Our latest insurance update from the Asia Pacific region includes articles from Australia, China and Thailand.
ASIC sounds warning on add-on insurance products: time to get your houses (and car yards) in order
In his recent speech at the Insurance Council of Australia Annual Forum the Deputy Chair of the Australian Securities and Investments Commission (ASIC), 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. The findings are discussed below.
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 5 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.
The study found that car yard life insurance is on average 50 per cent more expensive than life insurance sold through other distribution channels. It concluded that this is likely due to the impact of ‘reverse competition’, which has taken effect in the absence of demand-driven competition. Reverse competition causes insurers to compete on the basis of the commissions paid to intermediaries, rather than the premium costs, thereby increasing the cost to consumers. In some cases, intermediaries were found to have received commissions of up to 50 per cent of the premium payable.
The review also found that car yard life insurance has a low claim-to-premium ratio; only $6 million was paid in claims during the FY2010 – FY2014 period, which equates to 6.6per cent of the total premiums paid. In his speech to the ICA, Mr Kell noted: “Low claims payouts relative to premiums was another important and concerning finding. Does this audience think that any alarm bells should ring about a product with a claims ratio of 6 per cent?”.
The report found that car yard life insurance also offers less value than traditional life insurance, because the insurer’s liability decreases over time; as the insured makes repayments under the loan, the claimable amount decreases. Further, because the premium is generally paid upfront as a lump sum, funded by the consumer borrowing more from the lender, the consumer incurs interest on the entire premium, once again increasing the total cost of the product.
Similar concerns over low claims ratios and funded up-front premium were key concerns of the UK regulator during the course of addressing the payment protection insurance (PPI) “scandal” which resulted in over AUD$40 billion of premiums being refunded to consumers. The regulatory attention in the UK has led most distributors to cease the sale of single premium PPI altogether.
Poor investment decisions
These findings indicate that car yard life insurance often offers poor value for consumers, which begs the question: why do consumers buy the product?
The report concludes that the context in which car yard life insurance is sold contributes to poor decision-making by consumers. Most consumers enter a car dealership with no awareness that they will be offered add-on life insurance, and therefore have limited capacity to assess the value of the products or seek an alternative. They are not provided with advice as to whether the product is suitable for their circumstances. Indeed, the report found that 11 per cent of policies were sold to consumers aged 21 and under, who do not have dependents, and therefore arguably have no need for the product. Further, some consumers were found to lack an understanding of the product purchased. There is also evidence of the use of unfair tactics to increase sales.
Again, recent UK experience is relevant. In addressing similar concerns, the UK regulator has imposed a range of restrictions on the sale of add-on insurance products through car yards, including imposing a 24-hour deferral period from the time of purchase of the vehicle before GAP insurance can be sold to the consumer. The intention is to separate the purchase of the car from the insurance and allow the consumer time to shop around for alternative products.
Another relevant area of focus for ASIC is on intermediaries. In his speech, Mr Kell noted that many insurers were unaware that they were underwriting certain add-on products because they were sold through wholesale channels, or white-labelling. He said, “[i]nsurers cannot simply reach wholesale agreements with other insurers or underwriting agencies and ignore what happens next…the days of washing your hands when it comes to the actions of distributors is over”.
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. It has also flagged regulatory changes to promote better consumer decision-making, such as the introduction of more detailed pricing disclosure or comparative value measures.
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.
For further information please contact Matt Ellis in Melbourne.
Looking for a new act? The WA Court of Appeal tells us where to look
In Allianz Australia Insurance Ltd v Inglis  WASCA 25, the West Australian (WA) Court of Appeal clarified the meaning of ‘act’ in s54 of the Insurance Contracts Act 1984 (ICA) and reminded us how to construe insurance contracts.
- Section 54(1) of the Insurance Contracts Act 1984 prevents an insurer from refusing indemnity solely on the basis of an act of the insured or another person which occurs after the inception of the policy.
- In this context, ‘act’ means something done or being done by a person. It does not include a state of affairs or the description of a relationship. ‘Normally living with’ another person is not an act.
