a SPDS would replace the existing PDS and not be required to be
provided in addition to the PDS. However it must be noted that initial
costs incurred in developing a new shorter 4-8 page full disclosure
document would be greater than the initial costs incurred for producing a
one page document that does not provide full disclosure.
4.115 However, although this option had a number of benefits, for the
reasons outlined below it was not considered further.
4.116 The SPDS regime has only recently been introduced into
legislation and while it is expected to result in increases in consumer
awareness in relation to the products covered, the effectiveness of the
SPDS regime has not been fully established at this time.
4.117 Moving insurance products into the SPDS regime requires
changes to the Corporations Act; in order for this to occur, extensive
consultation and consideration would be required to ensure the underlying
principles of the Corporations Act are maintained. This may increase the
lead in time for any changes in the disclosure requirements for HBHC
insurance policies.
4.118 The ability to target particular products is not easily achieved
under the SPDS regime; therefore consideration would be required to be
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Regulation impact statement
given to the inclusion of all general insurance policies (this goes beyond
the intended scope of the current Commonwealth objectives). However, it
is recognised that General Insurance products may be suitable for
inclusion in the SPDS regime at a future time.
Assessment of options
Option A - Keep the current requirements under sections 35 and 37 of
the IC Act and Chapter 7 of the Corporations Act (Status Quo)
Impacts
Consumers
4.119 By maintaining the status quo, consumers will continue to be
presented with a PDS containing large amounts of information. Key
information required for consumers to make decisions about their HBHC
insurance policies will continue to be provided but difficult to access in
the PDS and policy documentation.
4.120 In addition, a PDS will continue to contain an amount of
additional information that the insurer deems to be required by the
consumer. Inclusion of this additional information by insurers may be
seen by some consumers to add increased complexity and ambiguity
which may lead to increased confusion. The effect of this confusion may
be that consumers will have a lower level of protection than was originally
intended in the legislation. Costs in the terms of time and effort may
persist as consumers who choose to be adequately informed may continue
to be required to read long and complex PDS documents.
4.121 More importantly, the current regime might encourage
misguided decisions about the insurance cover provided under particular
policies especially for consumers with low levels of financial literacy.
Industry
4.122 There will be no transition costs for HBHC insurance policy
providers if the status quo maintained. Insurance policy providers are
already developing insurance policy documents and PDSs in accordance
with the sections 35 and 37 of the IC Act and Chapter 7 of the
Corporations Act, so they are familiar with the current disclosure
requirements.
4.123 The confusion surrounding insurance policies as a result of the
current disclosure requirements may be seen in some circumstances to be
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Insurance Contracts Amendment Bill 2011
potentially leading to poor decision making by some consumers and as
such may be resulting in underinsurance in some instances.
Commonwealth
4.124 Under Option A, there will be no change in benefits or costs
regarding HBHC insurance policies.
Table 4.4 Impact assessment of Option A (status quo)
Benefits Costs
Consumers No change Some consumers will
continue to be unable to
access the key information
regarding their HBHC
insurance policies. This may
in turn lead to adverse
outcomes.
Industry No change No change
Commonwealth No change No change
Option B -- Introduce a KFS
General Impact
4.125 The KFS is intended to provide information that is concise and
easier to understand to assist consumers with their decision making. This
may enable them to take out an insurance policy that best reflects their
preferences.
4.126 The KFS will be required to be issued by insurers as soon as
practicable after a consumer has requested information on a particular
HBHC insurance policy, or in conjunction with the PDS (if the consumer
has not previously obtained the KFS); and to have a copy of the KFS on
their website for consumers to access.
4.127 The introduction of a KFS is expected to improve accessibility
of the key information regarding HBHC which is expected to in turn
reduce the current confusion surrounding these policies. Improvements in
financial decision making have been recognised when financial disclosure
documentation has been shortened.
4.128 In this regard. Chapter 6 of the Explanatory Memorandum to
the National Consumer Credit Protection Amendment (Home Loans and
Credit Cards) Bill 2011 stated that:
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Regulation impact statement
`Empirical studies show that simplified and timely disclosure can
improve consumer comprehension of credit contracts as well as
improve decision making processes, such as encouraging them to
consider a wider range of options and choosing the right option for
them.'
4.129 Further, in mid May 2010 a final report was released,
Simplification of Disclosure Regulation for the Consumer Credit Code:
Empirical Research and Redesign. The report covered a number of
elements of disclosure documentation on home loan products, the report
indicated that:
· simplified precontractual disclosure greatly assisted
consumers with improving their understanding of the cost of
the credit contract;
· comprehension tests based on simplified disclosure was
improved by factors of between 400 per cent and 1,800 per
cent; and
· when exposed earlier to simple disclosure of key facts,
consumers find comparison of products easier and make
more informed choices.
4.130 A reduction in the number of disputes regarding the key facts of
particular HBHC insurance policies is also expected to occur. As
indicated in table 4.2 and table 4.3 the issues surrounding dispute claims
are most likely to be related to consumers understanding of what
exclusions/coverage they have under their HBHC insurance policies. It is
expected that if consumers increase their knowledge and awareness of the
key facts contained in their policies PDS they may make more effective
decisions and as a result may secure adequate insurance cover for their
needs.
4.131 The idea that effective disclosure is more likely to be achieved
through shorter and sharper documents such as a shorter PDS document or
KFS has been widely supported. This can be seen in the Supporting
Material to the Corporations Amendment Regulations 2010 (No. 5) where
it states:
` The Government considers effective financial disclosure
important so that consumers receive adequate information to make
more informed and efficient choices, and have a higher level of
accountability for their investment decisions. Effective disclosure
then, means that the information is provided in such a way that
consumers can easily locate and understand all the key information
they require to make an informed decision'
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Insurance Contracts Amendment Bill 2011
4.132 The precise content and format of the KFS will be contained in
Regulation and will be established through extensive consultation with
key stakeholders to ensure effective policy outcomes are achieved.
