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Insurance Contracts Amendment Bill 2012

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2010-2011

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Insurance contracts amendment bill 2011

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

 



Table of contents.............................................................................................. iii

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 7

Chapter 1               Standard Definition of Flood............................................ 11

Chapter 2               Key Facts Sheet................................................................. 17

Chapter 3               Regulation impact statement........................................... 27

Chapter 4               Regulation impact statement........................................... 73

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ASIC

Australian Securities and Investment Commission

Corporations Act

Corporations Act 2001

HBHC

Home Building and  Home Contents (combined and individual)

ICA

Insurance Contracts Act 1984

ICR

Insurance Contracts Regulations 1985

KFS

Key Facts Sheet

PDS

Product Disclosure Statement

RIS

Regulation Impact Statement

this Bill

Insurance Contracts Amendment Bill 2011

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Outline

In 2010-11, there were a significant number of natural disasters in Australia.  Queensland, New South Wales and Victoria all experienced severe flooding.  The number of people adversely affected by these natural disasters as a result of inadequate insurance cover has highlighted the level of consumer confusion about what is covered in insurance policies and in particular the extent to which policies provide cover for flood and what cover for flood means.

On 5 April 2011, the Government released a consultation paper ‘Reforming flood insurance: Clearing the waters’ in order to engage the community in suggesting improvements to the regulatory framework and other aspects of Australia’s insurance market.  The paper contained two key proposals designed to improve clarity for consumers in relation to insurance policies and in particular, the cover provided for various types of flood, namely, a standard definition of flood and the Key Facts Sheet (KFS) to outline the key information in relation to home building and home contents policies.  The Insurance Contracts Amendment Bill 2011 (this Bill) implements these proposals. 

The detail of the measures, including the actual wording of the standard definition and the specific content of the KFS, will be made in regulations contained in the Insurance Contracts Regulations 1985 (IRC). 

These measures will enable consumers to make better informed decisions about the purchase of insurance contracts; and will reduce the current level of consumer confusion regarding what is and is not included in their insurance contracts, in particular, the extent to which contracts provide cover for flood and what cover for flood means. 

Date of effect The amendments in this Bill will take effect from the date of Royal Assent.  However, the regulations in relation to the measures in this Bill (the standard definition of flood and the KFS) will commence two years after the day the regulations are made in respect of each of the measures.

Proposal announced On 14 November 2011, the Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP, announced the introduction of the legislative framework for the standard definition of flood and the KFS, as part of the Government’s response to the National Disaster Insurance Review’s report into the insurance industry.

Financial impact This Bill has no financial impact on Commonwealth expenditure or revenue.

Compliance cost impact Medium.  The measures contained in this Bill are expected to increase compliance costs for industry.  However, the compliance costs will be minimised by having a two year transition period from the date the regulations are made.

Summary of regulation impact statement

Regulation impact on business

Impact This Bill will affect insurers that provide insurance contracts in respect to Home Building and Home Contents (HBHC), small business and strata titles.  The beneficiaries of the new requirements in this Bill and regulations are the consumers who enter into these particular types of insurance contracts.

Main points :

•        Standard definition of flood

-       The standard definition of flood may reduce consumer confusion regarding what is and what is not included in insurance policies and will avoid situations where neighbouring properties, affected by the same inundation event, receive different claims assessments because the policies covering them (where they exist) use different definitions of flood. 

-       Compliance costs will be incurred by industry for reassessing and rewriting policies.

-       Industry has also indicated that a standard definition could result in re-pricing of policies or in products being withdrawn as these policies might provide greater coverage for flood.

•        Key Facts Sheet (KFS)

-       The KFS, by outlining key information in a concise form, will provide increased simplicity, consistency and comparability for consumers when they are making decisions regarding the purchase of HBHC insurance policies.  The KFS will also facilitate more effective decision making through an increased level of familiarity (knowing what to look for and the meaning of certain words and concepts).

-       Compliance costs will be incurred by industry both initially and on an ongoing basis.  The initial costs relate to the assessment of policies to establish what key information is required for inclusion in the KFS and the costs for the development of each KFS.  On an ongoing basis costs will continue to be incurred for the printing, production and distribution of the KFS.

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Chapter 1          

Standard Definition of Flood

Outline of chapter

1.1                   Schedule 1 to the Insurance Contracts Amendment Bill 2011 (this Bill) contains amendments to the Insurance Contracts Act 1984 (ICA) to provide a legislative framework to allow regulations to be established for a standard definition of flood for riverine flooding in Home Building and Home Contents (combined and individual) (HBHC) insurance contracts and contracts held by small businesses and strata titles. 

Context of amendments

1.2                   In 2010-11 there were a significant number of natural disasters in Australia.  Queensland, New South Wales and Victoria all experienced severe flooding.  The number of people adversely affected by these natural disasters as a result of inadequate insurance cover highlighted the level of consumer confusion that exists in relation to the definition of flood in HBHC insurance policies.

1.3                   On 5 April 2011, the Government released a consultation paper ‘Reforming flood insurance: Clearing the waters’ in order to engage the community in suggesting improvements to the regulatory framework and other aspects of Australia’s insurance market.  One of the proposals contained in the paper was the standard definition of a flood.

1.4                   The standard definition of flood involves introducing a standard form of words to describe riverine flooding and reserves the term flood and other variations of the word flood for flooding in this context (whether as an included or excluded event). 

1.5                   The purpose of introducing a standard definition is to reduce consumer confusion regarding what is and what is not included in flood coverage and avoids situations where neighbouring properties, affected by the same inundation event, receive different claims assessments because the policies covering them use different definitions of flood.  It will also improve consumers’ ability to evaluate potential insurance policies and compare between different insurers.

Summary of new law

1.6                   The provisions contained in this Bill will introduce a requirement for a standard definition of the term flood to apply to all HBHC, small business and strata title insurance contracts in accordance with regulations contained in the Insurance Contracts Regulations 1985 (ICR).

Comparison of key features of new law and current law

New law

Current law

Insurance providers will be required to use a standard definition of the term flood (and all related terms) in all HBHC, small business and strata title insurance policies and their supporting documents.  The term flood will be defined in regulations.

Currently the term flood is not defined in the ICA resulting in insurers defining the term in different ways.

Detailed explanation of new law

The application of definition of flood provisions (Division 1A) in this Bill

1.7                   The definition of flood provisions in this Bill apply only to the types of contracts prescribed in regulations (prescribed contracts) if those contracts are entered into the day after the regulations are made.  [Schedule 1, item 1, paragraph 37A(1)(a) and 37A(1)(b)]

1.8                   However, the definition of flood provisions will not apply if:

•        a contract that would be considered to be prescribed contract (once the regulations are made), is entered into prior to the making of those regulations; or

•        a flood event to which the standard definition of flood applies (as provided in the regulations) occurs prior to the commencement of the regulations. 

[Schedule 1, item 1, subsections 37A(2) and 37A(3)]

1.9                   For the purposes of Division 1A, the time between the making of the regulations and the commencement of the regulations is the transition time.  [Schedule 1, item 1, subsection 37A(4)]

1.10               The regulations will commence two years after the day the regulations are made.

Example 1.1  

On 1 June 2012 the regulations for the provision of a standard definition of flood were made.

 On 8 August 2013, Arthur a small business owner selling golfing supplies entered into a small business insurance contract, to amongst other things, cover his premises for flood. 

In accordance with the application of the standard definition provisions the contract entered into by Arthur is the type of contract to which the standard definition of flood provisions apply (as the contract was entered into after 1 June 2012).

On 1 January 2014 (five months prior to the commencement of the regulations) a local dam near Arthur’s premises overflowed causing minor damage to Arthur’s storage room.  The definition of flood in Arthur’s policy did not cover his premises for damage caused by water overflowing from a dam.  As the flood event (the overflowing of the dam) happened prior to commencement of the regulations, the damage to Arthur’s premise was not covered.

On 1 July 2014 (one month after the commencement of the regulations) the dam once again overflowed causing extensive damage to Arthur’s premises.  However, on this occasion the standard definition of flood applied (as the regulations had commenced) and as such the damage to Arthur’s premises caused by the overflowing of the dam is covered.  This is the case irrespective of whether the Arthur’s insurer had not updated Arthur’s insurance policy to reflect the standard definition of flood (as provided in regulation).

Standard definition of flood for home building and home contents, small business and strata title insurance policies

1.11               This Bill inserts Division 1A of Part V into the ICA.  Division 1A requires a standard definition of the term flood to be applied to all insurance contracts as prescribed in the Division.  The provisions contained within Division 1A while acting independently remain consistent with other requirements in the ICA.  A prescribed contract for the purposes of Division 1A is an insurance contract included in a class of contracts of insurance declared by the regulations to be a class of contracts in relation to which Division 1A applies.  [Schedule 1, item 1, paragraph 37A (1)(a)]  

1.12               The standard definition of flood has been introduced to, amongst other things, reduce the current level of consumer confusion surrounding the word flood.  The two key types of insurance contracts where it is considered to be critical for consumers to have a standard definition of flood are home buildings and home contents (both of these types of contracts are contracts to which standard cover applies).  Therefore, regulations will declare HBHC insurance contracts as prescribed contracts to which Division 1 A applies. 

1.13               In addition to Home Building and Home Contents (combined and individual) (HBHC) insurance contracts, it was considered appropriate to include other similar insurance contracts that directly impact consumers.  Therefore, regulations will declare insurance contracts covering small business and strata titles, as defined in the regulations, as prescribed contracts to which Division 1A applies.   

Meaning of flood in prescribed contracts

1.14               The meaning of flood in prescribed contracts must be provided in regulation.  [Schedule 1, item 1, subsection 37B(1)]  

1.15               While the actual wording for flood included in regulations will be subject to consultation, it is expected to be consistent with the wording proposed in the Government’s Consultation paper, ‘Reforming Flood Insurance: Clearing the Waters’.  The proposed wording is:

•        Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of:

-       any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or

-             any reservoir, canal, or dam.

