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Floods inquiry raises stakes for code review 

The federal parliamentary inquiry into insurers’ handling of record flooding two years ago has put the spotlight on the code of practice review launched in November, and the effectiveness and enforceability of the document. 

Hearings over the past few weeks have been told the code should have stronger rules around cash settlements as well as vulnerability and communication improvements, as part of a broader strengthening. Oversight of third-party assessors is also an issue. 

Code commitments on time frames were frequently breached during the flooding catastrophes, while in some cases meaningless updates that were sent out met the code “letter of the law” but were a long way from complying with its spirit. 

The Insurance Council of Australia (ICA) has named a three-member panel to review the 2020 code of practice, which mostly took effect from July 1 2021. The panel will deliver initial findings by June 30, then a second phase will focus on flood-related topics and potential refinement of initial findings. The final report is due by June 30 next year. 

New codes are normally introduced after a transition period, meaning it will probably be 2026 before the next version takes effect. 

Financial Rights Legal Centre Senior Policy and Communications Officer Julia Davis told the inquiry the code “is in dire need of some updates” and the changes required are clear and could be made without delay. 

The degree to which codes are enforceable and whether they go far enough is an issue across financial services. Industry groups argue they can self-regulate, as they seek to avert more legislative changes, while consumer groups point to a lack of repercussions for failings. 

Ms Davis says the codes feed into the Australian Financial Complaints Authority’s (AFCA) assessment of good industry practice, enhancing their value, but across financial services “breaches are great and the enforcement is minimal”. 

The current general insurance code introduced a community benefit payment of up to $100,000 for severe breaches, in answer to criticisms that it previously lacked teeth, but the penalty has never been imposed. 

AFCA GM Code Compliance and Monitoring Prue Monument told the inquiry last week that sanction changes had required ICA to strengthen indemnity for the General Insurance Code Governance Committee, and that has now been done. 

“The committee’s preference is to work with insurers to address concerns and improve practice in a sustainable way, and our experience is very much that insurers do take their engagement with the committee very seriously,” she said. 

“However, for the most serious and systemic failures, we can apply sanctions to an insurer and the committee absolutely has an appetite to apply sanctions, and we won’t hesitate to do so in the appropriate circumstances.” 

The Code Governance Committee has made a submission to the review requesting that it be able to name insurers in its breach reporting as an additional compliance tool, while it is due to deliver findings from its own inquiry into the use of external experts in the July-September quarter. 

The parliamentary inquiry has also questioned whether the updated code will be registered with the Australian Securities and Investments Commission (ASIC) and have some sections made enforceable in that process. 

ASIC registration has been discussed previously, but this time there’s a clearer intention for ICA to apply to the regulator for code approval and identification of enforceable provisions is part of the review’s terms of reference. 

Ms Monument says registration gives greater protection around changes or adjustments, so if ICA or the industry wants to alter a regulator-approved code, there must be a broad consultation process.  

“The benefit we see in terms of having the code approved by ASIC is an added layer of rigour and confidence around the code,” she said. At the same time, she warned about the risk of subscribers “pulling promises back to the base level required by law” rather than pursuing higher standards. 

The Victorian Council of Social Service in a submission to the inquiry recommends reforming the Insurance Act and regulations to improve outcomes for disaster-affected customers, and says the code of practice should be mandatory and have stronger commitments. 

Insurers have told the inquiry they are making improvements and ICA has committed to introducing recommendations from the Deloitte report it commissioned into the floods response. 

The House of Representatives Standing Committee on Economics is due to deliver its report by September 30. 

Former ICA CEO Rob Whelan said a few years ago that finalising the current code of practice amid the Hayne royal commission was “like trying to pitch a tent in the middle of a hurricane”. 

That finalisation was long delayed, also due to the impacts of covid, and came as the industry faced new laws and regulations sparked by the royal commission. 

This time it’s the floods inquiry that has the industry under scrutiny while the code is being reworked, and the stakes once again are high.