Telling consumers exactly what their policy covers them for, and what it doesn’t, seemed like such a good idea when it was first mooted in 2001.

The rise of the “aware consumer” and a long history of claims being declined because the customer didn’t understand the policy had led to calls for product disclosure statements (PDSs) that would explain each policy in plain and simple language.

What the Australian Securities and Investments Commission (ASIC) envisaged was a neat and tidy bundle of facts to assist the consumer’s understanding. However, that was before the lawyers got involved.

The insurers wanted PDSs that were not only full of essential inf ormation but also protected them from any possible mis-step. With the zealous attention to every detail that is a hallmark of the legal industry, that is what the lawyers set out to achieve.

The result was a bonanza for the paper and printing industries, with PDSs of 120 pages and more produced for even simple consumer products. An insuranceNEWS.com.au journalist remembers interviewing a senior federal minister in his electorate office at the time, and being shown how a door was kept open with the weight of a domestic insurance PDS.

Not that anyone wanted to change the unwieldy, jargonistic and legally watertight PDS. It met the regulator’s requirements, it protected the insurer and it communicated what the consumer needed to know – albeit in a way that made it almost impossible for the average Australian to easily understand.

The “key facts sheet” that followed the Brisbane floods farrago – which amply demonstrated that hardly anyone has read a PDS – was the latest attempt to paper over the obvious cracks.

Last year Good Shepherd Microfinance declared PDSs actually contribute to underinsurance among low-income earners because “the length of documentation and absence of plain English makes the decision-making process more complex”.

“This increases the likelihood of non-insurance or underinsurance or choosing an inappropriate product,” the group told the Financial System Inquiry.

The PDS itself – while a handy fallback when denying claims based on not understanding the policy – has also become the centrepiece of a number of legal actions, usually based around when or if the claimant received the document.

The most recent was in 2011, when QBE was forced to pay a flood damage claim because the Financial Ombudsman Service found the PDS wasn’t handed to the customer when the policy was sold.

So while the PDS is a useful document that meets the requirements of most stakeholders, the analogy of a camel being a horse designed by committee is an accurate reflection on its usefulness to the consumer.

News that the Insurance Council of Australia (ICA) is working on ways to improve the communication of PDSs to consumers is therefore welcome – and not before time.

ICA’s Effective Disclosure Taskforce has made 16 recommendations in a report titled Too Long; Didn’t Read.

The recommendations include carrying out market research to understand consumers better and to guide efforts to improve PDSs.

Going back to first principles, the industry will also engage ASIC to discuss ways to improve the way insurers can provide consumer advice. Perhaps they will dust off the old files that defined exactly what they were trying to achieve back in 2001.

Technology has come a long way since then, and there must be more effective methods of communicating the vital detail of simple insurance policies in ways that meet the regulator’s requirements.

The report’s key recommendations include:

• ICA should establish a disclosure performance benchmark by commissioning and publishing research on current consumer knowledge and understanding of commonly purchased general insurance
• ICA should commission and publish research to determine pre-purchase consumer behaviour and how disclosure can be used to “nudge” appropriate decision-making
• Insurers should integrate sum-insured calculators into the sales process for home buildings, so consumers are provided free and automatic guidance before selecting their sum insured
• ICA and the industry should work with ASIC and the Government to improve the advice regime, to enable the disclosure of more targeted information to consumers
• ICA should continue to press government to make natural hazard risk information available and accessible via a centralised portal, to better inform the community of their risks
• ICA should establish a committee to determine how natural hazard data held by the industry can be effectively provided to consumers in a consistent format, to improve their understanding of natural hazard risks specific to their homes
• ICA and the industry should seek law reform to enable electronic communication as the default method of providing insurance product disclosure, consistent with current regulation of other financial product disclosures.

It’s a step in the right direction, but the complexity of the issue shouldn’t be underestimated. The PDS is important to insurers, and the involvement of the legal profession in finding a way through the maze is essential.

Keeping it all in balance, with consumers’ interests uppermost, isn’t going to be as easy as it might at first seem.