A spate of natural disasters in recent years has revealed a concerning level of underinsurance in the home and contents insurance market, according to reports released by ASIC in late 2014. ASIC has called on insurance providers ‘to implement measures that will meaningfully improve consumers’ understanding of their policy, and help ensure consumers buy a product that meets their needs’.
Following its first significant review of the home and contents markets, ASIC has released the following reports:
- Report 415: Review of the sale of home insurance (Report 415); and
- Report 416: Insuring your home: Consumers’ experiences buying home insurance (Report 416).
Both reports suggest that the current philosophy underpinning the regulation of the home and contents insurance market requires rethinking. The current ‘disclosure philosophy’ works on two key premises, namely (1) that consumers who lack knowledge relevant to their insurance needs will seek out that information; and (2) if consumers are provided with the relevant information about a product, they ‘will be able to read it, and as a result of doing so, understand the product.’ Both reports suggest that these assumptions are flawed and that appropriate consumer behaviour is not always predicated on the mere provision of information. Consistent with a number of recent statements ASIC has made in respect of financial services and products more generally, the reports endorse a shift away from a system centred around disclosure to one grounded in behavioural economics principles, with the goal being to place an obligation on product providers to “nudge” consumers toward better understanding the insurance they are purchasing.
Both reports are critical of the “no advice” model adopted by insurance providers, whereby distribution channels (such as online arrangements) offer no assistance to consumers regarding the features they should consider, beyond price. Consumers were often referred to detailed information contained in a Product Disclosure Statement (PDS), without being provided any guidance or assistance in understanding what was contained in the documentation. Consumers therefore tended to be overly influenced by the price of a given insurance policy, without giving appropriate consideration to the policy terms and conditions that are relevant to them. This in turn led to the risk of under-insurance. To address this risk, ASIC has suggested that consumers would ‘benefit from the best the insurance industry can provide in terms of information, guidance or advice.’
The purpose of Report 415 is stated to be to ‘encourage insurers to adopt practices that reduce the risk of consumers buying insurance that does not meet their needs.’ These findings underpin much of ASIC’s agitation for greater product governance obligations on product providers, and to strongly highlight the need for a move away from disclosure based regulation.
There is little doubt that the findings of Report 415 and 416 will be a regular feature in ASIC’s lobbying to government in respect of implementing recommendations of the recent Financial Systems Inquiry in these areas. However, it is apparent from the reports that ASIC already expects product providers to change their distribution methods to take greater account of an individual consumer’s home and contents insurance needs. Insurers should therefore give consideration to whether “no advice” sales channels are appropriate in all circumstances, and whether information provided to consumers through PDS documentation is sufficient to address the concerns raised.
Finally we note that the review of the home and contents market has prompted a change in the regulation of disclosure material. Effective from 9 November 2014 a standardised “key fact sheet” must be provided by insurers to prospective consumers of either home or contents insurance. Failure to comply with this requirement can result in a fine of up to 150 penalty units ($25,500).