The standard definition of flood in prescribed contracts

1.16               Insurance providers, are required to use a standard definition of the term flood, when using the word flood (or other parts of speech or grammatical forms of that word, such as flooding)) in prescribed contracts (or the notice or other document or information) as provided in the regulations.  If the definition or meaning of the word flood (or other parts of speech or grammatical forms of that word, such as flooding) provided in the prescribed contract (or the notice or other document or information) is different from the definition of meaning of word flood provided in the regulations, the prescribed contract will be taken to have the meaning of flood as provided in the regulations.  [Schedule 1, item 1, subsections 37B(2) and 37B(3)]

Circumstances in which a prescribed contract is taken to provide insurance cover

1.17               Prescribed contracts that include provisions (flood provisions) that provide insurance cover in respect of any loss or damage caused or resulting from one or more flood events as defined as a flood in the regulations are taken to provide insurance cover for flood as defined in regulation.  [Schedule 1, item 1, subsections 37D(1) and 37D(2)]

1.18               When applying the standard definition of flood in respect of prescribed contracts a flood event is an event that is, or would be, a flood as defined by regulation.  For example, one flood event in relation to the standard definition of flood as defined in ‘Reforming flood insurance: Clearing the waters’ would be ‘water that has escaped or been released from the normal confines of a lake’.  [Schedule 1, item 1, subsection 37D(7)]

1.19               If any loss or damage caused or resulting from flood events is sustained by the holder of a prescribed contract (the insured), an insurer may not refuse to pay a claim where the contract provides cover for a narrower definition of flood than the standard definition.  For example, where the standard definition of flood covers the flood event ‘water that has escaped or been released from the normal confines of a lake’ but the insurer’s definition of flood does not cover this flood event, the insurer must pay a claim for the excluded flood event as it forms part of the standard definition under the regulations .  [Schedule 1, item 1, subsection 37D(3)]

1.20               In the event that a prescribed contract provides different maximum amounts of insurance for different flood events (within the standard definition as prescribed in the regulations), the contract is taken to provide the highest maximum amount of cover offered in respect of any flood event.  When a prescribed contract provides different maximum amounts for different flood events, an insurer cannot refuse to pay an amount equal than that maximum amount for an event on the basis that any loss or damage caused or resulting from that event was less than the maximum amount of flood cover.  [Schedule 1, item 1, subsections 37D(4) and 37D(5)]

Example 1.2  

Scarlett enters into an insurance contract that offers cover for flood.  The contract stipulates that loss or damage of property sustained by water that has escaped from a river is covered for a maximum amount of $200,000.  The contract goes on to stipulate that loss or damage of property sustained by water that has escaped from a dam is covered for a maximum amount of $100,000.  Following a flood event Scarlett makes a claim on her insurance contract for loss or damage valued at $150,000.  The loss or damage is determined to have been caused by water that has escaped from the confines of a dam.  While Scarlett’s insurer has provided a maximum level of $100,000 in respect of the loss or damage of property sustained by water that has escaped from a dam, the insurer is required to accept Scarlett’s claim as the maximum cover for flood is the highest maximum provided in respect of all flood events which in respect to Scarlett’s insurance contracts is $200,000. 

1.21               The provision of the maximum cover provided in respect to flood in relation to a prescribed contract, that is, the highest maximum provided in respect of every flood event, will apply irrespective of whether or not the insurer clearly informed the insured of the purported effect of the flood provisions in the contract.  [Schedule 1, item 1, subsection 37D(6)]

Provision of insurance cover for other events outside the standard definition 

1.22               The definition of flood in a prescribed contract has the meaning of flood in the regulations.  If the definition of flood used by the insurer is broader than the standard definition of flood, the prescribed contract will still provide cover for those events not included in the standard definition of flood.  [Schedule 1, item 1, paragraphs  37E(a) and 37E(b)]

Example 1.3  

Abbie enters into a home building insurance contract with ABC Insurance to cover her new beach house at Bryon Bay.  ABC’s home building  insurance contract offers cover for flood and contains a definition of the term flood that includes sea inundation, in addition to the flood events as prescribed in the regulations. 

Six months after entering into the home building insurance contract Abbie’s beach house was damaged as a result of a king tide.  While the definition of flood in the contract is taken to be the standard definition of flood, the sea inundation event is still covered by the contract. 

Insurer to clearly inform insured whether prescribed contract provides insurance cover in respect of flood

1.23               In order for consumers to be aware of certain aspects of insurance contracts, the ICA imposes a requirement on the insurer to ‘clearly inform’ the insured of these aspects in writing prior to a contract being entered into.  Consistent with these requirements, consumers must also be made aware of the extent to which insurance contracts provide cover for flood so they can make informed decisions about the insurance contract.  Therefore, the insurer must clearly inform the insured in writing on whether their insurance contract covers flood.  [Schedule 1, item 1, section 37C]



Chapter 2          

Key Facts Sheet

Outline of chapter

2.1                   Schedule 2 to the Insurance Contracts Amendment Bill 2011 (this Bill) contains amendments to the Insurance Contract Act 1984 (ICA) to implement a requirement for an insurance provider to provide consumers with a Key Facts Sheet (KFS) for Home Building and Home Contents (combined and individual) (HBHC) insurance contracts in accordance with the regulations.

Context of amendments

2.2                   In 2010-11 there were a significant number of natural disasters in Australia.  Queensland, New South Wales and Victoria all experienced severe flooding.  The number of people adversely affected by these natural disasters as a result of inadequate insurance cover highlighted the level of consumer confusion that exists in relation to what is and is not covered by HBHC insurance policies.

2.3                   On 5 April 2011, the Government released a consultation paper ‘Reforming flood insurance: Clearing the waters’ in order to engage the community in suggesting improvements to the regulatory framework and other aspects of Australia’s insurance market.  One of the proposals contained in the paper was the KFS.

2.4                   Insurers are currently required to give consumers a Product Disclosure Statement (PDS) if they offer or issue an insurance policy.  PDSs can be lengthy, making it difficult for consumers to access key information about the features of the policy, including the inclusions and exclusions. 

2.5                   The KFS will make information about what is covered by HBHC policies more accessible to consumers.  In particular, the KFS will outline key information in relation to the HBHC policies in an easy to read and consumer friendly layout, enabling consumers to access the key information in a simple and effective way.  Consistent with current requirements, a PDS will still need to be provided in addition to the KFS.

Summary of new law

2.6                   The provisions contained within this Bill introduce a requirement for insurers to provide a KFS in accordance with regulations contained in the Insurance Contracts Regulations 1985 (ICR) for HBHC insurance contracts.

Comparison of key features of new law and current law

New law

Current law

In addition to existing disclosure requirements for home building and home contents insurance policies contained in the Corporations Act 2001 (Corporations Act), insurers are required under the ICA to provide a KFS, which outlines the key information on what is and what is not covered in respect of the particular home building, home contents or home and contents insurance policy at the requested by of a consumer.

The existing disclosure obligations in the Corporations Act require an insurer to disclose information in relation to the terms and risks associated with the insurance policy in a product disclosure statement.

There is no disclosure requirement in the ICA for a document containing a summary of the key information to be made available to consumers for home building and home contents insurance policies.

Detailed explanation of new law

Key Facts Sheets for home building and home contents insurance policies

2.7                   This Bill inserts Division 4 of Part IV into the ICA, which imposes requirements on insurers to provide consumers with a one page KFS on request.

2.8                   A KFS is a document which contains the key information relating to prescribed contracts, or potential prescribed contracts.  A KFS will be required to meet content, format and provision requirements as prescribed in regulation.  [Schedule 2, item 6, paragraph 33B(a)]

2.9                   The content, format and provision requirements for the KFS will be determined in regulations after extensive public consultation to ensure appropriate consumer and industry outcomes can be achieved.

2.10               The KFS is a one page document that will summarise the key information about a given HBHC insurance policy, which may include:

•        what is covered;

•        what is not covered;

•        the cooling off period;

•        what type of cover is offered under the policy; and

•        an explanation of how the KFS is to be used.

2.11               The regulations will also prescribe any other requirements in relation to the introduction of the KFS, such as the prescription of the length of the KFS.  [Schedule 2, item 6,  paragraph 33B(b)]

Prescribed and potential prescribed contracts

Prescribed

2.12               A prescribed contract for the purposes of Division 4 is a contract prescribed in the regulations.  A prescribed contract will exist only where the contract of insurance has actually been entered into.  [Schedule 2, item 6, paragraph 33A(a)]

2.13               The contracts that will be prescribed in regulation will be contracts for HBHC insurance contracts in accordance with Divisions 2 (home building insurance) and 3 (home contents insurance) of Part II of the ICR. 

Potential prescribed contracts

2.14               A potential prescribed contract is a contract that if entered into would be a prescribed contract in accordance with Division 4.  The term potential prescribed contact is intended to apply in situations where there is no contract of insurance but it is possible that there will be a contract of insurance in the future.  [Schedule 2, item 6, paragraph 33A(b)]

Example 2.1  

Charlie is looking for an insurance policy to cover his home contents.  In order for Charlie to establish if the insurance policy he is considering satisfies his insurance requirements, he requests information from the insurance policy provider regarding the types of events the policy covers. 

At that time Charlie has only requested information regarding the policy and has not entered into a contract and as such a contract would not exist.  However, if after receiving the information Charlie decides to enter into the insurance contract, the contract that he would be entering into would be a prescribed contract under Division 4. 

Therefore at the time information was requested by Charlie the insurance contract can be seen to have only have the potential to be a prescribed contract. 

An insurer’s obligation to provide a Key Facts Sheet

2.15               In order to ensure consumers are able to effectively access key information on HBHC insurance contracts, insurers are required to provide a KFS in the circumstances prescribed in the regulations. 

2.16               The regulations will specify that a KFS will be required to be provided, when a consumer makes a request regarding a particular HBHC insurance contract.  [Schedule 2, item 6, subsection 33C(1)]

Things to be done before entering into a contract cannot deferred until the contract is entered into

2.17               Currently subsection 11(11) of the ICA, provides that where a provision of the ICA requires anything to be done before a particular contract is entered into, it is sufficient if that thing is done at the time the contract is entered into. 

2.18               The timing of the request made by the consumer is not a relevant consideration for an insurer when a KFS is required to be provided.  A KFS is required to be provided for both prescribed contracts and potential prescribed contracts.