- The general principles of contractual construction apply to insurance contracts and there is no general rule that exclusion clauses are to be construed strictly or narrowly, absent ambiguity.
Stephen Sweeney drove a mower into Georgia Inglis, injuring her seriously.
Georgia Inglis sued Stephen Sweeney and his parents in the WA District Court. The Sweeneys then sued Georgia’s father and brother, Stuart and James Inglis, claiming an indemnity, alternatively a contribution, on the basis that their negligence had caused Georgia’s injuries.
Stuart and James Inglis sought indemnity under the legal liability section of their home insurance policy, which covered them for legal liability to pay compensation in respect of bodily injury occurring during the policy period.
Allianz declined indemnity on the basis of an exclusion in the policy that provided, ‘We will not cover your legal liability for injury to any person who normally lives with you’.
WA District Court decision
The WA District Court found that Georgia Inglis was a person who normally lived with Stuart and James Inglis within the meaning of the exclusion. However, that fact was an ‘act’ for the purposes of s54(1) of the ICA which (in the absence of any prejudice) prevented the insurer from declining cover.
WA Court of Appeal decision
The Court of Appeal considered several issues but it was its interpretation of ‘act’ under s54(1) that effectively disposed of the appeal. The court held that living with another person is not an ‘act’, but a ‘state of affairs’ or a ‘description of a relationship’. Here, the facts depended on an inference to be drawn from the conduct of all relevant persons over an extended period of time and did not depend on a single act of a particular person on the relevant day. So they could not amount to an ‘act’ within the meaning of s 54(1).
McClure P also considered two matters of contractual construction.
The policy defined the insured as Linda and Stuart Inglis and ‘you’ or ‘your’ as:
‘the person(s) named in the current schedule as the insured and those persons who live with you permanently who are any of the following:
- any member of your own family and your spouse’s or de facto family.’
The Inglises argued that the exclusion relied upon by Allianz did not apply as ‘you’ meant all the insureds and so ‘any person’ had to mean any person other than an insured (including Georgia Inglis).
McLure P rejected the argument. After setting out the relevant principles of contractual construction, her Honour held that the meaning of ‘you’ was informed by its context and the nature or type of the insurance. At its widest, ‘you’ meant all the insureds under the policy severally. However, for the purposes of the relevant insuring clause, the context required that it meant only those insureds who were legally liable to pay compensation in respect of the bodily injury. In the present case, that meant Stuart and James Inglis, not all the insureds, and ‘you’ and ‘your’ had the same meaning in the exclusion. So Georgia Inglis qualified as ‘any person’.
The second issue was whether a contribution claim was a claim which gave rise to a legal liability ‘for injury’ within the meaning of the exclusion. Having regard to the text, context and purpose of the insuring clause and the exclusion, McLure P held that it was.
The Court of Appeal’s decision clarifies the meaning of ‘act’ in s54(1) of the ICA. A state of affairs is not an ‘act’. The decision also provides a useful reminder that the court will determine the meaning of a policy provision, including exclusions, by reference to the text, context and purpose of the provision and the policy as a whole. Notably, here, although the policy definition of ‘you’ and ‘your’ referred to all insureds, the Court of Appeal found that this was not its meaning in the context of the legal liability cover and the exclusion.
Draft Amendments to use of insurance fund measures for public consultation
On 9 March 2016, China Insurance Regulatory Commission (CIRC) published draft amendments (the Draft Amendments) to the Interim Measures for the Administration of Use of Insurance Funds (the Use of Insurance Funds Measures) for public consultation. These are the second substantial amendments made to the Use of Insurance Funds Measures since investment by insurance funds became a hot topic six years ago.
The Draft Amendments implement significant changes to requirements set out in the Several Opinions on Accelerating the Development of the Modern Insurance Service Industry issued by the State Council in 2014 (the State Council Opinions). We summarise these major changes below for reference:
- Supervision of foreign investment
The Draft Amendments now expressly provide that investment in foreign assets by insurance funds is not only subject to CIRC requirements, but also requirements of the People’s Bank of China (China’s central bank) and the State Administration of Foreign Exchange (China’s foreign exchange control regulator). The Draft Amendments clarify in legislation the position that has been in practice in the market.
