Lydia Carstensen

The Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 was passed by Parliament on 10 December 2020.

It covers a range of reforms, in line with the revised regulatory timetable and includes claims handling and settling services for insurance products regulated by ASIC (Claims as a Financial Service). ASIC also issued a draft information sheet on 27 November and we extract the key points for you in this article.

Key takeouts

While the definition of claims handling activity is broad, the range of providers that need an AFSL or to be an Authorised Representative is limited to those with the authority to reject all or part of a claim. Those doing only claims fulfilment or making a recommendation to the insurer, like an adjuster or investigator, do not need their own authorisation, with the insurer being responsible for their actions.

AFSL applications and AR appointments need to be in by 30 June 2021, but the authorisation requirements are effective from 31 December 2021 giving ASIC time for licensing. An AR can represent more than one AFSL holder without getting cross-approval from others, removing a potential problem.

Who must hold an AFS licence with a claims handling authorisation

What does “authority from an insurer to reject all or part of a claim” mean?

Precisely what it says. If you only have the authority to recommend, then you don’t need a licence. It comes down to decision-making authority so insurers and fulfilment providers should clarify their roles and responsibilities to avoid any unintended consequences.

How to apply for an AFS licence or variation to provide a claims handling service

ASIC’s draft information sheet is clear: “Select the elements of a claims handling and settling service that apply to you – ASIC will grant an AFS licence or variation with an authorisation that covers only those elements. In your application, you will need to specify if you are: an insurer; a member of one of the categories of person who act on behalf of an insurer and require a claims handling authorisation, or neither (in which case you will be assumed to be a claimant intermediary).

In your application, you will need to specify if you are:

• an insurer
• a member of one of the categories of person who act on behalf of an insurer and require a claims handling authorisation, or
• neither (in which case you will be assumed to be a claimant intermediary).”

Who is exempt from the AFS licensing regime

A ‘general exemption’ means that some persons who are often involved in the claims handling process do not need to hold a licence. Some examples are:

• loss assessors or loss adjusters
• specialists who are providing an expert opinion to help an insurer assess a claim (e.g. engineers, geologists, forensic accountants)
• investigators
• other ‘fulfillment providers’ (e.g. builders, smash repairers) – unless they are authorised to reject claims
• independent medical examiners
• debt collection agents, and
• superannuation trustees.

There are some specific exemptions for foreign insurers and wholesale insurers if they have an authorised intermediary. Lawyers providing legal services relating to claims handling are also exempt.

What about authorised reps?

As an AFS licensee, you can provide financial services directly or through a representative or another AFS licensee who acts on your behalf.

ARs are ‘external’ to you and would otherwise require an AFS licence with a claims handling authorisation to provide these services (e.g. a financial adviser or claims manager who handles claims on behalf of an insurer).

There are formal processes for appointing and notifying ASIC about your authorised representatives:

• Authorised representatives are your representatives by law. They may be an individual or another company (a ‘corporate authorised representative’).
• A person can be the authorised representative of multiple claims handling licensees.
• An authorised representative can ‘sub-authorise’ other people with the consent of the AFS licensee.

As an insurer, if you want another AFS licensee to be your authorised representative (e.g. a financial adviser or insurance broker), you must give them a binder.

AFS licensees with a claims handling authorisation may provide their services to multiple entities, including other AFS licensees (e.g. a claims management company which holds its own AFS licence with a claims handling authorisation and provides services to multiple insurers).

Insurance fulfilment providers are deemed to be acting on your behalf when providing services or goods to satisfy an insurer’s liability. These providers are your representatives by law because they provide claims handling and settlement services on your behalf (e.g. a smash repairer who is engaged by an insurer but who does not have authority to reject claims).

You do not need to appoint these people as your authorised representatives, and there is no process you need to follow under the Corporations Act to engage these persons to provide claims handling services on your behalf.

Other people involved in claims handling may also be acting on your behalf (e.g. loss assessors, loss adjusters, investigators). They also do not need to be appointed as authorised representatives unless they have authority to reject claims.

Providing financial product advice

Thankfully, giving a recommendation or opinion (or a report of either of those things) which is reasonably necessary as part of handling and settling an insurance claim is not providing financial product advice.

