Chapter 7 Recommendations
7.1
This inquiry was conducted in response to reports of large numbers of disaster
victims encountering extreme difficulties with their insurance claims. Having
nowhere else to turn, these residents began contacting their elected
representatives—local, state and federal—to plead for assistance or
intervention.
7.2
During the course of the inquiry, the Committee met and heard from many
people who could not obtain information about the progress of their insurance
claim or who were struggling to understand or dispute their insurers’
decisions.
7.3
The Committee recognises that the Australian insurance industry faced
multiple major events in the space of a few years and that this had an impact
on the resources able to be employed in processing claims. It may certainly
have been a worst-case scenario that hopefully will not be repeated for decades
or even centuries. Nonetheless, these events exposed the weaknesses in the
self-regulation of claims-handling in the general insurance industry.
7.4
In the aftermath of the succession of wide-ranging, sometimes
simultaneous, natural disasters across the country, it became apparent that consumer
rights are not sufficiently protected in many aspects of the insurance
contracts that are entered into for peace of mind and out of personal responsibility.
7.5
The Committee appreciates that the number of people with negative
experiences may not be in the majority of claimants. Nonetheless, it is
precisely that segment of the population that has demonstrated the necessity
for consumer rights that can protect all Australians. As Cr Paul Pisasale,
Mayor, City of Ipswich, said, ‘the insurance companies have been like a
protected species, and it has taken a flood to flush them out’.[1]
7.6
Moreover, the industry is aware that climate change patterns indicate
increases in the number and severity of extreme weather events such as cyclones
and hailstorms. Compounding these risks, larger numbers of Australians are
living in or moving to higher-risk areas,[2] such as the coastline or
in outer suburban bush settings. Unfortunately, this means that scenarios such
as the recent spate of natural disasters may be repeated at any time.
7.7
The Committee is resolute that consumer protections must be increased for
insurance policyholders, particularly due to the low levels of consumer insurance
literacy. Currently, consumer rights are protected in a piecemeal fashion. In
the past, the general insurance industry has successfully argued for some
exemptions to relevant legislation. However, given the flaws exposed in the
General Insurance Code of Practice as it currently stands amidst a
self-regulatory approach, these exemptions should be overturned and more
stringent, mandatory obligations implemented.
7.8
The Committee presents here a suite of recommendations to provide
much-needed consumer protections and to require the general insurance industry
to put in place measures for responding appropriately during disaster events.
7.9
These recommendations will ensure comprehensive protections for
consumers:
n when entering into
insurance contracts;
n during
claims-handling processes; and
n when pursuing insurance
disputes.
Insurance contracts
7.10
Consumers need to be able to make informed decisions when they purchase
insurance policies. Although price is often the main consideration, consumers
need to be aware of other very important factors. Given the complexity of
insurance contracts, consideration must be given to how best inform consumers
of their policy coverage, and the consequences that can subsequently flow from
a need to lodge a claim against the policy. Awareness of levels of risk and
types of insurance policies may lead to decisions based on more than just the
cost of the premium.
Standard cover
7.11
Consumer awareness of their policy coverage could be greatly improved if
it could be compared against the reference of Standard Cover as detailed in the
Insurance Contracts Regulations. Standard Cover includes flood insurance among
its perils coverage, and provides for total replacement, rather than up to a
nominated sum, in the event of loss. The Committee considers that Standard
Cover should be a benchmark for the ideal policy against which consumers can consider
their needs and their capacity to accept deviations from the Standard Cover.
This would enable more informed decision-making for consumers when entering
into an insurance contract.
7.12
Greater awareness of Standard Cover can be achieved either through making
it mandatory for insurers to provide policies that meet Standard Cover, and
through more easily understood and readily available disclaimers of derogation from
Standard Cover than those that are currently given. This would mean clear
up-front information without the capacity for a disclaimer to be lost within a
lengthy Product Disclosure Statement.
7.13
Consumers should be able to choose a policy that does not conform to
Standard Cover, but in such instances they should be made aware that in doing
so they are opting out of certain standard conditions, such as cover for flood
or actions of the sea, or total replacement cover. State and local government
measures to quantify and reduce the risks of natural disaster damage will
assist consumers in making decisions about general insurance policies.
