Australian insurers continue to attract their share, or perhaps more, of regulatory review and change. In this section DLA Piper Partner, Samantha O'Brien explains some of the significant regulatory developments in 2011 affecting the insurance industry.
As you will see below, the regulators in Hong Kong, New Zealand and Thailand are also busy. Read our interview with Michael Gill on page 18, who has mostly positive things to say about the Australian regulatory regime. He also comments on the inevitable rise in regulation in the Asia Pacific region. To keep up to date with regulatory change, log on to our blog www.insuranceflashlight.com where you will find that Samantha O'Brien and lawyers in our Asian offices are regular bloggers on these issues.
CHANGES TO REGULATION OF INSURANCE CONTRACTS
Luckily, no-one held their breath when, on 10 September 2003, the Federal Government announced a comprehensive review of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act). Nine years later, the review still hasn't produced any legislative change.
There was change on the horizon when the Insurance Contracts Amendment Bill 2010 (Bill) was introduced to the House of Representatives on 17 March 2010.
The Bill gave effect to a number of the review panel's recommendations. In several areas the review panel's recommended approach was modified to take into account subsequent consultations with stakeholders of the details of the proposed amendments. In particular, the proposed amendments to section 54 were removed. However, the Bill included the much needed electronic transaction reforms.
The Bill passed the House of Representatives, but as a result of the Federal Election in August 2010 it lapsed before it could pass through the Senate.
So what has been the hold up since then?
In addition to the election in 2010, it is likely that matters the subject of ongoing consultation have impacted the timing of the Insurance Contracts Act amendments. These include the unfair terms laws, standard flood definition and key fact sheet reforms.
Flood insurance reforms were inevitably the subject of a number of state and Commonwealth reviews and inquiries in 2011, notably the National Disaster Insurance Review (Review) and the Queensland Floods Commission Inquiry. The flood reforms are discussed in some detail on page 9.
An interesting development to come from the Review was the recommendation to extend the unfair contract terms in Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to insurance contracts. Insurance contracts are not presently "caught" by the unfair contract terms because contracts covered by the Insurance Contracts Act are specifically excluded.
In light of the Review's recommendations in respect of unfair contract terms, Treasury released a Consultation Draft Regulation Impact Statement, Unfair terms in insurance contracts (Impact Statement) on 12 December 2011. The "problem" to be addressed through consultation is expressed in the Impact Statement as "the current imbalance between protections offered under existing regulation of insurance products and that which currently applies to other financial products and services".
In the Impact Statement, Treasury outlines the options available to ensure that consumers of insurance products and services receive comparable protection to consumers of other financial products and services where the unfair contract terms presently apply. These options include applying the unfair contract terms laws to insurance contracts, either by modifying the ASIC Act or the Insurance Contracts Act, enhancing the current remedies under the Insurance Contracts Act or encouraging self regulation. Status quo remains an option for consideration.
It is anticipated by Treasury that a resolution on these issues will pave the way for the introduction of the other long-awaited Insurance Contracts Act amendments. Based on the time lines mentioned in Impact Statement for the introduction of unfair contract terms, this time line may stretch out to 2013.
APRA ISSUES NEW PRUDENTIAL STANDARDS
On 12 September 2011, the Australian Prudential Regulation Authority (APRA) issued four consolidated prudential standards on governance, fitness and propriety, outsourcing and business continuity management to replace 12 existing standards for Authorised Deposit-Taking Institutions, general insurance and life insurance industries. The new standards will take effect from 1 July 2012.
At that time, APRA also issued minor consequential amendments to Prudential Standard GPS 221 Risk Management: Level 2 insurance groups to remove material contained in the consolidated standards.
On 5 October 2011, APRA issued its new refinements to the prudential supervision of general insurance groups, which are mainly consistent with the proposals APRA released in its May 2011 discussion paper.
The new prudential standards effective on 1 December 2011 are Prudential Standard GPS 001 Definitions; Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Groups; and Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups.
The capital standards no longer require reinsurance assets not meeting governing law requirements in foreign jurisdictions to be deducted. However, APRA expects that Level 2 insurance groups understand and comply with relevant regulatory requirements in jurisdictions in which they operate.
For the purposes of determining the Level 2 insurance groups' capital base, reserves from equity-settled share-based payments (shares or share options) granted to employees as part of their remuneration package may only be included in reserves if certain conditions in GPS 111 are met.