Therefore, it must be noted that the effectiveness and any potential
benefits of this option cannot be fully measured at this time.
4.133 It is important to note, that even in cases where the presentation
of financial information is succinct and assessable, consumers approach
financial decisions with different levels of financial literacy.47 This can
affect the effectiveness of a KFS and means that, even if a KFS is
introduced, the desired benefits may not apply to consumers uniformly.
That is, there may still be a number of consumers that may not even read a
one page document prior to making their insurance decisions.
4.134 In this regard, it must be made clear that the introduction of a
KFS in the following options will not be a substitute for the requirement
for insurers to issue a PDS under the Corporations Act. Rather, insurers
will be required to provide a KFS as well as a PDS.
Costs
4.135 The introduction of a KFS has received broad support from
industry. However requiring industry to provide consumers with a
document stating the key facts/information relating to their policy would
impose additional compliance costs; primarily in the form of transitional
costs.
4.136 The specific amount of compliance costs would be difficult to
calculate as the complex nature of HBHC insurance policies would
require different amounts to be calculated for each particular insurance
policy and would depend on each insurance provider's current disclosure
procedures.
4.137 The compliance costs for producing a KFS for home and content
insurance policies has been estimated by the ICA, after consulting with a
number of its members48, to be approximately $1.2 million in the initial
year and $1.2 million every year thereafter. The compliance costs will be
incurred in the establishment (statement development and legal costs),
implementation (systems changes, website updates and front line staff
47 ANZ Survey of Adult Financial Literacy in Australia,
http://www.anz.com/Documents/AU/Aboutanz/AN_5654_Adult_Fin_Lit_Report_08_Web_
Report_full.pdf
48 Which, as asserted by the ICA, represent a significant proportion of the home and contents
insurance policy market.
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Regulation impact statement
training costs) and ongoing annual costs (printing and distribution costs)
of the KFS.
4.138 It is important to note that the initial and ongoing costs
associated with the KFS are the estimated total combined cost for the
insurers consulted and not for each individual insurer consulted. These
costs are not to be taken to be the estimated costs for the entire insurance
industry.
4.139 When looking at these estimates it is important to note that they
are based on the assumption that the KFS is likely to be a highly
prescribed document, provided together with the PDS and able to be
provided electronically (and otherwise on request/on insurer's web page).
4.140 It is important to note that the cost of the introduction of the
KFS would be likely to spread across insurance policies as insurers are
unlikely to only allocate costs particular groups of consumers.
4.141 It must be made clear that under this option the total cost
identified is likely to result in cost increases across all policies to address
confusion concerns in relation to only a percentage of policy holders.
4.142 It is once again important to note that the nature of insurance is
to protect consumers from incurring a loss when an unforseen event
occurs. An insurers' business is to provide consumers with this protection
for unforseen events for periods for which policies apply not to periods
prior to that time.
4.143 The costs associated with the introduction of the KFS as
outlined in the preceding paragraphs are expected to be minimal for most
insurance providers. However, one HBHC insurance provider stated in
their submission49 to the `Reforming flood insurance: Clearing the waters'
consultation paper that the introduction of a KFS
`might be advantageous in terms of simplicity, it would of course
come at a significant cost for the industry and have prudential
implications'
4.144 This statement however was not supported in any other
submission to the `Reforming flood insurance: Clearing the waters'
49 The RACQ submission and other industry submissions can be found at:
http://www.treasury.gov.au/contentitem.asp?ContentID=2039&NavID=037
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Insurance Contracts Amendment Bill 2011
consultation paper. The expected costs are considered to be on a
proportional basis the same for both small and large insurers.50
4.145 While the actual costs incurred by industry are expected to be
passed onto consumers, they are not expected to be a material
consideration in the determination of HBHC insurance policy premiums.
The introduction of a KFS is not expected to have a material impact on
cost of HBHC insurance for consumers.
Expected content of the KFS
4.146 Submissions received on the proposal51 have highlighted some
of the key information that should be included in the KFS.
Type of policy
4.147 Outlining the type of policy (policy cover) provided by the
HBHC insurance policy is considered to be one of the most significant
aspects of the KFS. The exact format of how the policy type (policy
cover) will be outlined has not been fully determined at this time. The
approach currently being considered (outlined in the `Reforming flood
insurance: Clearing the waters') is that insurers will be required to outline
which of three categories the policy falls under (sum insured, sum insured
plus margin and total replacement).
4.148 While it has been indicated that this approach has merit, some
industry representatives have raised the concern that it may not reflect the
level of diversity offered in relation to HBHC insurance policies.
Consultation will be undertaken in order to determine the exact format for
outlining what type of cover policy information on the KFS.
What is covered?
4.149 Currently, the ICR contain prescribed events that are required to
be covered (standard cover events), unless a derogation applies. These
events include, amongst others, fire or explosion, lighting or thunderbolt,
earthquake, impact by a falling tree of part of a falling tree and riot or civil
commotion. Although ideally the `what is covered' section of the KFS
would outline all of the standard cover prescribed events, limiting the KFS
to one page renders this impossible. Further, not all of the prescribed
events listed in the standard cover will be of significant consumer interest.
50 Smaller insurers generally have a stronger website focus and as such will provide consumers
with online access to their KFSs therefore potentially minimising printing and distribution
costs.
51 As outlined in `Reforming flood insurance : Clearing the waters'
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Regulation impact statement
4.150 Consultation will be undertaken in order to determine which of
the prescribed events should be outlined on the KFS. In this regard,
current feedback indicates that the main prescribed events of standard
cover such as fire or explosion, storm, flood, accidental damage (in
accordance with standard cover) are expected to be outlined on the KFS.
What is not covered?
4.151 Currently, the ICR contain prescribed events that are considered
to be exclusions. These events include, amongst others, depreciation,
wear and tear, rust or corrosion and the actions of insects or vermin.