Recommendation 1 |
| 7.14 |
The Committee recommends that the Australian Government
amend the Insurance Contracts Act 1984 (Cth) to make it obligatory
that insurers offer to consumers the option of a general insurance policy
that conforms to Standard Cover, as prescribed in the Insurance Contracts
Regulations 1985 (Cth), from 1 July 2012, so that all insurers carry a
product that provides full replacement in the event of total loss and cover
for damages resulting from flood. |
Recommendation 2 |
| 7.15 |
The Committee recommends that the Australian Government
amend the Insurance Contracts Act 1984 (Cth) so that from 1 July 2012 any
derogation from Standard Cover is required to be communicated to
policyholders as a departure from ideal standards:
n in
clearly understood terms and separately from the policy or the Product
Disclosure Statement;
n with
specific reference to the fact that the policy derogates from Standard Cover;
and
n with
specific reference to the manner in which the policy derogates from Standard
Cover. |
Standard definition of flood
7.16
The fine print about types of water inundation and definitions of flood
led to confusion, trauma and lengthy delays for many insurance claimants.
Further, many only discovered their policy terms when they lodged their claim. The
Committee fully supports the enactment of the Insurance Contracts Amendment
Bill 2011 that will provide for a standard definition of ‘flood’ to be defined
in the Insurance Contracts Regulations.
7.17
The bill will also require insurers to provide clients with a Key Facts
Sheet that summarises the main elements and exclusions of the relevant policy.
The Key Facts Sheet would be an ideal vehicle for explaining Standard Cover and
communicating any derogation from Standard Cover, as per the above Recommendation.
The Committee recommends the expedited passage of the bill.
Recommendation 3 |
| 7.18 |
The Committee recommends that the Australian Parliament pass
the Insurance Contracts Amendment Bill 2011 and ensure its enactment by 1 July
2012. The Committee further recommends that the standard definition of
‘flood’ be included in the definition of Standard Cover in the Insurance
Contracts Regulations 1985. |
Unfair contracts terms
7.19
The Committee does not consider that the exemption of general insurers
from unfair contract terms obligations is warranted. Further, the industry as a
whole has not demonstrated a capacity to protect consumers under the current
exemption. It is the view of the Committee that the application of unfair
contract terms laws would not be unduly onerous to general insurers who already
have sound business practices. However, their application would provide a
much-needed layer of protection to consumers by ensuring that they have access
to legal remedies against unfair terms or exclusions.
7.20
The Natural Disaster Insurance Review report concluded that:
… unfair contract terms legislation will provide consumer
protection over and above that provided by the duty of utmost good faith under
section 13 of the [Insurance Contracts]Act and the general fairness test under
the [Financial Ombudsman Service] Terms of Reference.[3]
7.21
Noting that the Treasury Department has released an options paper and a
draft Regulation Impact Statement for feedback on unfair terms in insurance
contracts, the Committee recommends that the exemption for general insurers to
the unfair contract terms laws contained in the Australian Securities and
Investments Act 2001 (Cth) be removed.
Recommendation 4 |
| 7.22 |
The Committee recommends that the Australian Government introduce
legislative changes required to remove the exemption for general insurers to
unfair contract terms laws, and ensure its enactment by the end of 2012. |
Claims-handling process
7.23
Consumer protection is particularly weak in the area of insurance claims
handling. As demonstrated in the aftermath of recent disaster events, with some
exceptions, the performance of insurers has been unacceptable with regard to
delays in determining claims and to communication practices with clients.
7.24
At present, oversight of consumer rights in the handling of insurance
claims is contained in the General Insurance Code of Practice (the Code). Given
the operation of the general insurance industry during recent disaster events,
the Committee has little faith in the Code as it currently stands as an
effective self-regulatory tool.
7.25
The Committee considers it essential that the Code be amended considerably.
The Code must have clear outcomes and definite timeframes for the
claims-handling process.
7.26
The Insurance Council of Australia has proposed amendments to the Code
that provide a maximum of four months to make a decision on a claim ‘unless
there are exceptional circumstances in relation to your claim’.[4]
‘Exceptional circumstances’ include claims related to a catastrophe or disaster
that has been declared as such by the Insurance Council Board. It is envisaged
that such a declaration would be made in the event that insurers were ‘under
severe strain’ to determine claims.
