Consumer groups have called on the Federal Government to establish an independent panel to lead reforms on standard terms and an effective standard cover regime. 

The panel should involve and consult representatives from industry, consumer and community groups, regulators, the Australian Financial Complaints Authority and government, a submission to a Treasury consultation paper says.

The consumer advocates say reforms should deliver a minimum set of basic default standards that meet community expectations and include a set of definitions for every inclusion, exclusion and commonly used term. 

Misunderstanding of policies is leading to underinsurance, inflated premiums and an inability to compare products as consumers face a “soul-crushing amount of inconsistent and confusing” information and choice, the submission says. 

“Inconsistent definitions actively undermine the risk mitigation partnership between the consumer and the insurer and create an imbalance of power that advantages insurers,” the Financial Rights Legal Centre, Consumer Action Law Centre, Choice, Mortgage Stress Victoria and WEstjustice say. 

“The lack of an effective standard cover regime and its lack of built-in standard definitions is also central to the poor outcomes.” 

The Insurance Council of Australia (ICA) has warned 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 sector welcomes and supports initiatives that may assist in improving consumer understanding of insurance products, and in reducing insurance premium price pressures for consumers,” it says. “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” to achieve any pricing stabilisation, it says.  

ICA also warns that proposals could have implications for reinsurance, where global companies are operating in many jurisdictions and may make changes.

"For example, a wildfire in another jurisdiction could cause the international reinsurance market to revisit the insurability parameters of conflagrations and they have to apply a consistent definition in their treaties," it says.

If a primary insurer has a regulatory veto in adapting to these definitions then they would have to "declare nonconcurrency to a regulator and possible issues with their reinsurance declarations" to the Australian Prudential Regulation Authority, ICA says.

The Treasury consultation paper was released last month, with submissions due this month. 

See Analysis.