Home / Analysis / Disclosure rethink gathers steam as commission ponders
1 October 2018
Making people aware of what their insurance policy covers – and just as importantly what it doesn’t – has been a preoccupation of insurers for more than 20 years. All that has been gained is an understanding that legal necessities don’t mix well with the need for simplicity.
A new Monash University study showing key fact sheets – which were introduced after the 2011 Brisbane floods as a bid to counter the sometimes-bewildering complexity of product disclosure statements (PDS) – offer little benefit to consumers.
This has added weight to arguments that disclosure documents are failing and some form of standard cover may offer a solution that might be popular with consumers but anathema to insurers.
The “Too Long; Didn’t Read” report for the Insurance Council of Australia (ICA) previously highlighted the logical fact that lengthy and complex PDS documents turn off consumers. In other words, they don’t read them.
The new Monash study “(In) effective disclosure: An experimental study of consumers purchasing home contents insurance” finds shorter and simpler key fact sheets don’t work, either.
The Financial Rights Legal Centre, which commissioned the study, says consumers would gain greater benefit from a standard cover regime that could provide simplicity and certainty.
“It would involve a standard set of terms, that are a minimum from which insurers could build and which consumers could trust, so when they buy a particular product it would be what they expect,” Policy and Advocacy Officer Drew MacRae told insuranceNEWS.com.au.
The Monash study was released as the Hayne royal commission heard evidence of misleading or incorrect promotion of policies by insurers, effectively putting the onus on consumers to spot the difference in the PDS.
The commission on Thursday released policy questions arising from the hearings, including whether the current disclosure regime is adequately servicing the interests of consumers. A final report will be delivered to the Government next year.
“Hopefully, it will place the issue higher in the mind of the relevant ministers and they will understand that change needs to happen,” Mr MacRae said.
Pressure to reform product disclosure documents have gained momentum as it has became increasingly apparent the PDS and key fact sheets were mandated with no solid basis to indicate they would work and amid increasing signs that they don’t.
ICA launched its Effective Disclosure Taskforce in 2015 and has continued to research the issue, sharing findings with the Monash study.
Treasury is due to release a discussion paper on disclosure after former revenue and financial services minister Kelly O’Dwyer referred the issue for investigation last year in response to Senate committee recommendations.
So what progress have the bureaucrats made? Treasury says it’s looking at standard cover and standard terms, but it’s also investigating the possibility of extending key fact sheets to insurance lines beyond home and contents.
The consumer lobby centre is focusing on standard arrangements that it says would provide a minimum level of cover, and linking that to the proposals to end the insurance industry’s exemption from unfair contract term provisions.
Caught between an insurance industry that would strongly resist standard terms and a consumer lobby set on contemplating no other solution, the compromise option of even more useless key fact sheets really isn’t going to satisfy anyone.
“The Monash research would tell us that more key fact sheets are not the answer,” Consumer Action Law Centre Senior Policy Officer Susan Quinn says. “It is just another version of the disclosure approach, and the disclosure approach really needs a shake-up.
“The key problem is the underlying complexity, and sometimes the unfairness of contracts, and that is what really needs to be tackled, not necessarily giving more information to people.”
So do the insurers have a counter-offer to solve the problem? Not yet, but they’re working on it. ICA CEO Rob Whelan told the royal commission that insurance is typically a “low interest category” that consumers tend not to think about.
“People have an optimism bias that these things are not going to happen to them, and they take very little interest in insurance per se,” he said.
“We need to find mechanisms to stimulate interest, stimulate information, and make sure that that information is transferred effectively.”
National Insurance Brokers Association CEO Dallas Booth says NIBA has long argued that key fact sheets are not the answer, and agrees standard form contracts could offer a solution when customers are not seeking professional advice.
“The idea is to give people the cover that they would assume is in the policy, without thinking about it,” he says. “If insurers wanted to take away from that and offer something less they would really have to get almost an informed consent from the client before that would be allowed to proceed.”
The Monash study came up with some intriguing results that should go a long way to assisting understanding of the scale of the disclosure understanding issue, In it, 406 participants were given combinations of product disclosure statements and key fact sheets before choosing a home contents policy from two or three options that were considered good, ok or bad.
Up to 42% of participants chose the worst offer, and when able to choose from three policies, 35% chose the worse policy and 46% the best.
“The key facts sheet was designed to make this information easier to find and compare, but the outcomes of this study show mixed results about [their] effectiveness,” the study says.
Monash Professor Justin Malbon suggests a set of gold, silver and bronze cover should be applied across the industry, and terminology should be standardised in areas beyond flood cover.
“When people keep making the wrong decision even in the most ideal of circumstances, and with starker differences in policy coverage than usually exists, you have to wonder if there is a better way,” he said.
The Monash choices strip out brand and price considerations, which highlights the potential for consumers to be led further astray if trust is misplaced or cost becomes the only consideration.
ICA says it will review the Monash report findings and discuss them with members, as it continues to considerer the issues.
“Further research being undertaken by ICA will put it in a good position to contribute strongly to the public policy debate on questions such as the usefulness of standard cover, standardised definitions, and the effectiveness of key fact sheets,” spokesman Campbell Fuller said.
“The industry would be concerned about any mandated imposition that risks oversimplifying products, reducing competition and undermining consumer choice.”