Standard definition reforms alone will not resolve underinsurance or affordability issues and changes may have cost and competition implications that lead to poorer consumer outcomes, the Insurance Council of Australia (ICA) says.

In a submission to Treasury, ICA says its members hold diverse views on the benefits of greater standardisation and reforms to the standard cover regime, and it expects companies will make separate contributions to the Government’s consultation. 

But it says any greater standardisation should ensure choices remain for consumers, “particularly where coverage choices may have an impact on the price”, and too great an alignment on terms could limit insurers’ ability to compete on other measures. 

“Consideration should therefore be given to ensuring standardisation does not lead to a reduction in capacity to compete across the sector, as this has the potential to lead to poorer consumer outcomes.” 

Standardisation of some terms may help some consumers in comparing products, it says, but the submission also points to issues around financial literacy and understanding of risk drivers, and impediments to gaining advice. 

“We note suggestions that greater standardisation of terms will lead to increased comparability, reduction in disputes, and ultimately greater affordability of insurance products,” ICA says. 

“The sector welcomes and supports initiatives that may assist in improving consumer understanding of insurance products, and in reducing insurance premium price pressures for consumers. However, we are concerned that standardisation of terms will be unlikely to achieve premium reductions in isolation.” 

The introduction of a flood definition in 2012 has not brought a reduction in premiums, and mitigation against the underlying risks of any terms proposed for standardisation will need to be progressed “at pace” for any pricing stabilisation to be achieved, it says. 

The Treasury consultation paper seeks feedback on whether there should be agreed definitions for more terms in addition to flood, and on potential changes to the standard cover regime. The paper raises questions on issues including underinsurance.  

“Consumer misunderstanding of insurance policies may be a contributing factor to unintentional underinsurance or inappropriate insurance but is not the highest-order contributing factor, and it is unlikely that standardisation of natural perils definitions alone will resolve this issue,” ICA says. 

ICA says the standard cover regime’s original intent was not to standardise policies, but to bring to a consumer’s attention any exclusions and limitations that they might not expect in a contract. There needs to be clarity on whether that remains the objective, it says. 

Meanwhile, a joint submission from consumer groups says if standard cover is to be effective, all key terms should be standardised and definitions around “maintenance” and “wear and tear” should be led by government and not industry. 

Reforms on terms and a standard cover regime should be undertaken by a government-established independent panel that would involve and consult with representatives from industry, consumer and community groups, regulators, the Australian Financial Complaints Authority and government, the submission says. 

The Financial Rights Legal Centre, WEstjustice, Choice and the Consumer Action Law Centre oppose a suggested narrowing of the regime to home policies, and say it should continue and be enhanced across home, motor, travel, sickness and accident, and consumer credit insurance. 

“Consumers are faced with a soul-crushing amount of inconsistent and confusing information and choice, which is counterproductive, leads many to be unable to make a genuinely informed comparison and choice, reduces market transparency, and ultimately leads to poor consumer outcomes at claims time,” they say. 

Placing the standardisation review within the broader context of disclosure failures is needed to appreciate that the issues are not confined to outcomes after extreme weather events, and won’t be solved by piecemeal action, the submission says.