However, if you recommend how a settlement amount is to be structured or should be managed or if you recommend an insurance product, then you will be providing financial product advice.

What are your obligations as an AFS licensee?

As an AFS licensee, you must comply with the obligations in sections 912A and 912B to:

• do all things necessary to ensure that the financial services covered by the AFS licence are provided efficiently, honestly and fairly
• have adequate arrangements in place to manage your conflicts of interest
• comply with your AFS licence conditions
• comply with the financial services laws
• take reasonable steps to ensure your representatives comply with the financial services laws, unless those representatives are insurance fulfilment providers
• have available adequate financial, human and technological resources, unless you are also regulated by APRA
• maintain the competence to provide the financial services
• adequately train your representatives and ensure they are competent to provide the financial services
• have a dispute resolution system that satisfies section 912A(2) where financial services are provided to retail clients (including an internal dispute resolution system and membership of the Australian Financial Complaints Authority (AFCA))
• have adequate risk management systems, unless you are also regulated by APRA, and
• have compensation arrangements if financial services are provided to retail clients.

This is a long list and the fear is that licensees will become lost in the detail. For GI insurers my top 5 are:

1. Abide by the GI Code of Practice including following timeframes and communication standards
2. Get your dispute resolution processes sorted – see Reg Guide 271
3. Manage conflicts of interest – this includes ensuring that incentives, KPIs and remuneration arrangements do not derogate from your obligations to claimants
4. Ensure you can provide evidence of a competent, properly trained and adequately resourced workforce
5. Have robust supervision of your providers – from the selection process to training and competency requirements through to performance and ‘consequence management’.

You will need to demonstrate that you can meet these obligations when applying for an AFS licence (or a variation to an existing AFS licence) to authorise you to provide a claims handling and settling service.

As an AFS licensee, you also have obligations to ASIC under sections 912C–912E to:

• comply with ASIC’s directions to provide a statement about the financial services you provide
• notify ASIC of breaches or likely breaches of any of your obligations as an AFS licensee
• assist ASIC with surveillance checks on your compliance with your obligations
• notify ASIC of any change in control of your organisation, and
• notify ASIC if you have not started providing financial services within six months after you are granted an AFS licence.

ASIC can take enforcement action if you breach your obligations as an AFS licensee. This includes cancelling or suspending your AFS licence or imposing conditions on your licence, as well as seeking civil penalties.

Pages 11 – 22 of the ASIC Draft Information Sheet contain further details about what the obligations mean and what you must do.

A couple more specific details:

For cash settlements the requirement is to give the insured a Cash Settlement Fact Sheet which seems rather easier than a Statement or Opinion of some kind. It is only needed if the claim can be legally settled in some form other than by cash. It must contain:

• options for settlement legally available under the insurance contract (e.g. to have the insured’s product repaired or replaced, or to receive a cash payment)
• the sum insured
• the amount of the cash settlement in total and as a breakdown of each component (e.g. sum insured, emergency payments and ex gratia payments), and
• a statement that the client should consider obtaining independent legal or financial advice before agreeing to the cash settlement.

Claimant intermediaries who carry on a business of representing insured people in pursuing a claim and do so in return for any benefit (monetary or otherwise) will need to be licensed or authorised and subject to the corporations law requirements. Clearly, this will include claims preparers, ‘storm chasers’ and advisors – perhaps credit hire companies will also be regulated under this category.

Timing

How can we help

How Finity can help

At Finity we have management consultants and claims experts and can assist with:

How The Fold Legal can help

The Fold Legal has extensive experience with licensing applications and advice on claims management. Based on this experience, there are a few key take-aways to consider:

a. making a recommendation or stating an opinion in response to an inquiry about a claim or potential claim
b. making a recommendation or stating an opinion that could influence a decision about making or continuing with a claim
c. representing someone in pursuing a claim
d. assisting another person to make a claim
e. assessing whether an insurer is liable under an insurance product
f. making a decision to accept or reject all or part of a claim
g. quantifying an insurer’s liability under an insurance product
h. offering to settle all or part of a claim, or
i. satisfying a liability of an insurer under a claim.