2.19               The KFS is required to be provided at the time a request is made by a consumer in relation to a particular prescribed or potential prescribed contract.  An insurer is not able to defer the provision of a KFS until an insurance contract is entered into.  [Schedule 2, item 6, paragraph 33C(4)(a)]

When a contract is entered into prior to obtaining a KFS

2.20               In some situations a consumer may not request information regarding a particular prescribed or potential prescribed contract prior to entering into the insurance contact.  In this situation, the regulations are expected to take the entering into the insurance contract as a request for information regarding that contract and as such the KFS will be required to be provided at that time. 

2.21               When a prescribed contract is entered into through an insurance broker.

2.22               Under subsection 71(1) of the ICA any requirement (other than subsection 58(2)) an insurer is not required to give a document to an insured before contract is entered into if the contract was arranged by certain insurance brokers acting as agents of the insured.    

2.23               The requirement to provide an insured with a KFS before entering into a contract will not apply if the contract to which the KFS was to be provided was arranged by the type of broker that was acting as agent of the insured as provided in subsection 71(1).       

Situations where it is not practicable for the Key Facts Sheet to be provided

2.24               Section 69 of the ICA currently allows insurers to provide information within 14 days after the day a contract is entered into when it is not practicable for the information to be provided at that time.  This allows insurers and consumers to enter into insurance contracts without having to satisfy the normal disclosure requirements at the time the contract commences. 

2.25               While this flexibility is required in certain situations, insurers are not able to utilise the flexibility provided under section 69 when providing KFSs to consumers.  [Schedule 2,  item 6, paragraph 33C(4)(b)]   

2.26               However, in order to ensure that insurers can meet their requirements under Division 4 in situations where it is not practicable to provide a KFS, the regulations will provide some flexibility in the timing of their provision. 

Exemptions to the requirement to provide a Key Facts Sheet

2.27               There are situations where the provision of a KFS would not be consistent with the policy intent of the KFS and these will be declared in regulation.  [Schedule 2, item 6, subsection 33C(3)]   

2.28               Circumstances where it may be considered that an exemption to the requirement to provide the KFS will (consistent with the policy intent)  include:

•        where the insurer has already provided the consumer with a KFS for a particular HBHC insurance contract and the new KFS would be the same (except for its date);

•        where the insurer reasonably believes that another person has already provided the consumer with a KFS, and the new KFS would be the same (except for its date); and

•        where the consumer has indicated that they do not wish to have a KFS provided in relation the HBHC insurance contract that they are seeking to have information on.

2.29               The insurer bears the evidentiary burden in relation to any defences for not providing the KFS, as these are matters that are within their knowledge and/or control.  [Schedule 2, item 6, subsection 33C(3)]

The provision of a Key Facts Sheet

2.30               Currently under subsection 77(1) of the ICA notices and other documents that are required or permitted by the ICA must or may be given:

•        to a body corporate in the way in which documents may be served on the body corporate; and

•        to a natural person

-       personally; or

-       by post to that person’s last known address. 

Documents are not permitted to be provided electronically.

2.31               Consistent with the current requirements of subsection 77(1) of the ICA, insurers will be able to provide the KFS to a body corporate in the way in which documents may be served on the body corporate and to a natural person either personally or by post. 

2.32               However, in order to ensure insurers are able to provide the KFS electronically, this Bill also allows for the regulations to prescribe the circumstances in which an electronic means of the provision of the KFS is able to be, or must be made.  [Schedule 2, item 6, subsection 33C(2)]

2.33               The provision of the KFS through electronic means will be permitted irrespective of the requirements relating to giving notices in subsection 77(1) of the ICA.  [Schedule 2, item 6, subsection 33C(2)]

2.34               Circumstances where it is expected that the regulations will allow a KFS to be provided electronically include when:

•        a consumer has verbally provided their email address for the purpose of being provided the KFS; and

•        a consumer has sought to be provided the KFS from the insurer’s website by providing their email address electronically. 

2.35               Insurers may also (or be required to) provide the KFS (in a printable form) on their websites, subject to certain criteria being satisfied. 

An insurer’s requirement to ‘clearly inform’ is not satisfied through the provision of a Key Facts Sheet

2.36               The ICA requires insurers to ‘clearly inform’ insureds of any derogation from the standard cover provided for prescribed contracts.  The requirement to ‘clearly inform’ must be in writing and may be satisfied by providing the insured a document or documents containing provisions or relevant provisions that outline the derogation.

2.37               In order to satisfy the ‘clearly inform’ requirements under the ICA, the requirement must be made in writing.  In order to achieve this, insurers may use as many or as few documents as they require.  However, in most cases insurers use the insurance contract and it’s associated PDS (as required under the Corporations Act) to satisfy their ‘clearly inform’ requirements. 

2.38               As the KFS is only a guide providing the key information about a particular HBHC insurance contract, the provision of a KFS will not be able to be used as a mechanism for satisfying the insurers need to clearly inform insureds of any derogation in their particular policy.  [Schedule 2, item 6, section 33D]

Failure to comply with the regulations regarding the content, format or provision of a Key Facts Sheet

2.39               This Bill introduces an offence in the ICA when an the insurer engages in conduct and that conduct contravenes the insurer’s requirement to provide the KFS for a prescribed or a potential prescribed contract in the circumstance, and manner, prescribed in the regulations.  [Schedule 2, item 6, paragraphs  33C(5)(a), 33C(b) and 33C(c)]   

The penalty for not failing to comply with the regulations

2.40               Currently, the ICA provides a penalty of 300 penalty units for offences relating to an insurers failure to inform an insured.  In these instances the failure to inform also results in a failure to satisfy the ‘clearly inform’ requirement in the Act.  The KFS will not be able to be used to satisfy the ‘clearly inform’ requirement.  As such a penalty of 300 penalty units would not be appropriate. 

2.41               In relation to the provision of information to Australian Securities and Investment Commission (ASIC), if an insurer fails to comply with a notice to provide information relating to insurance documents or review administrative arrangements the ICA provides a penalty of 150 penalty units.

2.42               The importance of disclosure for individual consumers is considered to be significant.  On this basis, if an insurer fails to comply with the regulations by not providing or failing to provide a correct KFS, the insurer will be taken to have committed an offence.  The offence attracts a criminal penalty of 150 penalty units.  [Schedule 2, item 6, subsection 33C(5)]

Engaging in conduct

2.43               In order to facilitate the offence provision for the failure for an insurer to meet their requirements in accordance with the regulations in Division 4, the conduct the insurer engages in must be taken into consideration.  This Bill amends subsection 11(1) to provide a meaning of to engage in conduct.  [Schedule 2, item 1, subsection 11(1)]    

Application and transitional provisions

2.44               The amendments in this Bill, in relation to the KFS, will take effect from the date of Royal Assent.  However, in order to minimise the compliance costs of implementing the KFS, a two year transition period will apply from the day after the Regulations are made in order for industry to make the necessary changes to implement the amendments. 

Consequential amendments

Changes to Part IV of the Insurance Contracts Act 1984

2.45               This Bill inserts Division 4 in Part IV of the ICA.  Under Division 4 an insurer is required to provide a KFS in accordance with regulations.  Currently Part IV of the ICA predominately deals with disclosure duties and misrepresentations of insureds. 

2.46               In order to clearly distinguish the current Divisions of Part IV of the ICA with Division 4, the headings of Divisions 1, Division 2 and Division 3 have been amended to include a reference to the insured.  [Schedule 2, items 3, 4 and 5, Division 1 of Part IV, Division 2 of Part IV, Division 3 of Part IV]  

Clarifying the scope of this Act

2.47               This Bill amends subsection 11(1) to clarify that a reference to ‘this Act’ in the ICA will include a reference to the regulations.  [Schedule 2,  item 2, subsection 11(1)]

2.48               Clarifying the scope of the ICA in this way, will ensure that the powers and functions of ASIC in respect to the administration of the ICA will apply to the regulations as well as the Act. 



Chapter 3          

Regulation impact statement

Reforming flood insurance — Standard definition of flood

Regulation Impact Statement

Background

3.1                   There are various possible sources of inundation that can cause damage to a property.  The Insurance Council of Australia (ICA) has suggested the risks can be divided into three broad categories, summarised below:

A.                Stormwater/rainfall runoff : These terms refer to high intensity, short duration storms producing localised flooding.  Most insurance policies (but not all) cover this risk.  Some insurers also use the term ‘ flash flooding ’ with similar intent.

B.                Riverine/inland flooding : Inundation caused by watercourses or catchments overflowing their banks due to long duration rainfall over large areas.  Some insurers provide cover for this risk, but many exclude it.  Whether included or excluded, the definitions of this risk can vary greatly.

C.                Actions of the sea/sea level rise/storm surge :  Inundation caused by movement of seawater.  Few insurance policies cover this risk.

3.2                   Aside from various definitions for category B (riverine flooding), some policies use terms such as flash flooding, accidental flooding and tidal flooding, to describe other types of inundation risk.

3.3                   In the wake of the recent floods in Queensland and Victoria, a number of policyholders have reported that they were surprised their policies did not cover the type of inundation that affected their property.  The variation in the usage of the term flood and flooding in policies are the potential sources of confusion for many consumers. 

3.4                   On 5 April 2011, the Commonwealth Government (Commonwealth) released a consultation paper ‘Reforming flood insurance — Clearing the waters’ in order to engage the community in suggesting improvements to the regulatory framework and other aspects of Australia’s insurance market.  The paper contained two key proposals designed to improve clarity for consumers in relation to insurance policies and in particular, the cover provided for various types of flood.  The proposals include a standard definition of a flood and a key fact sheet (KFS) which will outline the key information in relation to home building and home contents policies.  This regulation impact statement (RIS) covers the former proposal.

3.5                   On 4 March 2011, in response to the escalating number of natural disasters, the Hon Bill Shorten, MP Assistant Treasurer and Minister for Financial Services and Superannuation announced an independent review into disaster insurance in Australia.  The Natural Disaster Insurance Review (NDIR) [1] has been tasked with looking the broad issues relating to insurance in the context of the long term funding of disaster relief.  Affordability and availability of flood insurance are issues being addressed by the NDIR and are outside the scope of this RIS. 

3.6                   On 2 June 2011 the Standing Committee on Social Policy and Legal Affairs [2] commenced an inquiry into, and report on, the operation of the insurance industry with specific reference to extreme weather and disaster events.

3.7                   In addition, Queensland [3] and Victorian [4] governments are each conducting their own reviews into the events surrounding the 2010-11 flood season.  These reviews are looking at such as claims process handling and other state based flood issues. 