7.27
The Committee considers it essential that there is an identified
end-point for determining claims, regardless of the situation or declaration of
a disaster. The Committee considered carefully the issue of an alternative set
of standards and timeframes to apply during exceptional circumstances such as
declared disasters.
7.28
The Committee considers that many industries and services are required
to develop contingency plans to ensure that there is the capacity to respond as
required during unforeseen and exceptional circumstances. Furthermore, during
these situations, the needs of policyholders are even more acute as losses are
often catastrophic.
7.29
Consequently, the Committee concludes that it is the responsibility of
the insurance industry to collectively ensure it has the capacity to operate,
meeting agreed timeframes and obligations to regularly communicate regarding
the progress of a claim, regardless of the circumstances. The business of the
insurance industry is the unforeseen, and they must be adequately prepared to
meet service standards at the times that their services are most urgently
required.
Recommendation 5 |
| 7.30 |
The Committee recommends that the Australian Government work
with the Insurance Council of Australia to make the following amendments to the
General Insurance Code of Practice by 1 July 2012:
n remove
the clauses that set aside the Code standards in times of disasters;
n require
insurers to refrain from advising policyholders against making a claim under
their insurance policy, and incorporate a ‘right to claim’ so that
policyholders who contact their insurer about their eligibility to make a
claim are offered the opportunity to lodge a claim and have it assessed
fully;
n ensure
that a full explanation of the claims-handling process, including the right
to escalate decisions to internal dispute and external dispute resolution
systems, is given when policyholders lodge a claim;
n ensure
that an acknowledgement of the claims lodgement, contact details of the
claims officer, and expected timeframes for the claims-handling process are
provided to policyholders in writing;
n require
that copies of external expert reports used in the determination of a claim
to be provided to claimants within 10 days of request; and
n introduce
the following minimum standards for claims handling in times of exceptional
circumstances such as declared disasters:
-> a timeframe for informing claimants of the progress of the
claim;
-> a timeframe for advising claimants if an external expert has
been appointed;
-> assurance that external experts are fully qualified to
undertake assessments;
-> an undertaking to provide claimants with information about the
qualifications, employer, and role of external experts that are appointed to
assist with their claim;
-> a maximum timeframe of 12 weeks for external experts to provide
reports;
-> a maximum timeframe for accepting or denying a claim;
-> a timeframe for responding to requests for information;
-> an undertaking to communicate all decisions about insurance
claims to the claimant in writing with clear and explicit reasons relating to
their particular claim; and
-> a timeframe for informing claimants of the progress of their
complaint or dispute. |
7.31
At present, the Financial Ombudsman Service (FOS) compiles comparative
tables regarding the outcomes of the external dispute resolution process that
FOS engages in with insurers. Information published on the FOS website details
for each company the chance of a dispute coming to FOS, the average length in
resolution, and the outcomes of the resolution process.[5]
7.32
Under Australian Securities and Investments Commission (ASIC) Regulatory
Guideline 139, FOS also monitors the Code and reports to ASIC on its findings.
These reports, while informative about the industry as a whole, are generalist
and lessen the enforcement power of the Code and the capacity to sanction
insurers who breach the Code.
7.33
The Committee deems it appropriate that FOS is required to provide to
ASIC more detailed reports on breaches and systemic issues of the Code by
identifying the insurers concerned. In addition, following disaster events,
reports specific to the disaster area should be provided to ASIC regarding the
operation of insurance companies.
Recommendation 6 |
| 7.34 |
The Committee recommends that the Australian Securities and
Investments Commission amend Regulatory Guideline 139 by 1 July 2012 to
require the Financial Ombudsman Service to report regularly to the Australian
Securities and Investments Commission and also to make public:
n the
names of insurance companies that have breached the Code or are involved in
systemic issues, and the types of breach; and
n the
annual number of internal dispute resolution and external dispute resolution
cases for each insurance company.
Further, the Committee recommends that, following declared
disaster events, the Financial Ombudsman Service should be required to
provide a report to the Australian Securities and Investments Commission on
breaches and dispute resolutions specific to the disaster area. |
7.35
The Insurance Contracts Act imposes the duty of utmost good faith on
insurers in their dealings with policyholders. However, consumers would have to
take legal action against an insurer to prove a breach of this duty.
