Consumer groups have delivered a damning indictment of the general insurance industry and the regulation regime in submissions to the Hayne royal commission.

The Financial Rights Legal Centre, the Consumer Action Law Centre and Choice have all made submissions to the policy questions document released following the insurance round of hearings last month.

The Consumer Action Law Centre argues add-on insurance sold by motor dealers and funeral covers should be prohibited.

The centre wants law reform to provide a modernised standard cover regime, improved disclosure on insurance renewal notices and a suitability test for insurance.

Insurance claims-handling should be defined as a “financial service” and the Australian Securities and Investments Commission (ASIC) should be armed with more resources to counter errant behaviour. 

“It is clear from the case studies examined by the [royal] commission that leaving it to industry to self-regulate has failed miserably. Enhanced consumer protection in the financial services sector is desperately needed to keep big banks and insurers honest.” 

Meanwhile, the Financial Rights Legal Centre’s submission calls for the Banking Executive Accountability Regime, which took effect in July, to be expanded to include insurers.

This would give the Australian Prudential Regulation Authority power to remove or disqualify directors and impose financial consequences for individuals and banks.

The centre wants add-ons sales through vehicle dealerships abolished, the introduction of unfair contract terms laws, and legislation to enforce standard key definition terms.

Choice says industry codes must have greater regulatory involvement and oversight to improve consumer protection.

It argues self-regulation has not served consumers well, pointing to evidence heard during the insurance hearings at the commission last month.

“It is clear self-regulation has failed consumers,” Choice says in a joint submission with the Superannuation Consumers’ Centre. “Industry codes have proven to be inadequate in minimising consumer detriment.”

It says the industry “has little interest in addressing problems it is currently profiting from”.

Codes should be overseen by an independent party and shaped by consumer needs rather than industry preferences, the submission says. Accurate and unbiased research of issues and asking the right questions of industry are other requirements.

The submission, which proposes 16 ways to address the industry’s systemic issues, wants add-on products sold at car dealerships and other “toxic products and practices” banned.

It also wants insurance contracts to comply with unfair contract terms legislation – a step the industry has long opposed.

ASIC must be given the authority to administer mandatory industry codes, and the civil penalty regime should be expanded to include to all aspects of insurance service provision, such as claims handling and settlement.

“We need to move away from regulatory responses that ask industry if it would like to fix the problem to responses that force industry to fix the problem, while only consulting with it on options to implement reform,” the Choice submission says.