- New investment categories confirmed
In order to maintain consistency with the State Council Opinions, the Draft Amendments now expressly permit insurance funds to invest in asset securitisation products and private funds (such as venture capital funds).
- Investment in specialist insurance asset managers
The Draft Amendments encourage insurance fund investment in “specialist insurance asset managers”, which, unlike general insurance asset managers who usually diversify their investments, will only focus on investment in real estate, infrastructure and the pension industry. Such “specialist insurance asset managers” are in practice private fund managers with the ability to manage private investment in the above investment categories. This offers a new route for insurance funds to tap into the private funds market.
- New categories of investment managers confirmed
The Draft Amendments also confirm that investment managers, in addition to the traditional insurance asset managers, will be able to manage insurance funds. The new categories of investment managers that can manage insurance funds include securities companies, securities asset manage companies, securities investment fund management companies and their subsidiaries.
- Definition of “material equity investment” redefined
The Draft Amendments provide a revised definition of “material equity investment” which will include the following:
- acquiring control in non-insurance financial institutions;
- acquiring control in insurance business related entities with a relatively high investment amount;
- circumstances where there is not control in the invested entity, but the relevant investment amount or ratio reaches certain limits.
Such material equity investment by insurance group companies or insurance companies is still subject to CIRC approval, and CIRC will issue detailed standards on “material equity investment” separately.
In conclusion, these Draft Amendments consolidate the main rules and requirements that were previously scattered amongst various CIRC notices and circulars. The Draft Amendments have the effect of closing-up gaps in various legal measures which is expected to increase control over potential investment risks.
CIRC strengthens internal governance of insurance companies
In December 2015, CIRC issued the Regulations on the Internal Audit Work of Insurance Companies (the Internal Audit Regulations), which superseded the Trail Guidelines on the Internal Auditor of Insurance Companies issued by CIRC in 2007. The issuance of the Internal Audit Regulations is also to keep consistency with the State Council Opinions and improve risk management in insurance companies.
The Internal Audit Regulations apply not only to insurance companies, but also to insurance group companies, insurance asset management companies, reinsurance companies and their branches and subsidiaries (collectively, Insurance Entities).
According to the Internal Audit Regulations, every Insurance Entity is required to set up an audit committee under its board of directors with no less than three committee members being directors who do not concurrently assume positions in senior management teams of the Insurance Entity.
An independent internal audit function will generally be required in each Insurance Entity. The person-in-charge of the internal audit function must meet certain qualification requirements. Any change to the person-in-charge of this function must be reported to CIRC. Each internal audit function should be equipped with sufficient internal audit personnel - the number of designated internal audit personnel being no less than 0.5% (and in exceptional cases 0.4 per cent) of all employees employed by each Insurance Entity, with at least three designated internal audit personnel as a minimum.
Each Insurance Entity is required to submit annual internal audit report covering the previous year to CIRC, and shall provide notification of material risks identified during the day-to-day internal audit work in a timely manner.
Any breach of the internal audit requirements under the Internal Audit Regulations may subject directors, audit committee members, persons-in-charge of the internal audit function, general manager or other senior management personnel of the relevant Insurance Entity to various administrative liabilities. Where breaches constitute a crime, criminal liability also may be imposed.
CIRC to require insurance companies to meet disclosure obligations
On 25 March 2016, CIRC published the results of an inspection of 133 insurance companies registered in China in respect of their fulfillment of their respective disclosure obligations in the first half of 2015. After inspection, a number of insurance companies (including foreign invested insurance companies) have been found to be in breach of their disclosure obligations.
CIRC requires the named insurance companies to rectify their non-compliant activities by mid-May this year. This is the first time that CIRC has conducted an overall and comprehensive inspection of insurance companies’ fulfillment of disclosure obligations. This demonstrates CIRC’s new focus on improving insurance company disclosure.
