The Insurance Council of Australia (ICA) says a draft bill to extend unfair contract terms to the sector will result in higher premiums and worsen problems in the northern Queensland and professional indemnity markets.

“We support that extension in a manner that genuinely assists consumers, [but] we are seriously concerned that the draft bill, if enacted, would harm rather than improve consumer outcomes,” CEO Rob Whelan says in submission today.

An extension of unfair contract terms provisions to insurance was recommended by the Hayne royal commission.

The proposed changes would impose rules on insurance that would impact the sector more than other parts of the economy covered under existing unfair contract terms arrangements, he says.

“If insurers cannot rely on the terms forming the basis of their contracts, they will need to reprice the risks being underwritten and there will be significant implications for their reinsurance arrangements and the capital they need to hold.

“In turn, this will likely affect the scope of policy coverage and lead to higher premiums for consumers. In particular circumstances, insurers will be pressured to withdraw cover entirely.”

Mr Whelan says the main subject matter of contracts is defined too narrowly in the bill and would lead to significant uncertainty.

“Being required to justify the specified cover in the insurance policy is more onerous than what is required in other sectors,” it says.

“For example, a cleaning service is not required under the existing unfair contract terms regime to justify terms setting out areas that it will and will not clean.”

ICA has proposed that an unfair contract terms regime should follow an approach used in Europe, which allows consumers to challenge terms that unfairly prevent them from receiving protection they thought they had purchased. This also provides certainty for insurers.

The submission says the draft bill threatens to exacerbate insurance availability issues in northern Australia, and could also worsen problems in the professional indemnity arena for building certifiers and surveyors.

“The Insurance Council’s members confirm that their continued participation in the market is predicated on the validity of their cladding exclusions,” Mr Whelan says. “If these exclusions are reviewable for unfairness, insurers will not be able to remain in the market.”

The explanatory memorandum with the draft bill provides an example which describes the main subject matter as “the house, car or person that is insured”, but ICA says this would create ambiguity, lacks flexibility and would not allow for innovation.

In a case study, ICA says flood exclusions could be challenged under the proposed arrangements, potentially causing insurers in some circumstances to remove consumer choice and only allow full inclusion of flood risk.

The impact could mean an average 646% increase in premiums for customers living in a high flood risk area, who would be not be able to opt-out of flood cover.