 

The problem

Summary

3.8                   At present, insurers use different definitions of flood in policies making it difficult for consumers to know kinds of water damage are covered.   The different definitional approaches taken in insurance policies to flood and related terms result in potential confusion for many consumers.  This confusion makes product comparison difficult and may lead to underinsurance for flood risk.  Underinsurance in this context means a situation where an insured does not possess sufficient insurance so as to cover them in the event of certain events. 

3.9                   The following examples illustrate the differences that can be seen to exist between Home Building and Home Contents insurance policies (HBHC) (combined or individual policies).  However, it should be noted that some of these definitions are not too dissimilar to that proposed in the consultation paper: 

•        ‘Flood — The inundation of normally dry land by water which has overflowed, escaped or been released from a lake, river, creek, storm water channel, canal or any other watercourse whether natural, altered or man made.’

•         ‘Flood — The inundation of normally dry land by water which has overflowed, escaped or been released from a lake, river, creek, storm water channel, canal or any other watercourse whether natural, altered or man made.’

•        ‘Flood means the inundation or covering of normally dry land by water which:

-       escapes or overflows from, or

-       cannot enter (because it is full or has overflowed), or

-       is prevented from entering (because other water has already escaped or been released from it),

-       the normal confines of any watercourse or lake, including any that may have been modified by human intervention, or reservoir, canal, dam or stormwater channel.’

•        ‘Flood: Rising water which enters your home as a result of it running off or overflowing from any origin or cause.’

•        ‘Flood means: rain which results in water pooling on, flowing from or failing to drain away from:

-       a body of water

-       land

-       roads and streets

-       water that escapes or is released from a body of water.

A body of water can include a river, lake, dam, stormwater channel or canal, but not the sea.’

Current situation 

3.10               There are currently 6.2 million properties in Australia.  Modelling indicates that of those, six million properties are considered to have little or no flood risk.  Of the remaining 200,000 properties, 100,000 are considered to be at the core of the issue surrounding the need for a standard definition. [5]   In terms of insurance cover, those 100,000 properties are comprised of insureds who possess a mixture of :

•        Sufficient flood cover;

•        Insufficient flood cover; and

•        No flood cover.   

-       Treasury has sought, but has been unable to obtain data indicating the precise number of properties and individuals that fall into each of the three categories noted above.

3.11               In the wake of the recent floods in Queensland and Victoria, a number of policyholders reported that they were surprised their HBHC policies did not cover the type of inundation that affected their property.  The majority of these cases relate to policies that do cover category A (storm water/rainfall runoff) but exclude cover for category B (riverine flooding). 

3.12               Other consumers cited confusion over the fact that they understood their level of cover but were unaware of the risk they were exposed to or were unaware of the coverage they were insured for when multiple types of inundation occurred simultaneously.

3.13               In their submission to the NDIR, the Financial Ombudsman Service (FOS) noted that, as a percentage of insurance claims, the number of disputes lodged with FOS is high for flood events.  FOS cited a number of factors in explaining this, including exclusions for flood cover provided by some insurers; whether flooding was caused by a flood or storm; and delays in processing claims due to reliance on hydrology reports to determine whether a particular flood event was covered. [6]   FOS also cites factors including whether sections 35 and 37 of the Insurance Contracts Act 1984   (IC Act) were satisfied and what representations were made at the point of sale in explaining why the number of disputes lodged with FOS is proportionally high for flood events. 

3.14               In addition to its submission to NDIR, FOS has provided data on the number of disputed claims they have received in relation to the recent major natural disasters.

•        In relation to the Queensland floods, 597 disputes have been lodged.

•        In relation to Cyclone Yasi, 70 disputes have been lodged. 

•        In relation to Victorian bushfires in 2009, 19 disputes were lodged since 1 January 2010 (earlier data is not available).

3.15               When looking at this data in conjunction with the number of total claims lodged (57,730 claims for Queensland floods and 71,145 claims for Cyclone Yasi as reported by the ICA) a much higher rate of disputation can be seen to occur in relation to floods than in relation to other natural disasters.  In this regard, disputation can be seen to occur as a result of the Queensland floods, at more than 10 times than for Cyclone Yasi (approx 1/97 claims for Queensland floods compared to 1/1016 claims for Yasi) and from the available data the rate of disputation for the 2009 Victorian bushfires was considerably lower than for the Queensland floods.  It must be noted that the data is incomplete. 

•        The high rate of disputation points to the complexity of flood coverage compared to other types of cover and the fact that many people felt they were covered when they were not.

3.16               As part of the Queensland Floods Commission of Inquiry and the NDIR, individuals were asked to provide detail of their experiences as they related to the events of early 2011.  Submissions have been published and provide additional information in support of the introduction of a standard definition of flood. [7]   However, despite a considerable volume of evidence in the form of case studies and submissions to the various government inquiries currently underway, Treasury is unable to provide quantitative data supporting the introduction of a standard definition.  Therefore the magnitude of the problem is not quantifiable.

3.17               The variations in usage of the term flood and ‘flooding’ in HBHC policies are a potential source of confusion for many consumers.  For example, a policy which is stated to cover ‘accidental flood’ or ‘flash flooding’ could give the initial impression that the policy covers risks arising from rivers breaching their banks.  However, the policy might contain an exclusion for riverine flooding cover that would be evident on careful examination. 

3.18               While there is no empirical evidence supporting confusion regarding the understanding of what is meant by the word flood in insurance policies, the issue has been recognised for a number of years.

3.19                In the Formal Review of the Insurance Council of Australia Ltd’s General Insurance Code of Practice released in 1998, the issue of consumer confusion was raised:

‘ ... the use of technical terms, or terms whose meaning in the insurance context differs from their ordinary meaning, should be kept to a minimum.  Plain language continues to be a problem when dealing with terminology, such as definitions ‘flood’, ‘stormwater’ , ‘pre-existing conditions’ etc, all of which are not very user friendly and are difficult for many consumers to understand’

In addition, the report also stated that:

‘There appear to be special problems experienced by consumers in areas prone to flood: they often seem to believe they have cover against flood when, in fact, they only have cover against stormwater.’

3.20               The issue of consumer confusion was highlighted again in 2000 when the Australian Securities and Investments Commission (ASIC) noted in a report that due to difficulty in understanding policies on the issue of flood insurance, consumers may not be aware whether they are covered for flood and, if they are, about the importance of the distinction between flood and other storm damage. 

3.21               In 2008, the Australian Consumer and Competition Commission (ACCC) also raised the issue of consumer confusion regarding the definition of flood in insurance policies and have stated that:

‘Flood insurance has become a critical issue for Australian consumers in recent years, with a number of reports identifying unsatisfactory levels of consumer confusion about insurance cover for flood’ [8]

‘the ACCC supports effects to establish a common definition of flood that is widely understood by consumers and can be used as a benchmark for flood cover for insurance policies’ [9]

Current regulation

3.22               The main aim of the current standard cover regime in section 35 of the IC Act is to ensure that exclusions and limitations which an insured might not expect are brought to the insured’s notice before the contract of insurance is entered into. 

Section 35 of the Insurance Contracts Act 1984 — standard cover

3.23               Section 35 of the IC Act provides that standard cover (that is, minimum levels of cover for prescribed events) will be deemed to be included in certain classes of prescribed insurance policies, including HBHC insurance (other than cover notes and renewals).  The standard cover terms and conditions are set out in the Insurance Contracts Regulations (the Regulations).

3.24               By way of example, the Regulations state that standard cover in respect of home contents insurance includes loss that is:

...  caused by or results from — ...  storm, tempest, flood, the action of the sea, high water, tsunami, erosion or landslide or subsidence ... [10]

3.25               If an insurer seeks to limit or exclude its liability in respect of the standard cover, then the insurer must prove that:

•        it ‘clearly informed’ the consumer of the limitation or exclusion in writing before the contract was entered into (or within 14 days if provision before the contract was not reasonably practicable, for example, telephone sales); or

•        the consumer knew of the limitation or exclusion; or

•        a reasonable consumer in the circumstances could be expected to have known of the limitation or exclusion.

3.26               If the insurer is unable to prove one of these three cases, then the insurer will be liable to make good any losses suffered by a consumer that were caused by, or resulted from, any of the standard events (construed in accordance with their ordinary meanings) up to a maximum limit (usually $2 million).

3.27               There have been a number of court and dispute resolution cases in relation to interpretation of ‘clearly inform’, which illustrate that although there could be various means to inform, provision to the insured of a policy document containing exclusions is sufficient, unless there are exceptional circumstances (for example, if the provisions in the policy are particularly confusing or complex).  The court decision most cited on this issue (Hams) includes the following passage:

‘... a fair reading of s35(2) does not warrant the conclusion that the result need go further than provide for the relevant exclusion in the policy wording in clear and unambiguous language and in a manner which a person of average intelligence and education is likely to have little difficulty in finding and understanding if that person reads the policy in question.’ [11]

3.28               In practice, the standard cover regulations are very often rendered non-applicable by the provision to the insured of a policy document (usually contained within a PDS), thereby satisfying the requirement to ‘clearly inform’ the consumer.  In a case where such a policy document was provided, the protection offered by section 35 may be available if the terms in the policy were particularly complex or confusing. 

3.29               A common view is that a large proportion of policy holders do not read in detail the policy documents they receive from their insurer so the protection offered by section 35 is not, in practice, a very effective tool to ensure that consumers are informed about their cover. 

Dispute resolution options through the Financial Ombudsman Service

3.30               Consumers who believe they have not received the correct ruling from their insurance provider are advised to make their complaint to the provider, giving the provider’s internal dispute resolution mechanism the opportunity to rectify any error that may have occurred.

3.31               If the dispute remains unresolved after a complaint has been made to the insurance provider, a dispute can be lodged with the FOS at no expense to the consumer. 

Do the current laws deal effectively with the problem?

3.32               Current laws do not effectively deal with the problem.  As noted in paragraph 3.29, it cannot be assumed that consumers will carefully read and fully understand policy documents, particularly in relation to definitional matters either before or after purchase.  When this is considered together with the fact that current legislation allows for multiple definitions of the term flood, there is the risk of consumer confusion and resulting underinsurance. 