Clarifications for applications for waiver for increased foreign shareholding limit
Under current insurance regulations in Thailand, foreign shareholding is limited to 25% unless the insurance company obtains a specific waiver from either the Office of Insurance Commission (OIC) or the Ministry of Finance (MoF) to allow foreign shareholding (and foreign directors) of up to 49% (respectively a OIC Waiver or MoF Waiver). The circumstances in which these waivers will be granted are designed to limit foreign investment to situations where a Thai insurance business is unable to find a local investor or where, without investment, there are risks to policyholders or the public.
The internal policies and criteria used by the OIC and the MoF in considering applications for either an OIC Waiver or MoF Waiver, respectively, had not (until recently) been published. On 28 December 2015, the OIC issued a notification which sets out the procedures for, and the criteria it will apply when considering, an application for an OIC Waiver for both life or non-life insurance companies (OIC Notification). On 4 March 2016, the MoF issued a similar notification which sets out the procedures for, and the criteria it will apply when considering, an application from only non-life insurance companies for an MoF Waiver for foreign shareholding of up to 75 per cent for 10 years (MoF Notification).
The OIC Notification prescribes criteria and qualifications for an application by either a life or non-life insurance company to have aggregate foreign shareholding of up to 49 per cent. The circumstance in which such foreign shareholding will be allowed will include where the applicant insurance company must: (i) have or be likely to have capital adequacy ratio below the prescribed minimum level; or (ii) have adopted a plan to improve the management of its business to strengthen its operation and competitiveness.
The applicant insurance company must provide a three year business plan in support of the application. In addition, the OIC Notification also requires that the applicant insurance company has a clear and compliant shareholding structure.
In addition, any foreign shareholder holding more than 10 per cent of the shares in the applicant insurance company must meet the following qualifications (Major Foreign Shareholder Qualifications):
- be an insurance company, part of an insurance business group or in insurance related finance business;
- be financially and operationally stable;
- have insurance experience and expertise;
- have credibility and an operational network at an international level; and
- have a clear business plan to transfer knowledge and expertise to enable the applicant insurance company’s business to grow.
Current foreign shareholders which hold more than 10 per cent of the shares in any insurance company prior to the application may continue to do so under the grandfathering provisions.
The MoF Notification prescribes criteria and qualifications for an application by a non-life insurance company to have an aggregate foreign shareholding of up to 75 per cent for a period of 10 years. One of the prescribed conditions for an MoF Waiver will be where the status or operations of the applicant insurance company might cause damage to the insured or the public. This condition would be met where the OIC has, pursuant to section 52 of the Non-Life Insurance Act, issued an order for the applicant insurance company to remedy its status or operation by increasing or decreasing its capital or to temporarily cease writing policies. In addition, the existing shareholders must not be able to effect an increase of capital and the applicant insurance company is unable to find a Thai investor to inject capital required to continue its operations in a sustainable and efficient manner in the long term.
In addition, the foreign shareholder(s) must also meet the following qualifications:
- be an insurance company, part of an insurance business group or in insurance related finance business;
- be financially and operationally stable, with its shareholders or parent given at least an ‘A’ credit rating by a reputable institution and have an operational network at an international level;
- have insurance experience and expertise for 10 years or more;
- have a clear business plan, remedial plan and knowledge and expertise transfer plan; and
- able to inject capital required for the applicant insurance company to continue its operations in a sustainable and efficient manner. Minimum capital injection required is the higher of: (i) THB 500 million, and (ii) the amount required to increase the applicant’s solvency margin to at least 250 per cent.
The applicant insurance company must provide a business plan (in respect of its finances, human resources, internal audits and capital adequacy ratio) in support of the application. In addition, the MoF Notification also require that the applicant insurance company has clear and compliant shareholding structure.
For further information please contact Sarah Chen in Bangkok.
Commercial division update: Stays of state court securities actions
This column explores recent developments in stay of the state proceedings for defendants facing parallel securities class actions.