However in order to establish what is included in the `what is not covered'
list is not as easy as outlining all of these exclusions. Consideration is
also required to be given to the prescribed events of standard cover that
are not to be included in the `what is covered' list. Consultation will be
undertaken in order to determine which of the prescribed events that are
considered to be exclusions and those other events that are not included in
the `what is covered' section are to be outlined on the KFS.
Cooling off period
4.152 Currently, it is proposed to include a short statement simply
stating that a cooling off period applies to HBHC insurance policy which
enables consumers to cancel the policy within that period. This allows
flexibility for insurance provides to enable them to provide cooling off
periods in excess of the statutory period.
How to use a KFS
4.153 Currently, it is proposed to include a simple statement indicating
how a KFS is to be used. The statement will emphasise that it is only a
guide and should not be used as a substitute for a PDS as a basis for
making a purchasing decision.
Supplementary consideration for extending the application of a KFS
4.154 Initial consideration was given to potentially extending the
KFS application to small business and strata title insurance policies.
However, due to a number of potential issues, raised in consultation
(paragraphs 4.204 and 4.209), associated with extending the KFS to these
policies, this option was not considered further.
4.155 In this regard, insurance policies covering small business and
strata title are usually tailored and are not required to address the standard
cover obligations set down in the IC Act. This is in contrast to HBHC
insurance policies which are substantially standardised and are required to
the standard cover obligations set down in the IC Act.
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Insurance Contracts Amendment Bill 2011
Option B1 -- the introduction of a one page, fully prescribed, KFS
Impacts
Consumers
4.156 The introduction of a one page fully prescribed KFS may
facilitate increased simplicity, consistency and comparability when
consumers are making decisions regarding the purchase of HBHC
insurance policies.
4.157 A one page fully prescribed KFS will outline the key
information in relation to the insurance policy in an easy to read and
consumer friendly layout (determined through consumer testing). This
layout may enable consumers to access the key information in a simple
and effective way.
4.158 Having the KFS fully prescribed also provides consistency in
the formatting and content of the KFS. This consistency provides
consumers with a further level of familiarity (knowing what to look for
and the meaning of certain words and concepts) that results, in more
effective decision making.
4.159 The consistency provided in KFSs may allow consumers to
easily compare one policy with another through the identification of the
key facts and other relevant information.
4.160 The ability for consumers to be able to compare one insurance
policy with another may result in increased competition within the
insurance industry (however in must be recognised that the contents of the
KFS may not necessarily include all matters that are of relevance to
individual consumers) and provide potential financial savings for
consumers. However, these potential benefits must be balanced with the
potential costs for a consumer associated with the process of shopping
around for the best policy for the consumer's needs.
4.161 Although the introduction of a KFS facilitates increases in
simplicity, consistency and comparability, there is no guarantee that
consumers will take advantage of these improvements. In order for
consumers to obtain the benefits from the introduction of a fully
prescribed KFS, consumers must still consider all of the key information,
including that which is contained in the PDS, prior to making any
insurance policy decisions.
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Regulation impact statement
4.162 What is and what is not covered under an insurance policy
sometimes involves complex considerations52. A fully prescribed KFS
may not be able to cover all information that may need to be considered
by individual consumers. The potential for relevant information, to be
omitted, may result in consumers in particular circumstances making
decisions based on incomplete information leading to adverse outcomes.53
Industry
4.163 A fully prescribed KFS provides industry with a straightforward
legislative process to facilitate the disclosure of the key facts of their
HBHC insurance policies to consumers.
4.164 The benefits of Option B1 that have been identified in relation to
consumers, that is, simplicity, consistency and comparability, can also be
indentified for industry. In this regard, once KFSs for HBHC insurance
policies become part of standard industry practice (as required under this
Option) HBHC insurance policy providers may have a simple and
consistent way of communicating key product information to consumers.
4.165 Under Option B1the KFS will be fully prescribed. While this
allows the insurance industry to formulate standard procedures and
methods for informing consumers it does not provide the same flexibility
that is offered in Option B3. The insurance industry will only be required
to provide consumers with a document containing key policy information
(in addition to their current requirements under the Corporations Act and
IC Act), which may minimise the increased compliance costs.
4.166 The cost expected to be incurred in regard to this Option have
been outlined in the costs section of the introduction of a KFS paragraphs
4.135 to 4.150 above. This option is considered to have no other material
costs for industry.
Commonwealth
4.167 Under Option B1 the Commonwealth will incur consultation,
testing and implementation costs:
· Consultation costs will be incurred during the process of
forming and finalising the Regulations that will give effect
to the KFS.
52 National Insurance Brokers Association of Australia - Insurance Contracts Act Issues Other
Than Section 54 (submission) ,
http://icareview.treasury.gov.au/content/_download/submissions_post_issues/niba.pdf
53 Insurance providers will however continue to be required to provide a PDS.
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Insurance Contracts Amendment Bill 2011
· Consumer testing cost will be incurred during the
development of the KFS.
· Implementation costs associated with both the introduction of
the legislative framework and Regulations will also be
incurred.
4.168 In addition to the initial costs associated with introduction of a
KFS, ongoing costs will be incurred for monitoring of the KFS. In this
regard ASIC will administer the standard definition in line with its current
responsibilities under the IC Act.
Table 4.5 Impact assessment of Option B1 (One page, fully
prescribed, KFS)
Benefits Costs
Consumers Easy to read and consumer A fully prescribed KFS will
friendly layout (determined not be able to cover all
through consumer testing). information relevant for
Increased consistency as a individual consumers or
result of prescribed consumer groups. This may
formatting and content of the result in decisions being made
KFS. on some, but not all, of the
relevant information.
Easy to compare one policy
with another through the There is a potential risk that
identification of the key facts the KFS to be seen as a
and other relevant substitute for PDS.
information. Any costs incurred by
industry for producing a KFS
is likely to be passed onto
consumers through increases
in premiums.