Conclusion

3.33               The key points to note about the problem are that:

•        Anecdotal evidence in the form of consumer and industry submissions to the consultation paper, ‘ Reforming flood insurance — Clearing the waters ’ and the various government inquiries  currently underway in paragraph 3.5 and 3.6 suggest that there is consumer confusion in the area of flood insurance in respect to:

-       the types of inundation risk covered under a particular policy; and

-       what exclusions exist in particular policies based on the definition(s) used by individual insurance providers. 

•        Consumer confusion may potentially result in adverse outcomes arising for both the individuals affected and communities in general;

•        Despite a considerable volume of evidence in the form of case studies and submissions to the various government inquiries currently underway, Treasury is unable to provide quantitative data supporting the introduction of a standard definition.  Therefore the magnitude of the problem is not quantifiable; and

•        Although there is protection for consumers in the current law in respect to minimum levels of flood insurance in the IC Act, this protection is limited in that it can be overridden where the consumer has been made aware of an express exclusion in the policy.  In making those exclusions, insurers currently use multiple definitions of flood, sometimes making it difficult for consumers to understand what kind of flood damage is being excluded.  Hence, the extent to which consumers are fully informed is questionable. 

Objectives of Commonwealth Government action

3.34               The Commonwealth’s objective is to help consumers better understand the extent to which an insurance policy includes cover for flood.  Reducing confusion about flood cover may reduce the risk of inappropriate cover and the associated negative consequences for affected policyholders if a relevant event were to occur.

Options that may achieve the objectives

3.35               In previous consultations with stakeholders, a number of options and variations have been proposed and debated.  The possible options have been refined to the following set:

•                                Option 1: Status quo.  Individual insurers will continue to provide their own definition of flood and offer cover accordingly. 

•                                Option 2A : Apply a standard definition of flood for riverine flooding (category B) to HBHC insurance policies.  The ongoing issue of consumer confusion over the meaning and extent of flood coverage may be best addressed by standardising the definition of ‘riverine flood’ and restricting the use of the terms ‘riverine flood’ and ‘riverine flooding’ to the standardised definition. 

Standardising the definition of flood in policies has been recently called for by industry and consumer representatives. 

An example of a standard definition is as follows:

Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of:

A.                    any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or

B.                   any reservoir, canal, or dam.

•                                Option 2B : Apply a standard definition of flood for riverine flooding (category B) to insurance policies covering small businesses and strata title complexes, as well as HBHC insurance policies.  This option uses the same definition as Option 2A, but extends it to include insurance policies applying to small businesses and strata title complexes.

•                                Option 3A: Apply an alternative definition of flood covering categories A and B to HBHC insurance policies.  This definition would include flood occurring as a result of storm (category A), as well as riverine flood (category B).  Option 3A would seek to ensure consumers have a clear understanding that they will be covered for inundation occurring from both ‘bottom-up’ (riverine) and ‘top-down’ (storm) water sources. 

An example of this definition is as follows:

Damage caused by water that has escaped, been released, or originated from the confines of:

A.                    any lake, or any river, creek or other natural watercourse, whether or not altered or modified;

B.                    and reservoir, canal, or dam; and

as the result of storm including:

C.                   cyclones, tornadoes, windstorms, rainwater, hail or snow.

•                                Option 3B: Apply an alternative definition of flood covering categories A and B for small businesses and strata title complexes, as well as HBHC insurance policies.  This option uses the same definition as Option 3 but extends it to include insurance policies applying to small businesses and strata title complexes.

•                                Option 3C : Offer categories separately under an alternative definition of flood covering categories A and B for small businesses and strata title complexes, as well as HBHC insurance policies.  Using the same categories of flood as those contained in 3A, insurers would have the choice to offer cover for one or both of the two categories of flood. 

•                                Option 4A: Apply an alternative definition of flood covering categories A, B and C to HBHC insurance policies.  This definition would take in all types of inundation and would seek to ensure that consumers have a clear understanding of the cover offered by all insurers offering insurance for flood damage. 

 An example of this definition is as follows:

Damage caused by water that has escaped, been released, or originated from the confines of:

A.                    any lake, or any river, creek or other natural watercourse, whether or not altered or modified;

B.                    any reservoir, canal, or dam;

C.                   the ocean, sea or estuaries; or

as the result of storm including:

D.                   cyclones, tornadoes, windstorms, rainwater, hail or snow.

•                                Option 4B: Apply an alternative definition for flood covering categories A, B and C for small businesses and strata title complexes, as well as HBHC insurance policies.  This option uses the same definition as Option 4A, but extends it to include insurance policies applying to small businesses and strata title complexes.

•                                Option 4C: Offer components separately for an alternative definition for flood covering categories A, B and C for small businesses and strata title complexes, as well as HBHC insurance policies.  Using the same categories of flood as those contained in Option 4A, insurers would have the option to select which categories they wished to offer cover for. 

Other options

Consumer education program/campaign

3.36               Consideration was initially given to an education program/ campaign to inform consumers of the benefits of understanding particular terms such as flood in insurance policy disclosure documentation. 

3.37               A number of benefits may potentially arise when considering an educational program/ campaign.  In particular these efforts may encourage consumers to:

•        ask questions regarding particular terms;

•        seek advice when they fail to understand particular jargon/ terminology; and

•        become more actively informed in relation to their decision making process.

3.38               Although, an educational program/campaign may potentially have benefits, it was determined that an educational program/ campaign would not meet the Commonwealth’s objectives.  For the reasons outlined below, this option was not considered further.

3.39               The breadth of any educational program would need to be significant in order to address issues such as financial literacy and consumer engagement.  An educational program/ campaign that merely encourages consumers to read their insurance policy would be of little benefit.  Any success of such a program/campaign would require consumers to read and understand their policy and other relevant documentation on an ongoing basis. 

3.40               There are also concerns about the duration of a successful education program/campaign.  As most insurance policies have relatively short durations (usually one year), it will be difficult to effectively engage consumers as to the benefits of familiarising themselves with the detail of their policy documents each time they are required to renew or update them.  While it is recognised that the adverse outcomes experienced by a number of consumers who had not read their policy documents and were subsequently affected by recent natural disasters may prompt consumer engagement in the short term, it is not realistic to presume that this kind of momentum is sustainable in the longer term.

3.41               The effectiveness of an educational campaign/ program as a standalone option has also been questioned.  In a recent ASIC report into financial literacy and behavioural change [12] , ASIC stated that:

‘while raising people‘s level of financial knowledge forms the basis of many financial literacy initiatives around the world, there is a growing body of research suggesting that knowledge is only one factor when considering how to help people make positive financial decisions’

3.42               It may be possible for a targeted education note to be provided with insurance contracts.  The provision of advice to consumers that the inclusion of flood cover varies between insurance providers and their products may be a useful tool to encourage consumers to familiarise themselves with the detail of any insurance product they are considering.  In addition, the provision of instructions to consumers directing them to read the product disclosure statement and any other relevant material and/or ask questions of the insurer to satisfy themselves that they have an appropriate policy for their needs may contribute to a reduction in consumer confusion. 

3.43               However, the success of any education campaign is expected to be significantly limited where consumers are unable to rely upon a standard definitional approach adopted by all insurers who choose to offer flood cover.  The different approaches taken in policies to flood and related terms will still make it difficult for consumers to understand whether they have cover for flood and may still lead to underinsurance for flood risk.

Additional standard definitions

3.44           It may be possible to consider the introduction of standard definitions for other terms such as fire, in insurance policies.  However flood has unique characteristics that will benefit by it being viewed in isolation as far as a standard definition is concerned. 

•        The ‘unique characteristics’ referred to above are based on the different applications of the term in insurance policies.  While some consumers may define the term in a similar manner to that provided in the Macquarie Dictionary [13] , when used in a technical manner — as with insurance policies, the term may be given different meanings.  Insurers have the ability to allocate their own definition of the term which may lead to consumer confusion about what is meant by the term.

•        There is no evidence that the application of different meanings for the same term has been a problem in other instances.  However, as provided in response to the Government’s consultation paper and in responses to the Queensland Floods Commission of Inquiry [14] , there is anecdotal evidence to support the assertion that there is consumer confusion surrounding the meaning of the term flood. 

3.45               The uniqueness of the way the term flood is addressed, together with the severe impact of recent events and the Government’s commitment to ensuring consumers do not face similar detriments in the future, requires immediate attention given to this matter.  Any expansion of a standard definition to include terms other than flood is beyond the scope of this RIS. 

Assessment of options

Option 1 — Keep the current requirements ( Status quo )  

3.46               Under Option 1 insurers will continue to provide customers with insurance cover based on a definition of flood determined by the individual insurer.

3.47               The standard cover regime in section 35 of the IC Act will continue to ensure that exclusions and limitations which an insured might not expect are brought to the insured’s notice before the contract of insurance is entered into.

 

 

Impacts

Consumers

3.48               The status quo is described in some detail in the ‘Problem’ section of the regulatory impact statement, above.  The following key features are noted:

•        There is a concern that the status quo position is confusing for consumers and does not adequately inform them of the level or type of flood insurance they are covered for; and

•        The different approaches taken in policies to flood and related terms may cause potential confusion for many consumers, makes product comparison difficult and may lead to underinsurance for flood risk.  It is unclear to what extent this is the case given the lack of data.

Industry

3.49               Under Option 1 there will be no costs for insurers or related entities as there will be no change to the way they currently conduct business.

3.50               The current confusion surrounding the definition of the term flood in insurance policies is seen to lead some consumers to make poor decisions regarding their insurance cover.  This, in turn, is leading to an increasing amount of ill-will towards insurers.

Commonwealth

3.51               Under Option 1, there will be no change in either benefits or costs regarding the current use of the term flood in insurance policies.

Table 3.1     Option 1 impact assessment

 

Benefits

Costs

Consumers

No change

Some policyholders may continue to have claims denied or find they do not have adequate coverage.

Product comparisons may still be difficult. 

Industry

No change

No change

Commonwealth

No change

No change

Options 2, 3 and 4 — Introduce a standard definition of flood

General Impact

3.52               The benefits expected as a result of the introduction of a standard definition of the term flood in insurance policies include: consumers having the ability to access information on the type and level of flood insurance cover on offer.  Access to information may allow consumers to more easily make comparisons between different insurance products available. 

