The insurance industry’s failure to fully comply with its design and distribution obligations (DDO) has sparked a warning from the Australian Securities and Investments Commission (ASIC) to expect a tougher enforcement approach going forward.

ASIC issued the warning after its review of more than 100 target market determinations (TMDs) for general and life insurance products found flaws. The review included a sample of mortgage protection, mobile phone, travel and pet insurance products and is the first such examination since DDO laws commenced in October 2021.

The DDO regime requires every financial product to have an accompanying public TMD statement setting out in sufficient detail that the product is appropriate for the target market and that the distribution conditions appropriately direct distribution of the product to that market.

“This initial review was a targeted, risk-based exercise, which focused on the TMDs of a sample of general and life insurance products considered by ASIC to be higher risk and/or to potentially provide low value to consumers,” ASIC says in a letter to insurers.

“ASIC is considering follow-up action arising from this initial review and ongoing scrutiny of general insurers’ compliance with the DDO regime more broadly.

“This includes pursuing targeted, risk-based surveillances and taking enforcement action when appropriate.”

ASIC says in an email to insuranceNEWS.com that it “can’t comment on specific surveillances but we are actively considering stop orders across a range of products, including life and general insurance products”.

“Consistent with the outcomes-based, consumer-centric objectives of DDO, ASIC takes a risk-based approach to TMD compliance, focusing on the potential for consumer harm rather than technical non-compliance,” the ASIC email says.

ASIC released the review findings yesterday after issuing 38 interim orders last month banning the sales of 67 pet insurance products issued by Hollard and its underwriting management agency PetSure. The orders were lifted in less than 24 hours after the insurers addressed ASIC’s concerns with the products’ TMDs.

The review found some good practices in the TMDs but pointed out there were a portion that described target markets with less detail than may be needed.

“While TMDs described the products and their key attributes, many did not include an explanation of why the product is likely to be consistent with the likely objectives, financial situation and needs of consumers in the target market,” the ASIC letter says.

“Such a statement is generally necessary to show the insurer has critically assessed the product and met the appropriateness requirements… of the Corporations Act.”

The Insurance Council of Australia (ICA) says the industry welcomes the findings and feedback in ASIC’s review of insurance TMDs.

“Insurers take design and distribution obligations requirements seriously and have worked to ensure that their products and distribution of products comply with the DDO requirements," a spokesperson for ICA said.

“The feedback from ASIC will provide further insight as to how insurers can ensure that their TMDs are compliant, and the interests of consumers are protected when purchasing insurance products.”

Click here for the ASIC letter.