By Raj Kanhai and Lydia Carstensen

The post Regulatory response – What you need to know about claims as a financial service appeared first on AdviserVoice.

Lydia Carstensen

New Internal Dispute Resolution requirements (RG 271) – what are the key take outs and considerations for insurers?

ASIC released its new Regulatory Guide (RG 271) on complaints handling and dispute resolution standards and requirements, on 30 June 2020. The new RG 271 guide will replace the existing RG 165 guidance and will take effect for complaints received on or after 5 October 2021. In the meantime the current guidance will prevail as financial services firms work to implement system, procedural and resource changes to meet the revised dispute framework. It is expected that ASIC will consult further on the IDR data collection and reporting requirements of the new complaints regime in the last quarter of 2020.

The revised guide is intended to deliver improved outcomes for consumers by ensuring that complaints are resolved in a fair, timely and effective manner and reducing the need to escalate complaints to external dispute resolution. The new guidance attempts to balance the needs of complainants and financial services firms by ensuring that the standards are both achievable and practical.

That is not to say that financial services firms can take the IDR obligations lightly. Certain key standards and guidance in the guide are enforceable provisions, and these demonstrate that ASIC intends to hold financial services firms accountable where they fail to deal with complaints in an appropriate manner or where they deliver poor consumer-outcomes. Failing to meet the RG 271 obligations may even be considered a breach of the Australian Financial Services Licence condition to comply with all applicable financial service laws and regulations.

The new regulatory guide (RG 271) includes the following key changes:

Broader definition of complaints

A complaint is defined as an expression of dissatisfaction made to or about an organisation, in relation to its products, services, staff or the handling of a complaint. RG 271 contains guidance in relation to social media posts as expressions of dissatisfaction will help financial firms determine what is in the definitional scope. In the social media setting a comment is deemed to be a “complaint” if the comment is posted on an account or media channel owned by the financial firm, where the author of the post is identifiable and contactable.

Reduced maximum timeframes for responding to complaints

The maximum timeframe to respond to standard complaints will be no later than 30 calendar days after receiving the complaint (a reduction from the existing 45 days). These changes are designed to improve customer outcomes by reducing complaint handling delays by providing fair, timely and efficient resolution of complaints for customers.

In addition ASIC expects firms to provide an acknowledgement of a complaint verbally or in writing (email, post or social media channels) within 24 hours or one business day of receiving it, or as soon as practicable (this is not an enforceable requirement).

Exceptions to the maximum timeframe
The circumstances where firms are not required to provide a response within the maximum IDR timeframes are:

• Where there is no “reasonable opportunity” to provide the IDR response;
• Due to the complexity of the complaint; and/or
• If there are circumstances beyond the firm’s control that are causing the delays.

In these instances the firm must provide the complainant with an “IDR delay notification” before the maximum timeframe expires.

New resourcing requirements

There is an obligation for firms to ensure that there is adequate resourcing in place to ensure that the IDR process operates fairly, effectively and efficiently within the prescribed maximum timeframes. There is an added requirement for firms to regularly review ongoing resourcing requirements and to ensure that staff resourcing takes into account any spikes in complaint volumes. This means you may need to consider providing training to all staff members (so that any staff member can action complaints) or provide detailed policies and procedures.

Provides guidance on the identification and management of systemic issues

Complaints serve as a key risk indicator for systemic issues warranting early identification and resolution, to not only avert matters from being escalated to AFCA, but to also avoid further harm /detriment to more customers.

Boards have the responsibility to set clear accountabilities for complaint handling functions as well as the identification and management of system issues, including robust systems to enable systemic issues to be investigated, followed up and reported on. Reports provided to board and executive committee must include metrics and analysis of consumer complaints and include systemic issues identified.

All staff should understand their roles and responsibilities in relation to the IDR process.

Minimum requirements for written IDR responses

A written IDR response to the complainant confirming the final IDR outcome must include enough detail for the complainant to understand the basis of the decision and to be fully informed when deciding whether to escalate the matter to AFCA or another forum.

The written response will need to include the following:

• Final outcome of the complaint, including details of any actions taken to resolve the complaint;
• Reasons for the outcome, if the complaint was rejected in part or in full, including details of findings and the basis of the decision; and
• Complainant’s right to take the matter to AFCA and the contact details for AFCA.