•        It should be noted that the introduction of a standard definition of flood will not necessarily result in a greater number of consumers being insured.  However, it will ensure that consumers are in possession of the information that could provide them with a clear understanding of what they are and are not covered for in relation to flood.

3.53               It is expected that in addition to this, consumers may also benefit from increased competition within the insurance industry as they will be in a position to compare different insurance products which they can be certain use an identical definition of flood.  It is a widely- held principle that by providing consumers with the ability to compare like with like, in this case insurance policies containing a standard definition of flood (as either an included or excluded feature), they will have the opportunity to possess an improved understanding of what insurance providers are offering them.  The disclosure regime introduced by the Financial Services Reform Act 2001 and now contained in Chapter 7 of the Corporations Act 2001 introduced a consistent and comparable disclosure regime for financial products and services.  As noted by the then Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP, the introduction of this standardised disclosure regime enables consumers to compare ‘apples with apples’ — to analyse and understand competing products and services. 

3.54               However in order to maximise the potential benefits available to consumers, the following issues must be considered:

•        What type of inundation is to be included in a standard definition of the term flood?

•        Will a standard definition apply to only HBHC insurance policies or will it be extended to include small businesses and strata titles/bodies corporate?

•        What type of inclusions will permit consumers to access and afford the relevant insurance?

-       Once relevant regulations are made it is expected insurers will incorporate the standard definition of flood into existing policies as they come up for renewal.  Any changes to existing policies (as they relate to the introduction of a standard definition of flood) must be brought to the attention of insureds.  This will provide them with the opportunity to ascertain whether the product offered by their insurer meets their needs.

-       The affordability and availability of flood insurance are issues being addressed by the NDIR and are outside the scope of this RIS. 

•        Will insurers be required to use this definition in all instances or will they be able to replace the term flood with similar terms, thus enabling them to avoid the requirements of a standard definition?

-       In the event a standard definition of flood is introduced, use of the term flood will be reserved only for references as defined in the regulations.  Insurers will not be permitted to substitute other terms to replace flood and thus provide alternative definitions.

3.55               The introduction of a standard definition of the term flood has received broad support from both industry and consumer representatives.  However, any amendments that would see industry required to change the products they offer would impose compliance costs. 

3.56               The specific amounts would be difficult to calculate and are expected to vary between insurers depending on various factors including: their size; the type of insurance policies changes are made to; and the time it would take to effect change across all relevant policies.  The broader the definition, the greater the implications for reinsurance programmes which may impact on premiums and the potential for products to be removed from the market. 

•        In its consultation paper ‘ Reforming flood insurance — Clearing the waters ’, the Commonwealth sought industry and consumer views on the impacts of the introduction of a standard definition.  Responses to the paper did not provide data indicating the impact of the proposed measure beyond noting that there could be upward pressure on premium costs. 

•        In addition to this, data to provide greater certainty about the precise number of consumers who would be impacted by this measure and any potential financial costs and benefits resulting from it was sought from the NDIR but data was unavailable.

•        It should be noted that any reference in this RIS to costs and/or benefits of this measure being ‘unquantifiable’ refer to Treasury’s lack of access to data (as outlined above).

3.57               The introduction of a standard definition of flood will not guarantee insurers offer this type of cover.  Further, it will not assist consumers in assessing the risk of flood in their specific location.  This can only be achieved through the availability of appropriate flood mapping data that can be accessed by both consumers and insurers.  This issue is being considered by the NDIR.

Option 2A — standard definition for riverine flooding (category B) for home building and home contents insurance policies

3.58               Under Option 2A, a standard definition of the term flood for riverine flooding (category B) would apply to HBHC insurance policies.  The reported consumer confusion in relation to inundation risk is most commonly related to riverine flooding (category B), particularly when that category is excluded.



 

Impacts

Consumers

3.59               Based on evidence provided in submissions to the Government’s consultation paper ‘ Reforming flood insurance — Clearing the waters ’  and to the inquiries outlined this RIS, a standard definition of the term flood for riverine flooding (category B) would be an effective way of reducing consumer confusion regarding what is and is not included in HBHC insurance policies.  A clear understanding of what insurance providers are willing to insure against would provide consumers with certainty when entering into a contract with an insurance provider. 

3.60               While this will mean that categories A and C will remain without standard definitions, consumer and industry advice suggests that these categories are not considered to be main causes of consumer confusion.  Standardising the definitions of these categories of flood may reduce product innovation and competition.

3.61               The benefits of a standard definition (category B) are expected to include:

•        a reduction in consumer confusion regarding what is and is not included in insurance policies;

•        avoiding situations where neighbouring properties, affected by the same inundation event, receive different claims assessments because the policies covering them use different definitions of flood; and 

•        improvements in consumers’ ability to evaluate potential insurance policies and compare between different insurers, which may lead to an increase in price competition across the insurance industry.   

3.62               These benefits cannot be quantified (as defined in paragraph 3.56).

3.63               Although the introduction of a standard definition of flood will increase the opportunity for consumers to improve their understanding of what an insurance product offers in terms of flood cover, there is no guarantee that consumers will take advantage of this.  The onus will remain on the individual consumer to ensure they are fully informed of the features of any insurance product purchased.

3.64               Further, the introduction of a standard definition of flood will not necessarily reduce the time taken by insurers to process claims.  Delays are generally due to the complexity and size of the event itself rather than the complexity of any definition currently used.

3.65               The costs to the consumer of a standard definition (category B) are:

•        the potential increase in premiums from increased compliance costs and the possible increase in the cost of reinsurance; and

•        the possibility that some flood insurance products will be removed from the market. 

3.66               There are no quantifiable costs to consumers available (as defined in paragraph 3.56).

Industry

3.67               The benefits to industry include that it may improve the reputation of insurers thereby encouraging consumers to purchase insurance. 

3.68               There are no quantifiable benefits available (as defined in paragraph 3.56).

3.69               The costs to the industry include:

•        financial costs associated with the requirement for insurers to amend existing policies; and

•        potential increases in reinsurance costs which may be passed on to consumers.

-       Where reinsurance costs are deemed by insurers to be too high and effected products commercially unviable, they may be withdrawn from the market. 

3.70               There are no quantifiable costs to industry available (as defined in paragraph 3.56).

3.71               However, it should be noted that the creation of a standard definition does not mean that all policies will cover the defined flood risk.  Insurers will continue to make commercial decision about the levels of cover offered in their products.   

3.72               Compliance costs to industry are expected to be reduced by a two year transition period commencing from when the regulations specifying the definition are made.  Industry has indicated that a two year transition period will reduce uncertainty and alleviate concerns about the impact of the measure on the commercial interests of insurers.  As insurance policies are updated on an annual basis, a two year transition period will allow policies to lapse and the definition of flood to be adjusted along with any other changes to terms and conditions with minimal cost.    

Commonwealth

3.73               The Commonwealth will bear the costs associated with the consultation, implementation and regulation of this option.    

Table 3.2   Option 2A impact assessment

 

Benefits

Costs

Consumers

A universal set of words defining flood may be an effective way of reducing consumer confusion regarding what is and is not included in insurance policies.

May improve consumers’ ability to evaluate this particular feature in potential insurance policies.

Is considered relatively simple and is expected to be capable of being understood by the majority of policy holders.

 

Potential increase in premiums if insurers pass on the increased costs of reinsurance.

Possible removal of some flood insurance products from the market.

 

Industry

May improve the reputation of insurers and encourage greater willingness of consumers to purchase insurance.

Possible costs associated with having to amend policies to reflect change in definition.

Additional reinsurance costs may be incurred and may be passed on to consumers.

Commonwealth

 

Legislative amendments will be required.  ASIC expected to administer the standard definition in line with its current responsibilities under the IC Act.

 

Option 2B — standard definition of flood for riverine flooding (Category B) for home building and home contents, small businesses and strata title/bodies corporate insurance policies

3.74               Under Option 2B, a standard definition of the term flood for riverine flooding (category B) would apply to HBHC, small business and strata title insurance products.

Impacts

Consumers

3.75                 It is expected that the same benefits broadly apply to option 2B as apply to option 2A. 

3.76                 However, it is expected that an additional benefit of option 2B compared to option 2A is that extending the standard definition to include small businesses and strata title/bodies corporate will ensure that a larger number of policy holders benefit from an increase in clarity over what is and is not covered by insurance policies. 

3.77                In relation to insurance policies for small business and strata title customers, insurance decisions are made either directly or through a third party agent such as an insurance broker. 

3.78                Treasury has sought data from the National Insurance Brokers Association, the Australian Prudential Regulation Authority (APRA) and ASIC on the approximate number or percentage of small businesses and strata customers which access brokers when purchasing insurance policies but the data are unavailable.  The lack of data makes it difficult to determine the magnitude of benefits associated with Option 2B.

3.79               However APRA has identified certain trends which may give an indication as to the likelihood of sub-groups of small businesses and strata title customers that may access a broker when purchasing insurance.  APRA notes that:

•        Across the spectrum of small and medium enterprises (SME), micro and small businesses are less likely to use insurance brokers than medium sized SMEs when purchasing insurance. 

•        For strata policies, company and community title properties, body corporate administered properties (larger blocks of units/apartments) are likely to use an insurance broker.

3.80               In general terms, third party agents such as insurance brokers are under a duty at common law to arrange a satisfactory level of cover.  Where the consumer (small businesses and strata title customers) engages a broker to arrange cover for them, responsibility for assessing the appropriate sum insured may pass to the broker.  Brokers are more likely to have an expert knowledge of the industry and the tools available to estimate rebuilding costs. 

Industry

3.81               It is expected that as with Option 2B the benefits to industry include that it may improve the reputation of insurers thereby encouraging consumers to purchase insurance. 

3.82                An additional benefit of option 2B compared to option 2A is covering small businesses and strata title/body corporates will enable industry to streamline the way they handle a more broad range of clients.  There are no quantifiable benefits to industry available (as defined in paragraph 3.56).

3.83               Some industry groups support a broader category of policy holders including body corporate/strata insurance and small business insurance would benefit from a standard definition of flood.  They claim that this proposal would not force insurers to offer flood cover to bodies corporate or small businesses, but it would help these consumers to understand the cover offered by their insurance policy and to consider what risks they need cover for.

3.84               They also argue that an extension of the proposed standard definition to a broader class of premises should be undertaken as it is incorrect to assume that owners and occupants of non-residential premises are necessarily better informed regarding inundation risk.