Industry A simple and consistent way Initial costs associated with
of communicating key the introduction of the KFS,
product information to including assessment of
consumers. HBHC insurance policies.
A mechanism to reduce the Increased ongoing cost,
number of inferior HBHC including printing, production
insurance policies. and distribution costs.
Commonwealth Consultation, consumer
testing and implementation
costs will be incurred.
Monitoring costs will also be
incurred as ASIC will
administer the standard
definition in line with its
current responsibilities under
the Insurance Contracts Act.
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Regulation impact statement
Option B2 -- the introduction of a one page, fully prescribed, KFS that
refers to the PDS
Impacts
Consumers
4.169 The introduction of a one page fully prescribed KFS that refers
to the PDS may facilitate increased simplicity, consistency and
comparability when consumers are making decisions regarding the
purchase of HBHC insurance policies.
4.170 The referencing aspect of Option B2 essentially creates an
intrinsic link between the key information in the KFS and the disclosure
information in the PDS. In effect the KFS will have two purposes; the
first to provide consumers with a summary of the key information on the
particular insurance policy and the second, to act as a potential guide to
more detailed information contained in the PDS.
4.171 The incorporation of referencing enables consumers to access
additional information on areas in the KFS that they consider to be crucial
when making decisions. Consumers are able to increase their knowledge
and awareness of their policy in accordance with the level of complexity
they wish to adopt.
4.172 Although the introduction of a fully prescribed KFS that refers
to a PDS facilitates increases in simplicity, consistency and comparability
there is no guarantee that consumers will take advantage of these
improvements. Furthermore, some consumers may see the inclusion of
PDS referencing as just additional information that can be disregarded and
as such fail to recognise its additional benefits.
4.173 In order for consumers to obtain the benefits from the
introduction, consumers must still consider all the key information on the
KFS and where possible all the other relevant information in the PDS
prior to making any insurance policy decisions.
Industry
4.174 A one page fully prescribed KFS that refers to the PDS may
provide industry with a straightforward legislated process to facilitate the
disclosure of the key facts of their HBHC insurance policies to consumers.
In addition, it may provide insurers with the ability to increase customer
knowledge and awareness.
4.175 The benefits of Option B2 that have been identified in relation to
consumers, that is, simplicity, consistency and comparability, can also be
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Insurance Contracts Amendment Bill 2011
identified for industry. In this regard, once KFSs for HBHC insurance
policies become standard industry practice (as required under Option B2)
HBHC insurance policy providers may have a way of communicating key
product information that is seen by consumers to be simple and easy to
understand.
4.176 While this allows the insurance industry to formulate standard
procedures and methods for informing consumers it does not provide the
same flexibility that is offered in Option B3.
4.177 Under Option B2, HBHC insurance providers will be required to
have references to the full PDS. This requirement may result in a
reduction in the number of disputes from consumers having policies that
fail to provide them with the appropriate cover. The reduction in disputes
can be seen to be achieved though the increased level of knowledge and
awareness displayed by consumers as a result of the easy access to the key
information in the PDS.
4.178 The costs expected to be incurred in regard to Option B2 have
been outlined in the costs section of the introduction of a KFS paragraphs
4.135 to 4.150 above. However, under Option B2 there is a potential for
the costs to increase as a result of the inclusion of PDS referencing. In
this regard, if the two documents (the PDS and KFS) are intrinsically
connected any change in one document would require a change in the
other. In order to address this issue insurers would be required to:
· implement new IT procedures and or practices to integrate
the two documents, potentially creating a one-off compliance
cost; or
· make individual changes to the documents as they occur,
creating ongoing compliance costs.
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Regulation impact statement
Commonwealth
4.179 Under Option B2 the Commonwealth will incur consultation,
testing and implementation costs:
· Consultation costs will be incurred during the process of
forming and finalising the Regulations that will give effect to
the KFS.
· Consumer testing cost will be incurred during the
development of the KFS.
· Implementation costs associated with both the introduction of
the legislative framework and Regulations will also be
incurred.
4.180 In addition to the initial costs associated with introduction of a
KFS, ongoing costs will be incurred for monitoring of the KFS. In this
regard ASIC will administer the standard definition in line with its current
responsibilities under the IC Act.
Table 4.6 Impact assessment of Option B2 (One page, fully
prescribed, KFS, that refers to PDS)
Benefits Costs
Consumers Easy to read and consumer That while a fully prescribed
friendly layout (determined KFS that refers to the PDS
through consumer testing). will be able to cover all
Increased consistency as a information relevant for
result of prescribed individual consumers or
formatting and content of the consumer groups, there is a
KFS. potential that consumers may
not see its benefits and fail to
Ease of comparing one policy look beyond its general
with another through the content. This may result in
identification of the key facts decisions being made on
and other relevant some, but not all, of the
information. relevant information.
Ability for consumers to gain There is a potential risk that
an increased knowledge and the KFS to be seen as a
awareness of all aspects of substitute for PDS.
their HBHC insurance
policies. Any costs incurred by
industry for producing a KFS
are likely to be passed onto
consumers through increases
in premiums.
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Insurance Contracts Amendment Bill 2011
Benefits Costs
Industry A simple and consistent way Initial costs associated with
of communicating key the introduction of the KFS,
product information to including assessment of
consumers. HBHC insurance policies.
A mechanism to reduce the Increased ongoing cost,
number of inferior HBHC including printing, production
insurance policies. and distribution costs.
Insurance providers should be Additional costs will be
able to reduce the number of incurred as new IT
disputes over the level of procedures and or practices to
cover of its policies. integrate the two documents
(KFS and PDS) will have to
be established.
Commonwealth Consultation, consumer
testing and implementation
costs will be incurred.
Monitoring costs will also be
incurred as ASIC will
administer the KFS in line
with its current
responsibilities under the IC
Act.