A written IDR response must always be provided if the complaint is about;

• Hardship;
• A declined insurance claim or the value of an insurance claim; or
• The complainant requests a written response.

Fostering a proactive complaint handling culture

Firms are encouraged to adopt an organisation-wide approach to complaint management and to promote a culture that values complaints and is highly receptive to customer feedback. A complaint should be viewed as an opportunity, not a negative. It is expected that Board members, chief officers and senior management take an active interest in the proactive management of complaints, and will have specific responsibilities, to include:

• Oversight of the IDR process;
• Ensure that adequate resources, training and upskilling is provided to staff managing complaints;
• Champion the complaint management policy across the organisation;
• Ensure that there are effective systems and reporting procedures to enable the timeliness and effectiveness of complaint management and monitoring practices; and
• Establish clear roles and responsibilities for the management of complaints.

Beyond the Boardroom
Firms are also expected to ensure that their people demonstrate the right values, behaviours and attitudes towards complaints. This will underpin a philosophical approach to complaint handling that goes beyond adherence to a set of guidelines, checklists or timeframes. It’s about delivering respectful, user friendly and transparent practices that support the early resolution of complaints and reduce the need to escalate to external dispute resolution, and creating an environment and culture where it is safe for staff to escalate potential systemic issues before they turn into seismic issues will be essential.

The new IDR framework will further serve to elevate the importance of complaints in shaping the firm’s response mechanism as the impetus for continuous improvement, with complaint trends identified and root causes well understood. Firms have the opportunity to further harness customer insights derived from complaint data and analysis to tackle long standing pain points and customer irritants and drive continuous improvement, help shape product design, and improve service delivery across the value change.

Effective complaints management practices can help power continuous improvement and innovation.

Adopting changes to meet IDR requirements

Financial firms have between now and October 2021 to implement a range of measures in preparation for the new complaint handling requirements under RG 271. This will include the need to establish clear lines of accountability and reporting (if not already in place), develop processes and systems and upskill staff to deal with complaints in a fair, effective way.

For many financial firms the changes to the timeframes will require making some improvements to business processes, addressing process weaknesses to ensure that complaints can be resolved promptly and efficiently and strengthening governance around the capture, tracking, analysis and reporting of complaint data.

In addition, financial firms will need to bolster resources for their IDR functions to ensure that ongoing commitments to the revised maximum IDR timeframes can be met. Firms should also use the time to review and update complaint correspondence and templates to ensure that they satisfy the new requirements and enhance the quality of written communication and IDR responses. They should also review their complaints register to tackle customer irritants at the source.

The revised IDR guidance is the key to delivering better outcomes for consumers and reducing the need to escalate complaints to external dispute resolution. It’s now up to firms to embrace these reforms in order to deliver improved outcomes for their customers and leverage the insights gained to power continuous improvement opportunities.

What’s next?

ASIC intends to shortly commence its second phase of targeted consultation on IDR data collection and reporting. This consultation will build on the feedback that industry and consumer stakeholders provided in response to Consultation Paper 311 Internal dispute resolution: Update to RG 165.

By Lydia Carstensen and Raj Kanhai

The post Changes to Internal Dispute Resolution (IDR) procedures – what it means for you appeared first on AdviserVoice.

Jaime Lumsden Kelly

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

The post Deferred sales model for add-on insurance appeared first on AdviserVoice.

Charmian Holmes

The recommendation to regulate claims handling as a ‘financial service’ impacts both general insurance and life insurance, although this analysis is limited to general insurance. The change may be more far-reaching in its impact for the general insurance industry than initially thought.

A government response could be quick

The government announced in February that it would move quickly on this recommendation. Treasury issued a consultation paper on 1 March seeking submissions by 29 March on how to implement this change.

It remains possible that we could see the outcome of consultation and draft legislation before the Federal election.

What is the goal of the recommendation?

Commissioner Hayne recommended that insurers should have a duty to handle claims ‘efficiently, honestly and fairly’. This is one of the core obligations imposed on AFS License holders. Because of the claims handling exemption, ASIC has had no jurisdiction to investigate unfair claims practices by insurers and third party administrators, which was raised as an issue in previous life insurance reviews. There were several case studies examined during the Royal Commission involving life insurance claims, as well as four cases of general insurance claims following natural disasters.