In assessing the overall capital strength of a Level 2 insurance group, APRA may request that the parent entity provide details of the group's intra-group exposures, including capital transactions and intra-group guarantees such as details of all intra-group exposures provided by the parent entity to the Level 2 insurance group. APRA may also request details of material exposures between entities controlled by the parent entity.
FOFA REFORMS CONTINUE
The focus on the reform of the regulation of financial services advice continued in 2011 with the release of draft legislation.
The proposed commencement date of the Federal Government's Future of Financial Advice (FOFA) reforms is 1 July 2012, however there has been considerable pressure from stakeholders to delay this start date to give the financial services industry more time to comply. The terms of the draft legislation generally reflect the successful lobbying of the insurance and broking industry in relation to the ban on conflicted remuneration (including volume and profit share arrangements). This ban will not apply to general insurance or life insurance other than certain superannuation fund-related life risk policies. Focus has turned to the terms of the "best interest" duty set out in the draft legislation and its risk and compliance impact on advice models.
Will such a duty enhance the quality of advice that consumers receive about insurance products or reduce the availability of tailored advice? Will the best interests duty be consistent with, and continue to allow, scaled advice? On 13 December 2011, ASIC released its plans for publishing regulatory guidance on the impact of the FOFA reforms.
Assuming the FOFA legislation is passed before 1 July 2012, ASIC will release regulatory guidance before 1 July 2012 on, among other things, ASIC's expectations for meeting the best interests duty, ASIC powers (in particular expanded powers to cancel or suspend an Australian Financial Services (AFS) licence and ban representatives) and, possibly, regulatory guidance on FOFA's anti-avoidance provisions.
ASIC has anticipated that it will consult directly with stakeholders in early 2012 as well as seeking industry feedback through its usual formal consultation process.
GENERAL INSURANCE TELEPHONE SALES
General insurers and their issuing agents will be amending their call centre scripting to take advantage of Product Disclosure Statement (PDS) relief issued in the form of ASIC class order CO 11/842 on 28 October 2011. This class order modifies the time for giving a PDS for a general insurance product when a retail client is given a quote for the policy during a solicited telephone call. It does not apply to unsolicited calls, when the anti-hawking rules must be followed.
This modification is required because a quote will, in some circumstances, amount to an invitation to apply for a general insurance product, triggering the obligation to give the PDS at the time the quote is given.
This relief will enable quotes to be provided without the need for a PDS to be given. It will ensure that the quote stage of a telephone sales process can be completed without the provisions of a PDS until after the call (if at all). This will assist product comparison by removing compliance hurdles for "full" quotes, allowing consumers to continue to "shop around" for insurance cover.
Of course, if during any phone call the client proceeds past quote stage to acquire the policy on the call, additional obligations apply to the provisions of the PDS.
ASIC CONSULTS ON SCALING ADVICE
Consumers want advice and insurers want to give it. Insurers have long asked for changes to the law, or guidance from the regulator, to reduce unnecessary legal hurdles to their provision of advice to clients about their own products.
In July 2011, ASIC released Consultation Paper 164 on scaling advice, which will lead to regulatory guidance on this issue. On 13 December 2011, ASIC announced that it aims to release that regulatory guidance before 1 July 2012 as part of the package of FOFA guidance referred to above.
Insurers, like others in financial advisory industries, will need to keep an eye on the FOFA reforms to assess its impact on scalability. However, the consultation paper includes some helpful examples that demonstrate the regulator's distinction between factual information, general advice and personal advice.
With FOFA pending, the importance of "staying within the lines" is likely to increase.
GENERAL INSURANCE CLAIMS HANDLING
In August 2011, ASIC released Report 245 about its review of general insurance claims handling and dispute resolution processes. The review involved consideration by the regulator of claims handling and Internal Dispute Resolution (IDR) statistics and documents from eight different general insurers, with a focus on key motor vehicle brands and markets. The report card for these insurers, and the industry generally, was good.
ASIC's high-level findings were "generally positive". However, ASIC made nine general recommendations that should make their way through, where appropriate, to claims and dispute resolution practices and product disclosure content. These included recommendations about the role of "frontline" (or call centre) staff in claims decision-making, denials in particular, the provision of written responses to clients of complaint decisions made before stepping into the formal IDR stage and improved disclosure of no-claim discount scheme operation.
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