7.36
Under the Corporations Act 2001 (Cth) (Corporations Act),
ASIC is responsible for ensuring that financial service providers, including
insurers, fulfil the requirements of holding an Australian Financial Service
licence, such as providing services efficiently, honestly and fairly. However,
claims handling and settlement are exempt from the definition of a financial
service, meaning that the above obligations, and ASIC regulation, do not apply
to claims handling.
7.37
The Insurance Contracts Amendment Bill 2010 sought to reverse this
exemption to regulation. The bill proposed that breaches of the duty of utmost
good faith in claims handling would constitute a breach of the Insurance
Contracts Act. ASIC would then be empowered to deal with such breaches through
the use of remedies that apply to Australian Financial Service licensees. The
bill lapsed when the 2010 general election was called.
Recommendation 7 |
| 7.38 |
The Committee recommends that the Australian Government
empower the Australian Securities and Investments Commission to regulate
claims handling and settlement of financial service providers. This can be
achieved by the Treasurer introducing legislation by 1 July 2012 to give
effect to the measures contained in Schedule 1, Part 1 of the lapsed
Insurance Contracts Amendment Bill 2010, so that breaches of the duty of
utmost good faith in relation to claims handling constitute a breach of the
Insurance Contracts Act.
This would enable the Australian Securities and Investments
Commission to:
n monitor
and regulate claims handling and settlement processes;
n impose
sanctions on insurance companies, under Australian Financial Services Licence
remedies, on behalf of consumers; and
n negate
the current exemption of claims handling and settlement from the definition
of financial services for the purpose of the Corporations Act 2001. |
7.39
In the event that legislation is not introduced to empower ASIC to deal
with breaches of utmost good faith on behalf of consumers, as per
Recommendation 7, the Committee recommends compulsory standards for general
insurance claims-handling practices.
7.40
Some legal aid organisations have called for the implementation of an
Australian Standard on claims handling. However, given that there is an
existing Code of Practice endorsed by the general insurance industry, the
Committee does not consider that there
is a need to recreate standards for minimum claims-handling requirements.
Moreover, the development of an Australian Standard on claims-handling procedures
would be a lengthy process and one that the Australian Government would not be
able to provide input into.
7.41
The Code, once amended as per Recommendation 5, can be introduced into
legislation as mandatory for all general insurers who hold an Australian
Financial Service licence under the Corporations Act or who are authorised by
the Australian Prudential Regulation Authority under the Insurance Act 1973.
Recommendation 8 |
| 7.42 |
The Committee recommends that the Australian Government introduce
legislation by 1 March 2013 to make adherence to the General Insurance Code
of Practice a compulsory requirement for all general insurers. |
Managing disputes
7.43
It is critical that the general insurance industry has effective
internal dispute resolution (IDR) and external dispute resolution (EDR) systems
to ensure the integrity of the industry. The Committee was dismayed with the
lax operation of insurers’ IDR processes. There was evidence of a systemic
problem of lack of engagement by insurers in IDR. Some of the multi-tiered
processes seemed to be needlessly complex and frustrating. In addition insurers
did not appear to take seriously their obligation to inform clients of their
rights to IDR and EDR with FOS. Further, consumer awareness of IDR and EDR was
exceedingly low.
7.44
In the Committee’s opinion, IDR processes are effective when they are
managed in a genuine, efficient and transparent manner and complainants have
access to key information. As this is not occurring in the current regime, the
Committee considers that ASIC Regulatory Guideline 165 on IDR and EDR standards
should be more prescriptive in setting out obligations on general insurers.
Recommendation 9 |
| 7.45 |
The Committee recommends that the Australian Securities and Investments
Commission amend Regulatory Guideline 165 to:
n require
general insurers to provide clear and comprehensive information about both Internal
Dispute Resolution and External Dispute Resolution to clients at time of
claim lodgement;
n require
general insurers to provide information to clients at the time of claim
lodgement on the right to seek from Financial Ombudsman Service an
independent external expert report (such as a hydrology report);
n prohibit
general insurers from commenting to policyholders on the merits of a dispute;
n prescribe
an Internal Dispute Resolution model which avoids multi-tiered components;
and
n automatically
escalate a claim that has not been settled within four months to an internal
dispute should the General Insurance Code of Practice amendment to this end
not be implemented. |
7.46
As insurance is a complex subject area, many consumers may benefit from
legal assistance in navigating IDR or EDR processes. The Committee understands
that legal aid and pro bono legal assistance resources are stretched and that
insurance law is a specialist area. With additional funding, specialist
insurance law services can combine the resources of lawyers, financial
counsellors, social workers and consumer advocates.