Option B3 -- the introduction of a partially prescribed KFS
Impacts
Consumers
4.181 The introduction of a partially prescribed KFS may facilitate an
increased level of simplicity when consumers are making decisions
regarding the purchase of HBHC insurance policies. Consistency and
comparability may also be increased in the areas of the KFS that are
prescribed.
4.182 If the KFS is partially prescribed consumers will have access to
more tailored information for the insurance policy that they are
considering/assessing. Under Option B3 a number of key aspects of the
particular HBHC insurance policies will be prescribed54; however the KFS
may be tailored to include information (specific to the particular insurance
54 The prescribed section will be established through consultation with industry and consumer
groups. It is envisioned that both the type of cover and the basic information regarding what
is covered and what is not covered under the policy will be prescribed.
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Regulation impact statement
policy) to be disclosed in order to provide consumers with more relevant
information.
4.183 The tailoring of particular insurance policy information allows
consumers to make more simple and effective decisions as only the
relevant information is required to be considered. However, the benefit of
this tailoring is dependent on the consumer's use of the information.
4.184 The introduction of a partially prescribed KFS may provide
increases in comparability for consumers but not to the same extent as
Options B1 or B2. This is due to the fact that the non-prescribed sections
of the KFS may potentially contain a diverse range of additional
information. The loss of comparability under Option B3 may be
contained as a result of the one page format.
Industry
4.185 The benefits of Option B3 that have been identified in relation to
consumers, that is, simplicity, consistency and comparability can also be
indentified for industry. In this regard, once KFSs for HBHC insurance
policies become standard industry practice (as required under Option B3)
HBHC insurance policy providers may have a simple and consistent way
of communicating key product information to consumers.
4.186 Option B3 also provides industry with a level of flexibility while
still maintaining a level of comparability. This is achieved through the
incorporation of both prescribed sections and non-prescribed sections.
The prescribed sections of the KFS allow consumers and industry to
compare products while the non-prescribed sections allow increased
flexibility to include product specific information when required.
4.187 The costs expected to be incurred in regard to Option B3 have
been outlined in the costs section of the introduction of a KFS paragraphs
4.135 to 4.150 above. However, under Option B3 there is a potential for
compliance costs to increase as a result of the inclusion of the
non-prescribed sections of the KFS. In this regard, insurers may be
required to undertake further individual analysis of each of their HBHC
insurance policies to determine the required content of the non-prescribed
sections.
Commonwealth
4.188 Under Option B3, the Commonwealth will incur consultation,
testing and implementation costs:
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Insurance Contracts Amendment Bill 2011
· Consultation costs will be incurred during the process of
forming and finalising the Regulations that will give effect to
the KFS.
· Consumer testing cost will be incurred during the
development of the KFS.
· Implementation costs associated with both the introduction of
the legislative framework and Regulations will also be
incurred.
4.189 In addition to the initial costs associated with introduction of a
KFS, ongoing costs will be incurred for monitoring of the KFS. In this
regard ASIC will administer the standard definition in line with its current
responsibilities under the IC Act.
Table 4.7 Impact assessment of Option B3 (One page, partially
prescribed, KFS)
Benefits Costs
Consumers Easy to read and consumer There is a potential risk that
friendly layout (determined the KFS to be seen as a
through consumer testing). substitute for PDS.
Consumers will have access Increases complexity as more
to more tailored information information may be contained
for the insurance policy that in some insurance policies.
they consider/assess. Not all the additional
Consumers may be able to information included may be
make more simple and relevant to some consumers
effective decisions as all (the additional information
relevant information is will only be relevant if the
included. consumer values it).
Provides some increases in Any costs incurred by
comparability for consumers. industry for producing a KFS
are likely to be passed onto
consumers through increases
in premiums.
Industry A simple way of Initial costs associated with
communicating key product the introduction of the KFS,
information to consumers. including assessment of
A mechanism to reduce the HBHC insurance policies.
number of inferior HBHC Increased ongoing cost,
insurance policies. including printing, production
The ability to provide and distribution costs.
consumers with all relevant Insurers will be required to
information thus reducing assess what additional facts
disputes over cover provided (outside the facts already
under the insurance policy. prescribed) should be.
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Regulation impact statement
Benefits Costs
Industry (continued) provided to consumers.
This will increase compliance
costs and reduce certainty.
Commonwealth Consultation, consumer
testing and implementation
costs will be incurred.
Monitoring costs will also be
incurred as ASIC will
administer the KFS in line
with its current
responsibilities under the IC
Act.
Option B4 -- the introduction of a framework for the provision of a
document that contains key information regarding a HBHC insurance
policies (a non-prescribed KFS)
Impacts
Consumers
4.190 The introduction of a framework for the provision of a document
that contains key information regarding HBHC insurance policies may
improve consumer knowledge and awareness when making decisions
regarding HBHC insurance policies.
4.191 Currently, disclosure for HBHC insurance policies is provided
through the provision of the insurance policy and an accompanying PDS.
The PDS regime is essentially a framework for disclosure of financial
products. As discussed previously under the PDS regime a consumer may
receive a 30 page, or longer PDS document.
4.192 The introduction of a framework to be used to produce a
document that outlines the key facts may effectively ensure that the key
information is contained in a manageable document, thus increasing
simplicity and improving consumer knowledge and awareness. The
framework will set out what type of information should be included in the
KFS in a similar way to that of other disclosure documents such as PDSs
and Shorter PDSs.
4.193 This may result in consumers being in a better position to make
informed decisions regarding their insurance options and cover than is
currently the case. This is because consumers may receive simpler, more
readable and standardised guidance on key facts regarding HBHC
insurance policies.
