The general insurance industry regulators, ASIC and APRA, have been discussing the findings and recommendations of the Financial Services Royal Commission as they relate to both the providers of insurance and their customers.

The Royal Commission endorsed the current ‘twin peaks’ model of financial regulation and recommended that it should be retained.

Responsibility for conduct and disclosure regulation and whether or not specific products or sales channels are suitable for consumers lies primarily with ASIC.

Responsibility for prudential regulation with APRA. APRA’s key focus is that insurers retain sufficient financial strength to pay all legitimate claims from policyholders. APRA is preparing for the BEAR scheme to expand to cover other APRA-regulated sectors, including general insurance.

ASIC’s priorities for general insurance
In a recent speech, ASIC Commissioner Sean Hughes told the insurance industry that it is focussing on consumer credit insurance, fraud investigation practices and the review of the General Insurance Code of Practice.

Consumer credit insurance
With respect to consumer credit insurance, the Financial Services Royal Commission recommended a deferred sales model on add-on insurance sold in connection with motor vehicle purchases or credit transactions.

It also recommended ASIC should impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products.

In ASIC’s view, the responsibility to ensure that CCI is not sold inappropriately is shared by both the sellers of the insurance and the insurers themselves.

Hughes said there continued to be widespread mis-selling of CCI after ASIC’s 2011 report. ASIC is working with lenders and insurers on appropriate remediation and it is also considering its regulatory options. ASIC is also looking at the value to consumers of this type of insurance product.

In ASIC’s review in 2011, ASIC identified a high number of denied claims and cancelled CCI policies. In its 2018 review, ASIC has looked closely at the claims ratio of CCI sold with credit cards, personal loans and home loans. ASIC found the average claims ratio is 18 cents in the dollar, and for CCI sold with credit cards it is 10 cents in the dollar. ASIC questions the value of a product with such a low claims ratio.

Fraud investigation practices
ASIC is reviewing how insurers investigate claims that are suspected of being fraudulent. Hughes said there is a balance between following the necessary processes to identify fraud and ensuring legitimate claims are paid swiftly.

The data ASIC has collected indicates that over 70% of claims being investigated are in fact found to be valid and then paid. In contrast, only a very small fraction of investigated claims, a little over 4%, are declined due to fraud. ASIC considers these figures reveal a very high ‘false positive’ rate for suspected fraudulent claims.

ASIC’s data also indicates that almost 15% of investigated claims are withdrawn, with a withdrawal rate of 45% for investigated claims that take more than 360 days to be resolved. ASIC expects firms to ensure that the investigation process does not wear consumers down to the point of abandoning legitimate claims.

General Insurance Code of Practice
ASIC has made suggestions on the draft provisions relating to investigations in the revised General Insurance Code of Practice.
ASIC will be working with Government and industry to implement the Royal Commission’s recommendation that the Code contains enforceable provisions.

Hughes concluded with 4 recommendations:

“Be clear, to the public and your staff, about who your products are intended for and who they do not suit. If you know that one of your products does not cover particular groups of people, say this.
Make sure you know how your products are being sold and through which channels. Be careful to match the distribution of your products with who you intend the product to suit.
Reduce the risk of your products being mis-sold by getting rid of misaligned incentives. Think about this issue broadly. Sales incentives, volume bonuses, retention payments and even balanced scorecards can all contribute to poor consumer outcomes.
Undertake regular reviews of your products’ claim ratios and other value metrics. While these factors may not indicate everything about how a product is performing, they can provide a general guide of the product’s value to consumers and raise areas for further investigation.”