In his recent speech at the Insurance Council of Australia Annual Forum ASIC’s Peter Kell delivered a scathing commentary on the state of the add-on insurance market, saying that the industry had made insufficient progress towards delivering better consumer outcomes in the area and sounded a warning: if ASIC is still raising similar concerns in 2017, ASIC’s focus will be on stronger enforcement action. As Mr Kell said, ‘It’s time to get your houses in order’.
The speech followed the release of two reports into the sale of add-on insurance products through car yards. The findings in those reports were critical of the nature of add-on insurance products, the manner in which they are sold and the lack of oversight of distribution channels.
ASIC’s focus on consumer outcomes
The consumer protection recommendations of the Financial System Inquiry (FSI) signal a philosophical shift from a disclosure-based regime, based on ensuring consumers have sufficient information to make informed investment choices, to one aimed at ensuring that the financial services environment promotes positive consumer outcomes.
Two recommendations are particularly pertinent for the insurance sector. The FSI recommended imposing an obligation on product issuers and distributors to consider and monitor a range of factors to ensure that financial products meet the needs of their target market. The purpose of the obligation is to ensure organisations are responsible for ensuring that products are designed and distributed in a way that does not create consumer detriment. The FSI also recommended that ASIC be granted a product intervention power, to enable it to take a more proactive approach to reduce the risk of significant consumer detriment. This would allow ASIC to modify, or even ban, products that are considered harmful for consumers.
The Australian Government has taken on these recommendations, and intends to consult further on their implementation by the end of 2016.1
Ahead of their likely implementation, ASIC has been approaching its market surveillance with an eye to product design and development, with a strong focus on consumer outcomes rather than issues surrounding disclosure or misleading sales practices.
In early 2015 ASIC identified ‘add-on’ insurance products as a key area of concern due to the poor outcomes they generate for consumers, and has called on the insurance industry to improve practices and standards in this area. Add-on insurance is offered to consumers in a range of transactions, from taking out a credit card to buying a car.
To demonstrate the need for reform, ASIC has recently released a report that details the deficiencies of life insurance products sold through car yards. These products commonly provide a lump sum payment of the outstanding car loan balance upon the death of the insured. The report calls on the insurance industry to take significant steps to address the low value offered to consumers, and ensure that the product is targeted only to consumers for whom it is appropriate.
ASIC performed a review of five major life insurers offering car yard life insurance, estimated to make up over 90 per cent of the market, from FY10 to FY14. The report concludes that car yard life insurance offers poor value for consumers and is often sold to consumers who have limited knowledge of, and need for, the product.
A call for change
ASIC has now done a lot of work in the add-on insurance space. Along with this current report, ASIC has conducted a consumer research study to further understand customer experiences when purchasing add-on insurance2, and is currently conducting a similar review of general insurance sold through car dealers.3 The report calls on insurers to proactively improve the design and distribution of add-on insurance products, as well as their procedures for monitoring the conduct of intermediaries. If they fail to do so, ASIC has indicated, not only in the report, but also through industry briefings, that it will increase its enforcement action.
If the consumer protection FSI recommendations are implemented (as is expected over the next 18–24 months), ASIC will have a broad power to actively intervene in the design and distribution of these products, including amending marketing material, restricting distribution, or even banning certain products. If the industry fails to act on this call to action before the FSI recommendations are implemented, this report, coupled with findings from related surveillance conducted by ASIC, may well provide the evidence ASIC requires of significant consumer detriment, allowing ASIC to use its new powers without delay.