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Insurance Contracts Amendment Bill 2011
4.194 While providing similar benefits to the first three options,
Option B4 fails to adequately address the issue of confusion. The
introduction of a framework will not require insurers to adopt a particular
format or level of content that may result in the same increases in
simplicity, consistency and comparability as the other options. It allows
insurers to make judgements about what information they think
consumers require in order to make effective decisions.
4.195 Furthermore, insurers may, in endeavouring to ensure that they
meet the requirements under the framework, include more information
than is required. The inclusion of this additional content may create
further complexities that increase the current level of confusion
surrounding HBHC insurance policies.
Industry
4.196 The benefits of Option B4 revolve mainly around the ability for
insurers to customise the content and format of their KFS. Increased
customisation allows insurers to increase the level of knowledge and
awareness through the provision of specific policy information.
4.197 The ability to effectively determine the compliance cost under
Option B4 is more complex than with the other potential options. This is
due to the fact that under Option B4 the actual compliance costs are
dependent on:
· the current practices of each individual insurance provider;
and
· the changes insurance providers decide to make to their
practices (this will depend on the amount of key information
the insurance provider decides to include/not include).
4.198 In order to provide consumers with some level of increased
simplicity, consistency and comparability the insurance industry may be
required to introduce guidance regarding the format and content of the
KFS (this may be accomplished through changes to the insurance
industry's code of practice).
4.199 Although Option B4 is not strictly a KFS document the costs
expected to be incurred are similar to those outlined in the costs section of
the introduction of a KFS paragraphs 4.135 to 4.150 above. In this regard
the cost saving that may be achieved through the increased amount of
flexibility Option B4 provides to insurers. The costs associated with
establishing what level and type of information required to be included is
considered to substantially offset these savings.
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Regulation impact statement
Commonwealth
4.200 Under Option B4 the Commonwealth will incur only minor
consultation, implementation and ongoing monitoring costs.
Table 4.8 Impact assessment of Option B4 (framework for the
provision of a document that contains key information regarding a
HBHC insurance policies)
Benefits Costs
Consumers Key information regarding While providing greater
HBHC insurance policies will simplicity than the status quo
be contained in a manageable option (Option A), Option B4
document, increasing fails to adequately address the
simplicity and readability. issue of consumer confusion.
Consumers will be able to Simplicity may increase as a
make informed decisions result of the introduction of a
regarding their insurance framework, however, this is
options and cover. not guaranteed as insurers
may include more
information than is required
thus actually increasing the
complexity.
Any costs incurred by
industry for producing any
additional disclosure
documentation are likely to
be passed onto consumers
through increases in
premiums.
Industry Minimal changes are required Initial compliance costs
to meet the new requirements associated with the
of the regulations. introduction of the
framework.
Commonwealth Minor consultation,
implementation and
monitoring costs will also be
incurred as ASIC will
administer the KFS in line
with its current
responsibilities under the IC
Act.
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Insurance Contracts Amendment Bill 2011
Consultation
Government consultation with insurance industry
4.201 The Government met with the insurance industry on numerous
occasions. Many of these meetings have involved the Assistant Treasurer
and Minister of Superannuation and Financial Services.
· 14 January 2011 -- 1st meeting with insurance industry
heads, and Qld government in Brisbane. This meeting
focused on immediate response issues.
· 27 January 2011 -- ICA issues 10 point plan in response to
natural disasters. Calls for standard definition and improved
disclosure.
· 3 February -- 2nd meeting with the full ICA Board.
- The Government and the ICA discussed the 10 point plan
issued by the ICA.
- The discussion included consideration of standard
definition and one page key facts statement.
· 18 February 2011 -- 3rd meeting with the full ICA Board.
- The Govt and ICA reached in-principle agreement at this
meeting to work towards a standard definition and one
page key facts statement.
· 4 March 2011 -- 4th meeting with the full ICA Board.
- Further consideration of the details around a standard
definition and one page key facts statement.
- This conversation assisted the Government in developing
`Reforming flood insurance: Clearing the Waters', the
consultation paper containing a proposal in relation to a
standard definition and one page key facts statement and
seeking submissions.
· 5 April 2011 -- Government released `Reforming flood
insurance: Clearing the Waters' at a public forum in
Ipswich.
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Regulation impact statement
- This forum was jointly attended by the Minister, the ICA
and Qld Legal Aid.
- It was attended by hundreds of local people affected by
the floods and included many representations in relation
to consumer confusion in relation to flood coverage.
Many people thought that they were covered for flood and
weren't.
· 5 April 2011 -- ICA publicly supports a standard definition
and one page key fact statement.
· 16 May 2011 -- ICA lodged submission to Clearing the
Waters. Supportive of both standard definition and one page
key facts statement.
· 14 July 2011 -- ICA makes submission to the NDIR. .
Government consultation with consumer groups
· January 2011 -- jointly, consumer groups issue a 12 point
plan which includes recommendation to implement a
standard definition of flood and a one page key facts
statement.
· 31 March 2011 -- Meeting with consumer group
representatives re standard definition and one page key facts
statement.
· May 2011 -- consumer groups make joint submission to
Clearing the Waters. Strongly argue for standard definition
and key facts statement.
Reforming flood insurance -- Clearing the waters
4.202 On 5 April 2011, the Commonwealth released a consultation
paper `Reforming flood insurance -- Clearing the waters' that identified
issues and a number of options for improving the regulatory framework
and other aspects of Australia's insurance market.
· The consultation paper contained two key proposals for
consideration:
- To introduce a standard definition (in plain English) for
flood across HBHC insurance policies in order to ensure
HBHC insurance policies are more easily understood, so
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Insurance Contracts Amendment Bill 2011
consumers are not surprised when they try to make a
claim. Under the proposal, the term flood would only
appear in an insurance policy if it is defined as the
standard meaning of the term.
- The introduction of a single page KFS for HBHC
insurance policies, to allow consumers to see at a glance,
the key elements of the policy -- what is covered and
what is not.