3.85               However, some industry groups oppose extending the standard definition to small business and strata title on the basis that underwriters need flexibility to decide what aspects of flood cover can be extended to   commercial/industrial/rural zoning.  Removing this flexibility may have the effect of reducing the ability for insurers to provide bespoke and negotiated flood coverage for commercial premises.  However, insurers may choose to employ the standard definition of flood in their commercial policies as a matter of consistency and simplicity

3.86               In addition, business policy holders are more likely than homeowners to use the services of insurance brokers for advice and are less likely to be confused by language in policies.  In this instance, the knowledge of the broker is deemed to be the knowledge of the insured.

3.87               As with option 2A, the costs to the industry are expected to include:

•        financial costs associated with the requirement for insurers to amend existing policies; and

•        potential increases in reinsurance costs that may be passed on to consumers.

-       Where reinsurance costs are deemed by insurers to be too high and effected products commercially unviable, they may be withdrawn from the market. 

3.88               There are no quantifiable costs to industry available (as defined in paragraph 3.56).

3.89               However, it is possible that an additional cost for industry compared with Option 2A is that a large amount of cover purchased is regarded as wholesale by the Corporations Act.  To impose a ‘retail’ definition over a ‘wholesale’ regulatory regime would potentially add complexity as indicated by Suncorp in their submission to ‘Reforming Flood insurance — Clearing the waters. [15]

Commonwealth

3.90               As with Option 2A the Commonwealth will bear costs associated with the consultation, implementation and regulation of this option.

Table 3.3   Option 2B impact assessment

 

Benefits

Costs

Consumers

A larger number of policy holders may benefit from an increase in clarity over what is and is not covered within their insurance policies.

A universal set of words defining flood may be an effective way of reducing consumer confusion regarding what is and is not included in insurance policies.

Potential increase in premiums if insurers pass on the increased costs of reinsurance.

Possible removal of some flood insurance products from the market.

 

 

Benefits

Costs

Consumers (continued)

May improve consumers’ ability to evaluate this particular feature in potential insurance policies.

Is considered relatively simple and is expected to be capable of being understood by the majority of policy holders.

 

Industry

Insurers may be able to streamline the way they handle a more broad range of clients.

May improve the reputation of insurers and encourage greater willingness of consumers to purchase insurance. 

By imposing a ‘retail’ definition over a ‘wholesale’ regulatory regime there is the potential for an added layer of regulatory complexity.

Potential costs associated with having to amend policies to reflect change in definition.

Additional reinsurance costs may be incurred and may be passed on to consumers.

Commonwealth

 

Legislative amendments will be required.  ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Option 3A — An alternative definition of flood covering categories A and B in home building and home contents insurance policies

3.91               Under Option 3A an alternative definition of flood would apply   which would cover to category A (stormwater/rainfall runoff) and category B (riverine flooding) and would apply to HBHC insurance products.

3.92               Stormwater/rainfall runoff and riverine flooding when considered together would cover policy-holders for two common forms of water inundation.  A possible advantage of this approach would be that it may remove uncertainty relating to the way the two types of inundation interact and any difficulty establishing the source of any water inundation experienced. 

3.93               It should be noted that insurers will have the choice of whether or not to offer cover for this definition of flood.   

Impacts

Consumers

3.94               Some policies currently on the market may contain unusual definitions of storm or flash flood as a basis for limiting cover.  The main benefit of option 3A is that it may reduce consumer confusion as policyholders with policies containing flood cover will be insured for both stormwater/rainfall runoff and riverine flooding.  These benefits are not quantifiable (as defined in paragraph 3.56).

3.95               The costs of option 3A are expected to include:

•        the more elements there are in a definition, the greater the complexity will be and the less likely that consumers will understand the terms of their policies; and

•        there is a risk that consumers may not realise they need flood cover in order to be covered for storm damage and as a result remain uninsured for this event. 

3.96               These costs are unquantifiable (as defined in paragraph 3.56).

Industry

3.97               The costs to industry are expected to be:

•        an increase in definitional complexity

-       This may jeopardise individual insurer’s reinsurance programmes which may lead to an increase in premiums or the withdrawal of products considered commercially unviable; and

•        having to amend policies to reflect the change in definition (similar to Option 2A and 2B).  This cost is expected to be minimised by the transition period discussed in Option 2A. 

3.98               These costs are unquantifiable (as defined in paragraph 3.56).

3.99               There are also expected to be costs to amend policies to reflect the change in definition (similar to Option 2A and 2B) which will be reduced by the transition period discussed in Option 2A.  These costs are unquantifiable (as defined in paragraph 3.56).

Commonwealth

3.100           The Commonwealth will bear the costs associated with the consultation, implementation and regulation of this option. 

Table 3.4   Option 3A impact analysis

 

Benefits

Costs

Consumers

Where flood insurance is offered to consumers they would be covered for inundation occurring from both ‘top-down’ and ‘bottom-up’ water sources.

A standard definition could have little effect if consumers do not familiarise themselves with the detail of their policies including any technical meaning the term flood may have.

An increase in the financial burden imposed on insurers might result in an increase in premium costs and/or the withdrawal of insurance products affected by the broader definition.

The more complex a definition of flood the less likely consumers will understand the terms of, and any exclusions contained within their insurance policies.

Industry

 

Potential costs associated with having to amend policies to reflect change in definition.

An increase in definitional complexity may jeopardise individual insurer’s reinsurance programmes.

Commonwealth

 

Legislative amendments will be required.  ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Option 3B - An alternative definition of flood covering categories A and B in home building and home contents, small businesses and strata title/bodies corporate insurance policies

3.101           Under Option 3B, an alternative definition of flood applies which would cover category A (stormwater/rainfall runoff) and category B (riverine flooding) and would apply to HBHC, small business and strata title insurance products.

3.102           It is expected that the benefits and costs as a result of Option 3B are much the same as those discussed in Option 3A.  However they are likely to be experienced on a larger scale as it will be possible for a broader range of policy types to be affected.

3.103           It should be noted that insurers will have the choice of whether or not to offer cover for this definition of flood.   

Impacts

Consumers

3.104           It is expected that the benefits for Option 3B will be similar to Option 3A except that the there may be a larger number of consumers that could expect to receive the benefits of an additional category of inundation included in their insurance policies. 

3.105           The costs for Option 3B are similar to 3A except that extending this definition for flood to small business and strata title/bodies corporate will impact on the ability to have tailor made policies (as is currently the case). 

3.106           The costs and benefits to consumers are unquantifiable (as defined in paragraph 3.56).

Industry

3.107           The same types of costs to industry in relation to Option 3A (increased premiums and withdrawal of products from the market) apply to Option 3B except that the costs could be larger as the option includes a greater number of policyholders (as it also extends to covering small business and body corporate).  These costs are unquantifiable (as defined in paragraph 3.56).



 

Commonwealth

3.108           The Commonwealth will bear the same types of costs as Option 3A. 

Table 3.5   Option 3B   impact analysis

 

Benefits

Costs

Consumers

Where flood insurance is offered to consumers they would be covered for inundation occurring from both ‘top-down’ and ‘bottom-up’ water sources.  A broader range of consumers and categories of damage would be included.

A possible increase in the financial burden imposed on insurers is expected to result in an increase in premium costs and/or the withdrawal of insurance products affected by the broader definition.

The more complex a definition of flood the less likely consumers will understand the terms of, and any exclusions contained within their insurance policies.

 

Industry

 

An increase in definitional complexity may jeopardise individual insurer’s reinsurance programmes.

Commonwealth

 

Legislative amendments will be required.  ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Option 3C — Offer categories separately under an alternative definition of flood covering categories A and B for small businesses and strata title complexes, as well as HBHC insurance policies

3.109           Under Option 3C, an alternative definition of flood would apply to HBHC, small business and strata title insurance products.  This option would include standard definitions for two categories of flood (riverine (Category B) and stormwater/rainfall runoff (Category A)).  Insurers would have the choice to offer cover for none, one or both of the two categories.

3.110           It should be noted that insurers will have the choice of whether or not to offer cover for this definition of flood.   

Impacts

Consumers

3.111           The costs of option 3C are expected to be similar to option 3B.  However, there may be an additional cost with Option 3C, as providing individual insurers the discretionary power to determine which categories of flood they offer cover for may increase complexity, reduce comparability, continue to confuse consumers and may result in inappropriate insurance cover being purchased by consumers.

Industry

3.112           The costs associated with Option 3C are likely to be similar to 3B. 

Commonwealth

3.113           The Commonwealth will bear the same types of costs as Option 3A.  It is expected that an additional cost to Commonwealth relative to option 3B and option 2B is that it will fail to achieve the objectives of the Government, namely to reduce consumer confusion.  The introduction of a series of definitions whereby the insurer has the discretion to offer or withdraw categories of inundation insurance is unlikely to improve consumers’ understanding of what they are or are not insured for. 

Table 3.6   Option 3C impact analysis

 

Benefits

Costs

Consumers

Where insurers choose to cover both riverine flooding and storm water/rain runoff consumers would be covered for inundation occurring from both ‘top-down’ and ‘bottom-up’ water sources.  A broader range of consumers and categories of damage would be included.

The more complex a definition of flood the less likely consumers will understand the terms of, and any exclusions contained within their insurance policies.  This complexity and associated confusion could be magnified when viewed in light of the fact that individual insurers will have the discretionary power to determine which categories of flood they offer cover for, thus removing the consumer’s ability to compare

 

Benefits

Costs

Consumers (continued)

 

at a glance insurance products.

A possible increase in the financial burden imposed on insurers is expected to result in a potential increase in premium costs and/or the withdrawal of insurance products affected by the broader definition.

Industry

 

An increase in definitional complexity may jeopardise individual insurer’s reinsurance programmes.

The insurance industry may face reputational risks for not providing consumers with insurance covering the same categories of water inundation.

Commonwealth

 

Legislative amendments will be required.  ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Option 4A - An alternative definition of flood including categories A, B and C in home building and home contents insurance policies

3.114           Under Option 4A an alternative definition of flood applies which would cover category A (stormwater/rainfall runoff), category B (riverine flooding) and category C (sea inundation) and would apply to HBHC insurance products.  A possible advantage of this approach is that it would ensure all forms of inundation risk are covered.

