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Royal commission: brace for a Hayne crash?

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The long wait is almost over: next week insurance will finally be put under the royal commission spotlight.

No doubt it will be an uncomfortable experience for the industry, but just how bad will it be?

Let’s start with what we know.

The insurance hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry will begin next Monday and last two weeks, ending on Friday September 21.

There are three sections – life insurance, general insurance and the regulatory regime. But there is no indication how much time each sector has been allocated. On Monday there will likely be an opening statement cutting across all three segments.

The general insurance companies listed to appear are Suncorp, IAG, Allianz and Youi, and the regulatory section features the Code Governance Committee, the Financial Services Council and the Insurance Council of Australia.

The life companies called up are AMP, ClearView, CommInsure, Freedom Insurance, REST and TAL.

The commission says the hearings will consider “issues associated with the sale and design” of insurance and “handling of claims”, plus “appropriateness of the current regulatory regime”.

Natural disaster case studies postponed from round four will be covered, meaning the Wye River fires of Christmas 2015 – which led to allegations of poor claims-handling by AAMI – and last year’s Cyclone Debbie will certainly feature.

Major insurers were asked to supply vast amounts of information relating to premiums, claims, distribution and remuneration.

But the industry remains in the dark about where the questions might go, beyond the natural disaster case studies already mentioned.

“Nobody really knows what they have made of all that information,” an industry source tells insuranceNEWS.com.au.

Insurers are preparing for a tough time, wherever the focus falls.

“It doesn’t matter who you are or what the issue is, it’s going to be bad,” the source says.

“That’s the object of the exercise – it’s a royal commission into misconduct, not good conduct.”

KPMG Insurance Partner Scott Guse says insurance executives have put in months of preparation with legal teams, for what may be only half an hour on the stand.

IAG’s results last month revealed it has “worn about $10 million additional expenses” associated with the royal commission.

“I don’t envy those who are going to be in front of the commission,” Mr Guse says. “It has been a major distraction and a huge cost to organisations.”

Some clues about likely areas of focus can be found in the commission’s background papers and terms of reference. The clear focus is misconduct and practices that fall below community expectations. The commission is not supposed to go into depth on issues that have been or will be tackled elsewhere.

With that in mind, we can perhaps expect the commission to steer clear of the plethora of issues already addressed in some detail by the recent Senate inquiry into general insurance, or the Productivity Commission.

Old favourites such as unfair contract terms, disclosure regimes and an alleged lack of competition may get limited airing.

It’s also reasonable to expect insurance affordability in northern Australia will be given a wide berth, given the number of reports that have already considered that issue and the Australian Competition and Consumer Commission’s current inquiry.

However, previous rounds have covered old ground, so there are no guarantees.

Add-on insurance and funeral cover have already featured, but could easily get another run.

The general insurance industry’s code of practice – a cornerstone of the “self-regulation” regime – is also expected to come under scrutiny by the commission. The code is written and maintained by the industry, and it has been criticised in the past for being compromised by the fact that insurers play a hefty role in setting the rules.

For life insurance, there may be a strong focus on sales practices, with last week’s Australian Securities and Investments Commission report on direct sales a pretty good indication of what’s to come.

But for general insurance, consumer groups expect the emphasis to be very much on claims – with personal lines grabbing most of the attention.

“I expect most of the stories we hear at the commission will relate to the handling of claims, and where that has gone wrong,” Consumer Action Law Centre Senior Policy Officer Susan Quinn tells insuranceNEWS.com.au. “It could be quite awful for the industry. What about the insurers’ argument that among many thousands of claims, the overwhelming majority are fairly paid?

“[Poor claims experiences] might be a small percentage from insurers’ point of view, but for those people involved it is a very significant and distressing event,” Ms Quinn says. “We can’t just brush them off as statistics.”

Insurers say poor claims experiences are rarely black and white, and many can be interpreted as the policy responding correctly.

Industry sources fear a “parallel universe” has developed where legitimately denied claims are considered as falling below community standards.

“With complex products that consumers don’t read, it is inevitable some people putting in a claim will be disappointed,” one told insuranceNEWS.com.au. “But regulators, politicians and the public don’t want to hear these stories of claims not being paid.”

KPMG’s Mr Guse believes a strong focus on natural disaster claims would be “disappointing”.

“Insurers historically have done a wonderful job when it comes to natural catastrophes – getting teams on the ground and reinvigorating communities,” he says.

“It would be a shame if the commission focuses on individual complaints.”

Mr Guse believes that “while you can never be perfect”, insurers are “really fair” on catastrophe claims, even erring on the insured’s side in many questionable claims.

However, he says they also have a responsibility to their reinsurers and “there are times when they simply have to stick to the rules”.

ICA declined to comment before appearing at the hearing, but the National Insurance Brokers Association (NIBA) has not been called, suggesting brokers will avoid serious scrutiny.

“No broking firms have been called, so clearly the focus is on the insurers and the code,” NIBA CEO Dallas Booth tells insuranceNEWS.com.au.

“It has to concentrate on areas of greatest community detriment, and the Financial Ombudsman Service complaints figures suggest broking is not one of those areas.”

Mr Booth does not believe the outcome will be as harsh as others predict, but he welcomes a transparent process.

“If there are small numbers of issues raised, we already have procedures in place to deal with that. If there are significant systemic issues, I am not aware of them. But if there are, then they have to be brought to light and dealt with.”

Financial Rights Legal Centre Policy and Advocacy Officer Drew MacRae also expects poor claims handling to feature strongly, and doesn’t accept what he sees as industry excuses.

“We see poor claims handling all the time and we have had a problem in the past with poor investigation practices,” he says.

“The problems are systemic. You only have to look at the Financial Ombudsman Service complaints statistics to realise that, and the Senate inquiry found the general insurance sector wanting.

“We hope funeral insurance comes up again. It is not just a problem in Indigenous communities, but across all communities. We had one client with 11 different funeral policies – five of them from the same insurer.

“There is a lot of work already under way, but we are keen to see a lot of these issues get raised again during the hearing. Some of the case studies will cut across many different aspects.

“[The commission] has done an extraordinary job to catch the number of systemic issues that it has so far, and the case studies have been chosen really well.

“If it’s anything like what we’ve seen so far, insurers will have a tough time.

“Every hearing has produced extraordinary headlines and shocking revelations, and I don’t expect this round to be any different.”