4.203 Several submissions were received from interested stakeholders
and of these 13 submissions were able to be made public and can be found
on the Australian Treasury website: www.treasury.gov.au. Submissions
indicated a broad level of support for an adoption of a standard definition
of flood and a KFS. Submissions made a number of constructive
observations and suggestions in response to the questions in the paper.
4.204 There were no substantial disagreements from either consumer
groups or industry regarding the introductions of the KFS for HBHC
insurance policies. There was however some disagreement regarding the
exact content and format of the KFS with the main points of contention
being that of providing references to the insurance policies PDS and the
ability to have more flexibility regarding what is to be included in the
`what is' and `what is not' covered sections of the KFS.
4.205 One area in which significant disagreement may have arisen was
in relation to the potential for KFSs to be extended to Residential Strata
Insurance Policies (RSIP).55 There was a clear concern that as the
fundamental nature of RSIP were different to that of HBHC the ability for
RSIP providers would not be able to comply with the KFS requirements.
The extension of the KFS to RSIP was not pursued due to their
fundamentally different nature to HBHC insurance policies. That is, RSIP
policies are usually tailored and are not required to address the standard
cover obligations set down in the IC Act.
4.206 In addition, in relation to the costs associated with the
introduction of a KFS, only one insurer, as discussed in paragraphs
4.143-4.144, stated that:
`it would of course come at a significant cost for the industry and
have prudential implications'
55 The extension of the application of the KFS discussion regarding the consideration of this
extension may be found in paragraphs 4.154 and 4.155.
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Regulation impact statement
4.207 However as stated in paragraph 4.144 this statement was not
supported in any other submission to the `Reforming flood insurance:
Clearing the waters' consultation paper.
Consumer Comments
4.208 Consumer groups have indicated that they generally support the
introduction of a KFS. Consumer groups consider that a KFS will:
· give consumers a better understanding of what their policy
covers and what it does not, accepting the reality that very
few people read and understand their PDS;
· help consumers shop around for insurance by allowing easy
comparison between competing policies, thereby improving
competition; and
· give consumers important information relating to their
policies including information relating to under-insurance.
4.209 In relation to the type of KFS that should be introduced
consumer groups have indicated that:
· a KFS must set out the most important points of the policy
clearly and simply. By providing consumers with two
documents, a KFS and a PDS detail will be retained but
clarity and accessibility will be improved. This will lead to
better decision making by consumers regarding insurance
coverage, which is good for consumers, the industry and the
community at large;
· they strongly support a fully prescribed KFS, as this will
ensure clarity about what is and is not covered by the policy,
and will allow easier comparison between products;
· by prescribing the events covered, exclusions for key events
will be made clearer;
· if a KFS is not fully prescribed, insurers may simply avoid
mentioning events that they do not cover, thus leading to
unfavourable outcomes for consumers;
· if a partially prescribed KFS is adopted there must be a limit
on the additional matters that insurers might otherwise
choose to include in the 'what is covered' list but that are not
essential to the consumer's understanding of the most
important features of the product;
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Insurance Contracts Amendment Bill 2011
· if the KFS is not fully prescribed there is a potential for
insurers to choose to list a number of matters on the KFS that
are not essential to the policy that will make it harder for
consumers to read and understand;
· although fully prescribing the list may not effectively capture
all aspects of insurance cover under the policy, the greater
risk is that insurers would provide too much information.
Consumer groups have highlighted that it should be made
clear that a KFS will not replace a PDS (as it cannot provide
the same level of detail);
· if in the future the nature of insurance changes and different
events emerge that are of more importance, the Regulations
can be changed to allow other events to be included in the
KFS; and
· cross referencing with the PDS should be included in the
KFS to encourage consumers to read at least the sections of
the PDS that are relevant to the insurance related decisions.
Industry Comments
4.210 The insurance industry has indicated its general support for the
introduction of KFSs. The ICA released a media release56 supporting the
Commonwealth's release of the discussion paper `Reforming Flood
Insurance -- Clearing the Waters' stating that:
· they welcomed the release of the paper;
· they understand that the Australian community would like
improved clarity on the availability of flood insurance and
how it works;
· they have released a ten point plan57 to tackle disasters; and
· significant progress has been made on key issues outlined in
the ten point plan. In particular, work is well progressed on:
- a standard definition of flood;
56 Industry Continues Work on Flood Reforms, 5 April 2011,
http://www.insurancecouncil.com.au/Portals/24/Media%20Centre/2011%20Media%20Rele
ases/ICA%20Media%20Release%20Flood%20Insurance%20050411.pdf
57 Media release outlining the10 Point Plan to Tackle Disasters, 27 January 2011,
http://www.insurancecouncil.com.au/Portals/24/Media%20Centre/2011%20Media%20Rele
ases/ICA%20Release%20-%20Ten%20Point%20Plan%2027th.pdf
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Regulation impact statement
- improved disclosure; and
- flood mapping.
4.211 In relation to the type of KFS that should be introduced the
insurance industry has generally indicated that:
· the KFS should be prescribed and determined by Treasury in
consultation with the Financial Services Disclosure Advisory
Panel (with input from industry and consumer advocates);
· prescribing events has a number of advantages including:
- certainty about the minimum amount of information
required to be given;
- reducing the possibility of disputes between consumers
and insurers; and
- protecting against allegations of misleading and deceptive
conduct in relation to the content of the statement.
· the disadvantage of prescribing a KFS is that it will only ever
facilitate comparability at the minimum coverage level and
the content level of the KFS;
· not prescribing certain aspects of the KFS such as `what is
covered' means that insurers will be required to determine
what goes into the document and this will result in insurers
being exposed to the risk of unintentionally misleading
consumers;
· one major difficulty with prescribing what is key information
is that what is a key fact for one person is not for another. As
such the Commonwealth should identify what it believes
needs to be dealt with at a minimum;
· in situations where other exclusions/conditions in the policy
are not included in the KFS where they would be required to
be included for a particular consumer/consumers, it would be
appropriate for the insurance industry and in particular
insurance brokers to provide this additional information;
· the KFS should not refer to specific pages or paragraphs in
the PDS. Apart from taking up additional space, specific
references may change, making the statement inaccurate.
