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Long road ahead on consumer reforms

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There’s little dispute that standard cover arrangements aren’t much help to consumers trying to choose between policies, but responses to a Treasury discussion paper show that finding a better way forward will not be simple.

Under the existing arrangements, standard cover deviations can be included in a policy as long as they are disclosed in writing, meaning the requirement is met simply through providing the information in the associated product disclosure statement (PDS).

In practice, consumers have no knowledge that a standard cover regime even exists, or what deviations they should be looking out for. In any case, they rarely read the disclosure documents in any detail.

The Insurance Council of Australia (ICA) has been examining the problem of consumer understanding and the shortcomings of existing disclosures for some years. That examination includes the brief key fact sheets that were introduced to tackle consumers’ aversion to 100-page PDS documents.

It proposes a nine-point action plan for government and industry, which includes supporting a review of standard cover and contributing its own research in the area as part of measures to address the broader issues.

“Better consumer outcomes cannot be achieved solely through improved disclosure,” it says. “It would be counter-productive to add to the material provided to consumers if there is no demonstrable proof that they will read and benefit from it.”

ICA suggests a core package of covers common to all policies could offer a solution when it comes to standard cover. It is well advanced in assessing consumer interest in the topic and has offered to make the detailed results available to a proposed review.

It would be up to insurers how they deal with the core set of covers, with a provider potentially able to include more features in its policy, but not less.

The National Insurance Brokers Association (NIBA) also says standard cover is only part of the answer for addressing information asymmetries between consumers and insurers, and any solution would need to achieve a balance between community expectations and what underwriters can practically deliver.

The group says insurers shouldn’t be forced to only provide the standard level of cover, but there should be a clear warning that no consumer can fail to miss if there are deviations. Covers could be updated on as required.

“The challenge is getting the right balance and setting up a group trusted by all in this regard that is likely to achieve a fair balance,” it says.

NIBA, ICA, consumer representatives, the Australian Securities and Investments Commission (ASIC), the Australian Financial Complaints Authority (AFCA) and Government representatives would have to be the minimum stakeholders for it to work, NIBA says.

“A requirement could also be imposed that makes the insured acknowledge their decision before purchasing less than standard cover and the impact of this, and advises them of the option to seek personal advice from an insurance broker.”

The Financial Rights Legal Centre says standard cover needs to be accompanied by definitions for every standard risk inclusion, exclusion and commonly used term, with current variations making it impossible to compare “apples with apples”.

“Inconsistent definitions risk misleading consumers into thinking they have cover for certain events when in fact they do not,” it says.

“What insurers euphemistically deem ‘risk appetite’ is essentially gaming the system and subtly subverting commonsense concepts to benefit their bottom line through reduced claims payouts.”

It notes that fire is a risk where cover can unexpectedly vary widely and exclusions and limitations can include areas such as the use of heaters and irons.

ICA, for its part, proposes developing a common definition for “actions of the sea”, which is not well understood outside the insurance world. It says it will work with stakeholders on the need for other common definitions, but questions whether differences are as detrimental as often maintained.

NIBA says there should be consultation with AFCA on definitions that are causing disputes.

Other areas raised in the Treasury paper include providing year-on-year premium comparisons, which has wide support outside the industry, while neither insurers nor brokers favour component pricing.

ICA says its action plan for industry and government goes beyond the discussion paper and proposes some measures requiring careful research and consideration before adoption, while others could be put in place after transition periods.

Treasury’s consultation focuses on improving transparency and disclosure and is part of the Government’s response to a Senate committee inquiry into general insurance, while issues have since also been raised by other inquiries.

For the industry, ICA's plan proposes including year-on-year premium comparisons on home and contents and motor renewals; contributing research on the value of a core pack of covers for home and contents insurance to the standard cover review; developing a common definition for “actions of the sea” and working with stakeholders to determine the need for other definitions; publishing PDS and key facts sheets prominently online; and publishing brands on the insurer’s website and on the ASIC website.

For Government it proposes: amending the Corporations Act to make clear that insurers can discuss sum insured levels with consumers, amend the Insurance Contracts Act to facilitate electronic document disclosure, review the usefulness of the key facts sheet concept and how they could be made more useful; and legislate to apply unfair contract term protections to insurance.

Better consumer outcomes depend not just on disclosure, but also on increased consumer understanding of the risks they face and the options available for managing those risks, ICA says.

Standard cover is just one element, but there is some way to go just on that issue.