7.47
Particularly during disaster events when claimants are stressed, losses
are extensive, and claims are numerous, there is a need to be able to mobilise
specialist legal resources and ensure greater ongoing consumer advice through
FOS.
7.48
It is recommended that consumers have access to a consumer advisor at
FOS who can provide advice on registering, managing and progressing general insurance
disputes with FOS. The Committee considers it appropriate that such a position
be co-funded by the general insurance industry and the Insurance Law Service.
Such a position could also coordinate better dissemination of information about
the role of FOS, particularly in the wake of disaster events.
Recommendation 10 |
| 7.49 |
The Committee recommends that the Australian Government and relevant
State and territory governments jointly allocate additional and continuing funding
in the 2012–13 budget to the Insurance Law Service for the mobilisation of a
temporary physical presence in areas of need following natural disasters.
The service should be available to all persons in an
affected disaster area and not subject to means-testing. |
Recommendation 11 |
| 7.50 |
The Committee recommends that the Australian Government
allocate additional and continuing funding in the 2012–2013 budget to the
Insurance Law Service to establish a consumer advisory position at the
Financial Services Ombudsman. The position should be co-funded by the
Insurance Law Service and the insurance industry. |
7.51
Another issue of concern to the Committee, although slightly outside the
terms of reference, is the cost of contacting insurers. In the wake of natural
disasters that damage or destroy homes, many people do not have access to
landlines and must rely on mobile telephones. Calls to 1300 numbers are untimed
and charged at a local cost from landlines, but not for mobile telephones.
Given that consumer can be on hold for long periods of time, the cost of the
call can become prohibitive.
Recommendation 12 |
| 7.52 |
The Committee recommends that the Australian Government
investigate ways to reduce the cost of calling 1300 numbers from mobile
telephones in areas of natural disasters. |
Topics for further investigation
7.53
The Committee heard evidence about several issues that were outside the
scope of the terms of reference. However, the evidence and the nature of the
issues are compelling enough that the Committee considers they warrant
investigation.
7.54
These issues include:
n the sizeable
increases in insurance premiums in the wake of multiple natural disasters that
have diminished the insurance industry’s profits; and
n the emotional impact
of recovering from the life-changing physical and financial effects of disaster
events.
7.55
Further detail on these issues is provided in the following sections. A
third significant issue raised with the Committee was the inability to secure
multi-peril crop insurance or insurance for livestock and certain farming
assets and infrastructure. The Committee considers that the Department of
Agriculture, Fisheries and Forestry should hold discussions with primary
producers to investigate this further and report to the Minister for
Agriculture, Fisheries and Forestry.
Premium increases
7.56
By the end of 2011, renewal notices for insurance policies were
beginning to arrive in policyholders’ mailboxes. Many people were shocked to
find that their premiums had increased out of all proportion to previous yearly
increases. The Committee heard of increases in premiums ranging from 30 per
cent to 1 000 per cent.
7.57
The cost of premiums for home and contents insurance has increased
across the nation as a result of the recent natural disasters. Queensland has
especially been affected with an average premium rise of 12 per cent and a
median increase of 14 per cent.[6] However, 31 per cent of Queensland
policies have increased by more than 20 per cent. Price increases up to
41 per cent have been observed in one flood-affected regional area and increases
of up to 36 per cent were reported in a flooded Brisbane locality.[7]
7.58
In recent weeks, Committee members in different states have also been
approached by large numbers of constituents reporting exorbitant premium
increases, especially for strata title unit-holders.