Referring to specific pages/paragraphs could also cause
consumers to read their contract in parts or in isolation; and
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Insurance Contracts Amendment Bill 2011
· referring to the PDS could create additional costs to the
product if the insurer changes its policy wording and then has
to also amend the KFS each time as well.
4.212 However a number of issues have been raised in the particular
context of Residential Strata Insurance Policies (RSIP). In this regard, the
following statements have been made:
· Whilst the proposed approach appears logical to allow
comparison of HBHC insurance policies, doing so on a
prescribed events-basis would be misleading in the case of
Residential Strata.
· To satisfy all the various state based statutory requirements
relating to Residential Strata insurance cover, insurers must
provide cover via an `Accidental Damage Policy'.
· Accidental Damage policies provide broader cover and
additional benefits to consumers not otherwise available via a
prescribed/defined event loss cover.
· As RSIP are Accidental Damage Policies subject to
exclusions, the differentiating factors from a Body
Corporates perspective are the additional benefits provided
by each insurer.
· Therefore in the case of RSIP it would be necessary to
include `other' covers to allow the Body Corporate to
differentiate between products. Without an option to include
`other' covers the KFS would be misleading.
Conclusion and Recommended Option
4.213 Option B1 is the recommended Option. However, it is not
possible at this time to conclude that Option B1 will address the problem
and result in a net benefit as the size and the reasons for the problem are
not shown through empirical evidence.
4.214 Further, it is important to note that the precise content and
format of the KFS will be contained in Regulations and will be established
through extensive consultation with key stakeholders. As such the
effectiveness and benefits of this option cannot be fully measured at this
time.
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Regulation impact statement
4.215 Option B1 is the most likely option to achieve the objective to
assist consumers with understanding the basic terms of the insurance
policy, including the nature of cover and any key exclusions.
4.216 Some potential benefits to consumers include:
· increased simplicity, consistency and comparability when
consumers are making decisions regarding the purchase of
HBHC insurance policies;
· an easy to read and consumer friendly document (determined
through consumer testing);
· more effective decision making through an increased level of
familiarity (knowing what to look for and the meaning of
certain words and concepts) as a result of the introduction of
the KFS; and
· increased financial and time savings from the increase in
competition within the insurance industry.
4.217 Some potential benefits for industry include:
· a straightforward legislated process to facilitate the
disclosure of the key facts pertaining to their HBHC
insurance policies; and
· a simple and consistent way of communicating key product
information to consumers.
4.218 In adopting Option B1 some costs will be incurred. The costs
for consumers relate to the fact that the cost for insurers of providing a
KFS is likely to be passed onto consumer through increased premiums :
4.219 The costs for industry for adopting Option B1 are primarily the
costs associated with the:
· initial assessment of the policy required in order to establish
the key information of the HBHC policy that is required to be
included on the KFS; and
· printing, production and distribution of the one page fully
prescribed KFS.
4.220 In conclusion, while there is no empirical evidence supporting
the benefits of Option B1, qualitative and anecdotal evidence suggests that
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Insurance Contracts Amendment Bill 2011
there may be benefits for both consumers and industry. Therefore Option
B1 is the recommended Option.
4.221 However, as stated in paragraph 4.213 above, due to the fact that
the magnitude and the cause of the problem cannot be clearly established
through empirical evidence, it is not possible at this time to conclude that
Option B1 will address the problem and result in a net benefit.
Implementation and review
Implementation
Changes to the Insurance Contracts Act 1984
4.222 The legislative framework for a one page fully prescribed KFS
would be introduced by an amendment to IC Act. New regulations would
be required to be made to the Insurance Contracts Regulation 1985 (ICR)
to establish the content and format once the framework was introduced.
4.223 The introduction of a framework for a one page, fully prescribed
KFS would be expected to be introduced into Parliament in
November 2011 as part of a package of amendments to the IC Act.
4.224 There will be a two year transition period which will commence
from the date the regulations are made. It is envisaged that a two year
period will provide sufficient time for individual insurers to calculate the
impact the proposed changes will have on their businesses; make the
necessary amendments; and notify policy holders.
Consultation on the regulations covering the content and format of the
KFS
4.225 Extensive consultation will take place on the content and format
of the KFS. Consistent with comments received in submissions to the
`Reforming flood insurance: Clearing the waters' consultation paper, the
main consultation process would be expected to take place through the
Financial Services Advisory Panel (FSAP).
4.226 In addition to consultation on the content and format of the
KFS, consumer testing would be undertaken in order to ensure the
Commonwealths objectives are met. The precise format of the consumer
testing would be determined once the legislative framework for the KFS
had been introduced.
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Regulation impact statement
4.227 There will be public consultation on the draft regulations so that
consumer groups and industry representatives would be able to provide
comment on the proposed content and format for the KFS.
4.228 Issues that will be consulted on include the use of certain sized
text, prescribed wording, sections and terminology. Using the main
industry consultation group would ensure that all key stakeholders dealing
with HBHC insurance policies are properly consulted and will produce a
more robust product.
4.229 It is expected that once the content and format of the KFS has
been finalised, an implementation RIS will be prepared prior to the new
regulations being made.
Review
4.230 The effectiveness of the proposed measure and legislative
amendments would be monitored by ASIC. It is expected that the
effectiveness and impact of the introduction of a one page fully prescribed
KFS would be reviewed after a sufficient period of time had elapsed.
4.231 In this regard the time between the commencement of relevant
regulations and any review of the operation of the regulations must allow
for industry and consumer groups, as well as the Commonwealth, to have
gathered sufficient data so as to contribute to a meaningful assessment of
the success of the measure.
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