The goal is to apply the ‘efficiently, honestly and fairly’ obligation to claims handling and to give ASIC relevant regulatory authority to investigate and prosecute instances where this obligation is not met.

This goal can be met with modest changes to rules and practices, or it can be met with extensive changes and the consequent additional costs. This theme is explored throughout our analysis.

A best case outcome

The least disruptive and costly way of implementing the recommendation might be to:

1. Remove Regulation 7.1.33 which states that claims handling is not a financial service for the purpose of the Act. This brings in the overarching requirement to provide financial services ‘efficiently, honestly and fairly’.
2. Apply the AFSL requirements only to those with decision making authority over claims – such as insurers, third party claim managers and underwriting agents with claims authority and not regulate service providers such as loss assessors, adjustors and investigators.
3. Limit the licensing requirement to those providers who deal with retail clients. The licensees are responsible for the activities of their service providers.
4. Build the expectations regarding ‘efficient, fair and honest’ into the enforceable provisions within the General Insurance Code of Practice with AFCA responsible for first line supervision, leaving ASIC to intervene where there are significant breaches and systemic problems, by taking enforcement action (eg legal proceedings and penalties).

Unanswered questions

The ‘best case outcome’ outlined above makes assumptions regarding questions that are still unanswered including:

• How is ‘claims handling’ defined as a financial service in the Act?
• Would the requirements apply to ‘retail clients’, or a broader range of products, for example those insureds and products that are within AFCA‘s remit, including small business property risk?
• Would the obligations and AFSL requirements apply beyond the claim decision makers – to adjusters, investigators, inspectors, builders, medical experts, repairers?
• Which specific obligations will apply to claims handling – compliance systems, disclosure documents, resourcing, competence, conflicts of interest, training and the like?
• Will claims managers and officers now have to act differently with this new statutory duty to handle claims efficiently, honestly and fairly?

Defining the ‘claims handling’ activity

Treasury’s consultation paper suggests that the definition of ‘financial service’ in the Act may need to be expanded to clarify what is a claims handling activity.

The current exclusion in the Corporations Regulations specifies that the handling and settlement of claims is neither giving advice nor dealing in an insurance product. It gives specific examples:

• Negotiations on settlement amounts,
• Interpretation of relevant policy provisions,
• Estimates of loss or damage,
• Estimate of value or appropriate repair,
• Recommendations on mitigation of loss,
• Recommendation to increase limits or consider different cover options to protect against the same losses, and
• Claims strategies such as the making of claims under alternate policies.

These examples of what is currently not a financial service do not make a suitable definition of what constitutes claims handling when it is to be treated as a financial service. It may be that just the statement “handling or settlement of claims or potential claims” may be quite adequate as a definition.

Retail clients/products or all products?

As retail clients may be the most vulnerable to unethical or unfair claims decisions, there is a case for the requirement to be licensed for claims handling to be confined to retail clients/products. This would include products and clients as follows:

• Motor, home building, home contents, sickness & accident, consumer credit, travel and domestic & personal property insurance, and
• Where the policyholder is an individual or small business (up to 20 employees, or 100 if in manufacturing).

It seems unlikely, for example, that insureds holding a medical indemnity insurance product would need to be protected but this is unclear. Consumer groups may want claims handling to be regulated when dealing with some business insurance products such as fire or burglary (in line with the terms of reference for external dispute resolution by AFCA).

The requirements should not apply to motor injury insurance (CTP) or workers compensation even when these are underwritten by private insurers.

Who would the obligations apply to?

Most insurers hold an AFSL if they deal with retail clients and it is likely that they would vary their AFSL to include claim handling activities.

A third party claims administrator could manage the requirements to be licensed in one of two ways – obtaining its own AFSL or becoming an Authorised Representative of one or more insurers.

Insurance underwriting agencies (or MGAs) operating under a binder with claims handling authority that already have an AFSL are likely to vary their licence to include claims handling activities. If the regulations apply only to retail clients, this will result in consistent regulatory treatment as underwriting agencies are not required to hold an AFSL if they are acting on behalf of an APRA-regulated insurer and dealing only with wholesale clients.