7.59
The insurance industry attributes price increases to the subsequent rising
cost of reinsurance:
… it is well publicised that the appetite of reinsurers, who
have also played a major part in these losses, has changed and their perception
of the risk in Australia has changed, so they are changing their price models
quite significantly and passing those costs on to us as insurers.[8]
7.60
The Actuaries Institute of Australia said that another reason could be
that previously insurers had not correctly understood, and therefore priced,
the risk in particular areas and were now adjusting the premiums to accurate
levels.[9]
7.61
However, excessive premium increases have not been limited to areas
affected by floods, cyclones or bushfires. Residents in Victoria and Canberra
living in low- or no-risk areas for flood have reported large jumps in their
insurance premiums from the previous year.[10]
7.62
The increases are due to the inclusion of flood coverage in policies
that previously did not cover flood, but some policyholders at very low risk of
flooding are unable to opt out of flood for a lower premium because ‘some
insurers are not providing the opt-out option recommended by the government’.[11]
7.63
Moreover, some residents have not been able to access insurance,
particularly flood insurance, at all. Victims of natural disasters whose claims
had been settled, still under assessment, or in dispute, were told that their
policies would not be renewed.
7.64
Owners of strata title residences or units in northern Queensland, particularly
above the 26th parallel, were finding that they could not secure
cover from any insurer or that premiums had reached exorbitant levels.
7.65
Accordingly, on 24 November 2011, the then Assistant Treasurer and
Minister for Financial Services and Superannuation, Hon. Bill Shorten MP, asked
the Committee to inquire into and report on the costs of, and potential market
failure in, residential strata title insurance. The Committee will publish the
report in March 2012 as Volume Two of its investigations into insurance issues in
the wake of natural disasters.
7.66
However, the issue of a market failure in insurance applies equally to
non-strata residential properties, rural properties and businesses. Mrs
Rosemary Menken, Queensland MP for Burdekin, told the Committee that:
Quotes that I have been getting from people are that rural
insurances have increased enormously and many insurance companies have pulled
away from that [market].[12]
7.67
The Committee is concerned that the soaring costs of insurance will
dissuade many Australians from insuring their properties or businesses, leaving
large numbers of residents in dire situations should they fall victim to a
natural disaster. The Committee considers that the issue of dramatic rises in
insurance premiums is urgent and action should be expedited. The Committee has
identified this issue, but fear that conducting a further inquiry may delay
outcomes and result in more residents being left uninsured. Accordingly, the
Committee recommends that the Minister for Financial Services and
Superannuation immediately establish a joint industry-Government taskforce to
address the rising costs and potential market failure of insurance premiums
across Australia.
Recommendation 13 |
| 7.68 |
The Committee recommends that the Minister for Financial
Services and Superannuation immediately establish a joint industry-Government
action group to address evidence of the rising costs and market failure of
insurance premiums across Australia. |
Emotional impact
7.69
It was clear to the Committee that the recent catastrophes had taken a
large toll on people and entire communities. This is understandable in light of
the trauma that comes from significant or total destruction of one’s home and
contents or business. In addition to the financial ramifications, affected
residents had to deal with disruptions to work, school, social networks,
accommodation, health and transport.
7.70
In some cases, the resilience of disaster victims was sorely tested by
the additional burden of slogging through an insurance process that could be a
rigmarole of information-gathering, a black hole of information, a brick wall
against reason, or an endless wait. The Committee believes that insurance
companies should include employee training for managing people who have
experienced trauma or a Mental Health First Aid course.
7.71
It is anticipated that the recommendations made here regarding the
operation of the insurance industry will mark a new chapter in insurance
standards and service.
7.72
Regardless of the role that unreasonably difficult or extended insurance
claims-handling had on people’s emotional and mental well-being, the Committee
is concerned about the ongoing resources available to disaster victims after
the initial goodwill, volunteer clean-ups and distribution of charitable goods
have receded.
7.73
The Committee calls on the Australian Government and all state and
territory governments to maintain their commitment to funding services that
assist communities with the practical aspects of rebuilding lives with ongoing financial
and emotional counselling. Unfortunately depression and suicide are all too
common tragedies that follow in the wake of disasters. When the fires are
extinguished, the water receded, and the media retreated, the community still
needs time and assistance to heal.
Finally, the Committee thanks those who have participated in
this inquiry. Although the Committee regrets that it was unable to assist with
individual cases, we acknowledge your involvement while still on your road to
recovery. Your contribution will help ensure a smoother path for others who face
the insurance claims process in the wake of a disaster event.
Graham Perrett MP
Chair