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Standard terms could throttle innovation, NIBA warns

Care should be taken that any move to standardise more natural hazard terms in addition to flood does not inadvertently stifle innovation, the National Insurance Brokers Association (NIBA) says. 

“The ability of product issuers to develop and offer innovative insurance products that meet consumers’ evolving needs and preferences is vital to a healthy and competitive general insurance market,” it writes in a submission to Treasury.

NIBA says it supports implementing standardised definitions, particularly where they ease confusion and aid more straightforward comparisons, but it is crucial to “temper expectations and acknowledge that standardisation is not a cure-all” for underinsurance or claim-related challenges. 

Underinsurance is often a response to rising premiums or confusion about replacement value – issues not directly addressed by standardising terms or altering the standard cover regime, it says. 

The submission notes “storm” and “stormwater and rainwater run-off” are terms recognised as requiring clarity, but it raises reservations about including “fire” as a priority area. 

“NIBA is not convinced that the definitions of ‘fire’ within insurance contracts have led to consumer confusion. Additionally, inquiries conducted following the 2019-20 bushfire season did not identify that the term ‘fire’ specifically caused confusion.” 

Treasury has asked for feedback on standard terms and changes to the standard cover regime, which aims to achieve a minimum level of consistency. Insurers can deviate from the standard by informing consumers, which is typically through product disclosure statements. 

NIBA’s submission says: “While this disclosure satisfies the insurer’s duty to inform the consumer, it is unlikely to be effective in informing consumers that their policy does not meet the minimum baseline of the standard cover regime, as consumers rarely interact with disclosure documents prior to taking out a policy.” 

It says the regime’s limitations also reflect a reliance on consumers to understand standard cover and how it differs from a product being offered to them.

“While NIBA supports a review of the standard cover regime, it is important to ensure that the review’s policy objectives are clearly defined to avoid unintended consequences. 

“Reforms to the standard cover regime are unlikely to address affordability concerns and, if inadequately structured, could potentially drive insurers out of the market, elevate premiums for high-risk properties, and exacerbate consumer confusion.”

NIBA says in some scenarios a consumer’s circumstances may require a policy that offers less cover than outlined in the standard cover regime. “In NIBA’s view, the ability to provide such policies should be retained. However, to ensure consumers are not inadvertently underinsured, these policies should only be available through an intermediated channel where the consumer has access to a trusted risk adviser acting on their behalf.”