Many have asked about whether service providers should be included – loss adjusters, investigators, builders, forensic accountants, medical experts, engineers, and the list goes on.

Our view is that there is no benefit in bringing any of these groups specifically under the ASIC regulatory umbrella just for their outsourced services in relation to claim handling activities. The law already makes the licensee (in this case the insurer, TPA or underwriting agency) responsible for activities undertaken on its behalf by others and we think taking this approach will keep additional compliance costs to a minimum without any detriment to consumer outcomes.

What further obligations would apply?

The Act has a long list of obligations that need to be met by an AFSL holder (and their representatives) in addition to the core ‘efficiently, honestly and fairly’ provision. These include:

• Management of conflicts of interest – this could be difficult to deal with, e.g.
  – If a claims officer suspects fraud, does the insurer have to disclose this to the claimant and when?
  – Staff KPIs that may be perceived to compromise the ability to manage claims ‘fairly’
• Comply with the financial services laws and licence conditions
• Have adequate resources to carry out and supervise activities – this could be particularly challenging when managing claims arising from cat events
• Maintain competence
• Ensure adequate training of staff and authorised representatives
• Have internal and external dispute resolution systems
• Have adequate risk management systems.

This is where a great deal of additional compliance costs could arise if all of these obligations apply to regulated claims service providers. For sales and advice businesses ASIC issues regulatory guidance and requires systems to be in place to demonstrate and monitor compliance. It is those systems that can create significant cost.

A good case could be made to not apply these more specific obligations to claims handling and instead include more specific requirements for claims handling activities in the General Insurance Code of Practice (as these provisions will be mandatory and legally enforceable under another Royal Commission Recommendation).

Is there ‘advice’ in claims handling?

Some of the other questions that have arisen based on extending the currently sales and advice rules are:

• Will there be new disclosure requirements (akin to FSG or PDS)?
• Is there a need for a ‘general advice’ warning?
• Would any claims handling activities constitute ‘personal advice’ and how should this be regulated?
• If a product terminates as a result of a claim (e.g. a total loss) does that constitute ‘disposal’ of the financial product?
• Would suggestions made about alternative products following claims constitute ‘financial advice’?

In our view it would be wrong to assume that all the obligations relevant to advice and sales would also be relevant for claims.

As an example the current law says that estimating the value of goods to be insured is not a financial service. Estimates of repair cost and values would arguably warrant the same treatment.

Finity’s view: The cost and disruption to the general insurance sector could be a little or a lot depending on how the law is changed, how ASIC rules and guidance are developed and then how they are applied and supervised in practice.

Insurers in the retail market will need to:

• Take a view on whether claims costs are likely to increase
• Factor in additional compliance expenses
• Make a commercial decision on whether to change premium rates
• Develop early warning indicators of changes in claims experience in order to respond quickly

The Treasury consultation paper brings out the question of benefits versus costs.  The consultation process, closing on 29 March, may be the last opportunity to put forward proposals (such as we outlined in our best case outcome) to achieve the desired objectives at an acceptable cost.

The Fold’s view: There will be opportunities for consumer action groups and ASIC to hold insurers more accountable if they do not change claims handling practices. This could spell the end of current practices like cash settlements following a natural disaster. A focus on protecting the most vulnerable insurance consumers is likely to prevail to temper the increased compliance and regulatory costs.

The transition to claims handling as a regulated financial service will be clearer for all industry participants after the end of the Treasury consultation process and once draft legislation is released. ASIC will also release regulatory guides and other policy guidance for claims handling services.

Anyone seeking an AFSL or to vary their existing AFSL will need to be able to demonstrate their previous experience in claims handling. At this time, it is unclear how ASIC will handle the licensing process and whether some applicants will be able to streamline their application if they already have an AFSL and have provided exempt services previously. ASIC will probably impose training requirements within ASIC Regulatory Guide 146 (RG146) but we expect it will give the industry time to comply with them (as it has done in the past).

By Raj Kanhai and Charmian Holmes

The post Royal Commission Response – Claims as financial service appeared first on AdviserVoice.