The Consumer Action Law Centre (CALC) and the Financial Rights Legal Centre (FRLC) have called for separate inquiries into the insurance industry.

In a submission to the Financial System Inquiry the CALC proposes an independent review of lenders’ mortgage insurance (LMI) and flags the need for a “broader community debate about the purpose of insurance”.

The CALC is critical of LMI, claiming it “offers the industry much more than it offers consumers”.

“A key problem relating to lenders’ mortgage insurance… is that it is paid for by consumers… but it does not cover them, it covers the lender,” its submission says.

The number of consumer complaints about LMI to the Credit Ombudsman Service increased to 58 in 2012/13 from 20 in 2010/11.

The service says complaints generally arise when “a loan is not fully repaid from the proceeds of the sale of the security property and the lender makes a claim on its mortgage insurance policy for the shortfall, [but] the right to recover the shortfall is generally assigned to the LMI provider”.

The CALC says given this right of “subrogation” it is misleading to call LMI products “insurance” when bought by consumers. It calls for abolition of the right of subrogation, which would mean insurers bear the full risk being paid for.

The submission recommends insurance products and services be subject to a suitability requirement, as applies in the UK.

Other recommendations include: development of “default” insurance products; addressing underinsurance through better product design, improvements to “standard cover” regimes and more consumer-friendly disclosure and product information; and protection from “unfair terms”.

“It may also be useful to have a broader community debate about the purpose of insurance,” the CALC says. “We believe there is an argument for a return to the original philosophy of insurance in sharing risk across the community.”

The FRLC’s submission to the inquiry calls for an “urgent review” of insurance industry regulation.

It says current regulation is “completely unequipped” to handle challenges including climate change and underinsurance.

It criticises lack of transparency on premium pricing, variations in suitability and coverage of insurance products, “extremely poor, poorly structured and impenetrable” product disclosure and lack of protection from unfair terms.

“Overall, we contend [these] issues in the insurance industry require urgent review and regulatory reform,” the FRLC says.

“We contend that a failure to undertake that review in the context of climate change leaves consumers, the Government, the insurance industry and other financial services providers, and the economy as a whole, at serious risk.”