Deferred sales model for add-on insurance

Finity and The Fold Legal released an update on the Royal Commission’s recommendations into add-on insurance in July 2019.

After two separate consultation papers, Treasury has recently released:

• An Exposure Draft Bill;
• Exposure Draft Regulations;
• An Explanatory Memorandum; and
• An Explanatory Statement.

The consultation period for these draft documents ends on 28 February 2020. Assuming that there are no substantive changes to the Exposure documents, then this is what we know about the deferred sales model (DSM) for add-on insurance.

What aspects of the changes are now known?

• The deferral period begins at the later of:
  • The date the customer makes a financial commitment; or
  • The date that the seller provides the ‘prescribed information’ to the customer.

The exposure draft regulations identify when a consumer enters into a ‘commitment to acquire a product or service of a class’ for some transactions. However, this list is not exhaustive, and where a product is not on the list, the product issuer will need to determine what amounts to a commitment. The list may provide guidance in this respect, e.g. Insurance for removalists’ liability is not listed, but it may be considered analogous to the hire of a motor vehicle. Therefore, the commitment would be when the customer makes a reservation for the move or (less likely) the time at which the move actually takes place.

The content of the prescribed information and how the information must be given to ASIC has been left to ASIC to determine. Product issuers may prefer to give this information to the customer early in the process, so that the customer can consider the various products and the deferral period will trigger as soon as the customer makes a financial commitment.

• The deferred sales period is 4-5 days. The deferred sales period runs for a period of 4 days commencing on the day after the day the prescribed information is given or the financial commitment is made (whichever is later). This means if the deferred sales period is triggered at 9am on a Monday, it will end at midnight on Friday, which is practically a period of 5 business days. If it is triggered at 11pm on Monday night, it still ends at midnight Friday, which is closer to 4 business days.
• Customers cannot opt to end this period early. This means that no consumer (even a small business or savvy investor) can end the deferral period, regardless of the urgency of the need for the insurance.
• How and when customers can be contacted. Before the deferred sales period starts providers may provide information about the insurance to consumers verbally and in writing, but cannot conclude a sale. Once the period starts, information can only be provided in writing, and no sales may be concluded. If a consumer asks a question inside the deferred sales period, providers may provide answers verbally, but must contain their answers to the question asked. Once the period ends, until the date 6 weeks after the period commenced, providers may only provide information in writing, but if consumers ask for more information, providers may answer verbally and need to confine their responses to the specific question. Sales may now be concluded.

Anti-hawking

• The product seller can contact the customer for 6-weeks after the start of the 4-day period, but cannot contact the customer after the 6-week period has ended. This is because so long as the deferred sales rules apply, there is an exemption from the new hawking rules.

Exemptions

There are various powers to make exemptions, but currently the only proposed exemption is for comprehensive motor vehicle insurance.

A class of products may be exempted by Regulations (but none are presently proposed except comprehensive motor). ASIC also has the power to make exemptions, which it may choose to do itself by providing class order relief, or which it may exercise individually upon receipt of an application for relief. Relief applications will need to be made in accordance with ASIC’s Regulatory Guide 51 Applications for relief. In exercising its powers, it must have regard to:

• Any evidence as to whether the product has historically been good value for money;
• Whether there is a high risk of underinsurance or non-insurance without the exemption;
• Any evidence as to whether the product is well understood by consumers;
• Any differences between the product and financial products of a similar kind that are not sold as an add-on; and
• Any other matters that ASIC considers relevant.

ASIC has a separate relief power to exempt classes of products where ASIC considers consumers are likely to need to be covered by the products immediately.

There are a number of situations where this exemption may be needed, such as:

• Strata managers have a fiduciary duty to lot owners and this includes an obligation to protect the building by obtaining insurance. However, if strata managers are required to wait for the expiry of the deferred sales period providing strata insurance, there is a risk that they will be in breach of their fiduciary duties.
• Postal insurance, where the parcel has already been delivered by the time the deferred sales period has ended, and travel insurance, where the travel commences inside the deferred sales period, and rental car insurance where the hire has commenced (and possibly ended) inside the deferred sales period.

There is also an exemption for persons who give personal advice. The exemption for personal advice exists to avoid a double up with the best interests duty where it applies instead.

Where do the Design and Distribution Obligations fit in?

The design and distributions obligations will apply to all insurance products, including add-on products.

The Fold’s view:

Unless the DSM can be built into the sales process, product manufacturers should consider the merits of seeking an exemption from ASIC.Applicants for an exemption will need to be able to demonstrate (among others):

• Value for money;
• Significant consumer convenience and benefits; and
• Appropriate loss ratio.

Clearly stating their proposition and building a compelling case will be critical to success.

Finity’s view:

At least to some extent DDO and DSM are intended to address and mitigate similar types of consumer detriment, including poor product value. Treasury should consider the potential for overlap with DDO and which would be more likely to effectively reduce consumer detriment.We feel that the Exposure Draft documents leave some gaps and unanswered questions.  Our concerns include:

• the blanket approach with no ability to opt out
• there is still some room for uncertainty as to what amounts to a ‘commitment’, particularly for digital platforms
• for various product categories, it remains unclear as to what the best way forward will be; do the entities that provide, say, strata or landlords insurance need to change their sales model entirely or should they apply for an exemption?

Ultimately, it becomes an inconvenience if certain products cannot be purchased immediately – those of real value, such as removals insurance and travel insurance are likely to be the subject of an exemption – if they do not, there is a significant risk of underinsurance and financial loss to the consumer.

By Jaime Lumsden, Lydia Carstensen and Raj Kanhai