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Little relief from the regulatory squeeze

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Sorry, but calls for a slowdown in the regulatory reform that’s apparently wearing out the insurance industry are likely to go unheeded for some time.

The pipeline of inquiries, reviews and consultations is swelling, and momentum will likely be further driven by recommendations flowing from this year’s royal commission on financial services misconduct.

Drivers of increased scrutiny and tougher rules include a focus on consumer outcomes, technological change and scandals in other parts of the financial services industry.

The Insurance Council of Australia (ICA) Annual Forum in Sydney last week highlighted an emphasis on meeting community standards and expectations, which has emerged as a key element of the royal commission.

Michael Saadat, whose lengthy title is Australian Securities and Investments Commission (ASIC) Deposit Takers, Credit and Insurers Senior Executive Leader, says add-on insurance refunds sought for customers who were sold virtually useless products through car dealerships provide an example of the implications.

“Conduct that isn’t necessarily illegal, perhaps, but that is clearly out of step with community expectations, comes at a very high cost,” Mr Saadat told a panel discussion at the forum.

“The nature of the issues we are grappling with now have clearly gone beyond legal compliance.”

The crackdown on add-on cover shows how a product that is not a major part of an insurer’s business can have an outsized impact on its reputation.

Melbourne community legal centre Westjustice says issues around add-on insurance have been identified since the 1980s. Some products have had loss ratios below 10 cents in the dollar, prompting frustration at the industry’s delayed response to calls for change.

ASIC has now turned its attention to consumer credit insurance and to forthcoming product design and distribution reforms that aim to ensure consumers are buying insurance that is fit for purpose across the retail market.

Insurers have long discussed being more focused on customer needs and less driven by the product manufacturing end of the business, but the latest inquiries and reviews put a particularly high emphasis on transparency and social responsibility.

Practices that may have been cheered or remained unseen may now raise alarm bells, as scrutiny and regulatory data analysis reach new levels.

“We live and work in organisations that have glass walls now,” Deloitte Partner, Governance, Regulation and Conduct Karen Den-Toll says. “The zeitgeist has completely changed.”

Pressure for insurers to be more responsive to consumer issues will lead to another look this year at the extension of unfair contract term provisions to the sector.

The latest upgrade to the ICA Code of Practice aims to address many of the broad issues raised, including in product design and distribution and third-party involvement, and outside expectations are high.

“Insurers cannot walk away from how their products are distributed, regardless of the technical legal position,” ASIC Deputy Chairman Peter Kell says.

“Consumers expect the underlying insurer to be aware of the outcomes the products they underwrite have for consumers, however they are sold.”

Revenue and Financial Services Minister Kelly O’Dwyer has welcomed the latest ICA code review, and notes each previous version has featured improvements to ensure it remains relevant and meets consumers’ needs.

“The first General Insurance Code of Practice was introduced in 1994 and was one of the first of its kind in Australia – something not widely known about the insurance industry and something, I think, the insurance industry is not given credit for,” she says.

ASIC has urged the industry to make the code as strong as possible, and suggests that gaining the regulator’s stamp of approval for the updated version will help shore up consumer confidence.

“Ultimately, the quality, scope and ambition of the code will determine in large measure the extent to which industry practice meets consumer needs and expectations,” Mr Kell says.

The Australian Prudential Regulation Authority (APRA) has also tightened its supervision, driven by the impact of changing technology and the allure of financial services for cyber criminals.

It has released a draft information security standard for consultation and has warned insurers and other financial institutions they need to lift their efforts.

“This accelerating risk requires a rapid response, but also recognition that your stamina will be sorely tested,” APRA Executive Member Geoff Summerhayes says.

“The challenge requires ongoing vigilance, improvement, investment and oversight because, though this race has no finish line, it’s not a contest you can afford to lose.”

ICA CEO Rob Whelan says there is perhaps an unprecedented level of regulatory and governmental oversight on the financial services sector broadly, and on the general insurance industry in certain aspects of its conduct.

“Early in the life of the Turnbull Government, key ministers talked about reducing unnecessary regulation, and the need to balance new regulations with the removal of others,” he says.

“Instead, more imposition seems likely, particularly through unfair contract terms and product design and intervention powers.”

Mr Whelan says the royal commission can be a positive for insurers, because it will deal with community concerns in one fell swoop, facilitate reforms in the pipeline and possibly raise community trust.

Nevertheless, the Australian Competition and Consumer Commission inquiry into northern Australian insurance won’t deliver its final report until November 2020, inquiries have a habit of triggering further reviews, technological change is continuing rapidly and the industry must keep pace with shifting community standards.

There’s unlikely to be a break from the regulatory pressures any time soon. Guess we’ll have to get used to that “regulatory fatigue”.