3.115           It should be noted that insurers will have the choice of whether or not to offer cover for this definition of flood.   

Consumers

3.116           The main benefit of Option 4A is expected to be that if the incidence of cyclones and sea related inundation increases there may be additional support for a definition applicable to category C inundation.

3.117           The costs with option 4A are expected to include:

•         that more elements there are in a definition, the greater the complexity and the less likely that consumers will understand the terms of their policies; 

•        potential increases in compliance and reinsurance costs which may be passed on to consumers.

-       Where reinsurance costs are deemed by insurers to be too high and effected products commercially unviable, they may be withdrawn from the market. 

-       The increase in premiums and withdrawal of products from the market are likely to be greater under this option as the definition is the broadest.

3.118           There are no quantifiable costs to consumers available (as defined in paragraph 3.56).

Industry

3.119           It is anticipated that standardising a definition for category B (riverine) flooding may resolve any residual confusion regarding category A inundation. 

3.120           However, category C inundation (which is not deemed to be the result of rainfall), has been substantially defined through case law.  By grouping it with categories A and B flood, there is the risk of an increase in consumer confusion. 

•        The insurance industry’s representative body has indicated that there is no compelling evidence to support an increased level of definitional complexity and it brings the risk that individual insurer’s reinsurance programmes could be jeopardised. 

Commonwealth

3.121           The Commonwealth will bear the costs associated with the consultation, implementation and regulation of this option. 



 

Table 3.7     Option 4A impact assessment

 

Benefits

Costs

Consumers

The incidence of category C inundation (actions of sea), is expected to increase and so the broadening of a definition to include this type of inundation could benefit consumers.

A standard definition might have little effect if consumers do not familiarise themselves with the detail of their policies including any technical meaning the term flood may have.

An increase in the financial burden imposed on insurers could result in an increase in premium costs and/or the withdrawal of insurance products affected by the broader definition.

In the event that the incidence of category C inundation (actions of sea) rise, it is possible that consumers could be subject to additional exclusions in insurance policies.

The more complex a definition of flood the less likely consumers will understand the terms of, and any exclusions contained within their insurance policies.

Industry

 

Category C inundation has been successfully defined through case law.  Any amendments to the way in which it is dealt with may jeopardise this agreed definition and result in an increase in consumer confusion and additional ill-will towards the insurance industry.

An increase in definitional complexity may jeopardise individual insurer’s reinsurance programmes.

 

Benefits

Costs

Commonwealth

 

Legislative amendments will be required.  ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Option 4B - An alternative definition of flood including categories A, B and C for home building and home contents, small businesses and strata title/bodies corporate insurance policies

3.122           Under Option 4B, an alternative definition of flood applies which would cover category A (stormwater/rainfall runoff), category B (riverine flooding) and category C (actions of sea) and would apply to HBHC, small business and strata title insurance products.

3.123           The effects experienced as a result of the implementation of Option 4B are expected to be much the same as those discussed under Option 4A.  However they are likely to be experienced on a larger scale as it will be possible for a broader range of policy types to be affected.

3.124           It should be noted that insurers will have the choice of whether or not to offer cover for this definition of flood.   

Impacts

Consumers

3.125           The main impact of this option is expected to be the greater number of consumers that could expect to receive the benefits of a wider range of types on inundation being included in their insurance policies. 

3.126           The costs for Option 4B are expected to be similar to Option 4A except that extending this definition of flood to small business and strata title/bodies corporate will impact on the ability for consumers to purchase tailor-made policies (as is currently the case for small business and strata title/bodies corporate). 

Industry

3.127           The benefits and costs to industry are similar to Option 4B except that they apply to a broader range of policies.

Government

3.128           The Commonwealth will bear the same types of costs as Option 4A. 

Table 3.8   Option 4B impact assessment

 

Benefits

Costs

Consumers

The inclusion of category C inundation (actions of sea), is expected to increase and so the broadening of a definition to include this type of inundation would benefit consumers.

A broader range of consumers and categories of damage would be included.

A standard definition might have limited effect if consumers do not familiarise themselves with the detail of their policies including any technical meaning the term flood may have.

An increase in the financial burden imposed on insurers could result in an increase in premium costs and/or the withdrawal of insurance products affected by the broader definition.

The more complex a definition of flood the less likely consumers will understand the terms of, and any exclusions contained within their insurance policies.

Industry

 

Category C inundation has been successfully defined through case law.  Any amendments to the way in which it is dealt with may jeopardise this agreed definition and result in an increase in consumer confusion and additional ill-will towards the insurance industry.

An increase in definitional complexity may jeopardise individual insurer’s reinsurance programmes.

Commonwealth

 

Legislative amendments will be required.  ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Option 4C — Offer categories separately under an alternative definition of flood covering categories A, B and C for small businesses and strata title complexes, as well as HBHC insurance policies

3.129           Under Option 4C, an alternative definition of flood applies which would cover category A (stormwater/rainfall runoff), category B (riverine flooding) and category C (actions of sea) would apply to HBHC, small business and strata title insurance products. 

3.130           Insurers would have the choice to offer cover for none, one, two or three of the categories.

Impacts

Consumers

3.131           The costs of Option 4C are expected to be similar to Option 4B.  However, there is additional cost with Option 4C, as providing individual insurers the discretionary power to determine which categories of flood they offer cover for may increase complexity, reduce comparability, continue to confuse consumers and may result in the purchase of inappropriate insurance cover by consumers.

Industry

3.132           The benefits and costs associated with Option 4C are likely to be similar to 4B.  Additional costs are that the standardising of terms across all categories of inundation risk may have implications for competition and product innovation and may expose insurers to reputational risks for not providing consumers with insurance covering the same categories of water inundation.

Government

3.133           The Commonwealth will bear the same types of costs as Options 4A and 4B. 



 

Table 3.9   Option 4C impact analysis

 

Benefits

Costs

Consumers

The inclusion of category C inundation (actions of sea), is expected to increase and so the broadening of a definition to include this type of inundation may benefit consumers depending on insurers choosing to offer flood insurance covering category C.

A broader range of consumers and categories of damage would be included.

The more complex a definition of flood the less likely consumers will understand the terms of, and any exclusions contained within their insurance policies.  This complexity and associated confusion is magnified when viewed in light of the fact that individual insurers will have the discretionary power to determine which categories of flood they offer cover for, thus removing the consumer’s ability to compare at- a-glance insurance products.

A standard definition might have limited effect if consumers do not familiarise themselves with the detail of their policies including any technical meaning the term flood may have.

An increase in the financial burden imposed on insurers could result in an increase in premium costs and/or the withdrawal of insurance products affected by the broader definition.

Industry

 

Category C inundation has been successfully defined through case law.  Any amendments to the way in which it is dealt with may jeopardise this agreed definition and result in an increase in consumer confusion and additional ill-will towards the insurance industry.

An increase in definitional complexity may jeopardise individual insurer’s reinsurance programmes.

The insurance industry may face reputational risks for not providing consumers with insurance covering the same categories of water inundation.

 

Benefits

Costs

Commonwealth

 

Legislative amendments will be required.  ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Consultation       

Government consultation with insurance industry

3.134           The Government met with the insurance industry on numerous occasions.  Many of these meetings have involved the Assistant Treasurer and Minister of Superannuation and Financial Services. 

3.135           14 January 2011 — 1 st meeting with insurance industry heads, and Qld government in Brisbane.  This meeting focused on immediate response issues.

•        27 January 2011 — ICA issues 10 point plan in response to natural disasters.  Calls for standard definition and improved disclosure.

•        3 February — 2nd meeting with the full ICA Board .

-       The Government and the ICA discussed the 10 point plan issued by the ICA.

-       The discussion included consideration of standard definition and one page key facts statement.

•        18 February 2011 — 3rd meeting with the full ICA Board. 

-       The Govt and ICA reached in-principle agreement at this meeting to work towards a standard definition and one page key facts statement. 

•        4 March 2011 — 4th meeting with the full ICA Board. 

-       Further consideration of the details around a standard definition and one page key facts statement. 

-       This conversation assisted the Government in developing ‘ Reforming flood insurance: Clearing the Waters ’, the consultation paper containing a proposal in relation to a standard definition and one page key facts statement and seeking submissions.

•        5 April 2011 — Government released ‘ Reforming flood insurance: Clearing the Waters ’ at a public forum in Ipswich.

-       This forum was jointly attended by the Minister, the ICA and Qld Legal Aid.

-       It was attended by hundreds of local people affected by the floods and included many representations in relation to consumer confusion in relation to flood coverage.  Many people thought that they were covered for flood and weren’t.

•        5 April 2011 — ICA publicly supports a standard definition and one page key fact statement.

•        16 May 2011 — ICA lodged submission to Reforming flood insurance: Clearing the Waters .  Supportive of both standard definition and one page key facts statement.

•        19 May 2011 — ICA publicly reiterates its support for standard definition. 

•        14 July 2011 — ICA makes submission to the NDIR.

Reforming flood insurance — Clearing the Waters

3.136           On 4 April 2011, the Government released a consultation paper Reforming flood insurance — Clearing the waters in order to engage the community and provide suggestions for improving the regulatory framework and other aspects of Australia’s insurance market. 

•        The consultation paper contained two key proposals for consideration:

-       To introduce a standard definition (in plain English) of flood across HBHC insurance policies in order to ensure  HBHC insurance policies are more easily understood, so consumers aren’t surprised when they try to make a claim.  Under the proposal, the term flood would only appear in an insurance policy if it is defined in the standard meaning of the term.

-       The introduction of a single page KFS for HBHC insurance policies, to allow consumers to see at a glance, the key elements of the policy — what is covered and what is not.

3.137           Several submissions were received from interested stakeholders and of these 13 submissions were made public and can be found on the Australian Treasury website: www.treasury.gov.au.  Submissions indicated a broad level of support for the adoption of a standard definition of flood and a KFS.  Submissions made a number of constructive observations and suggestions in response to the questions in the paper. 

Consumer Comments

3.138           Consumer groups indicated broad support for the introduction of a standard definition of flood in insurance contracts.  It was widely held that:

•        concerns regarding consumer confusion about flood are still valid;

•        a standard definition will help consumers compare insurance products and select insurance coverage that most closely suits their needs;

•        improvements to consumer education on what individual insurance policies offer will reduce the incidence of under- insurance; and

•        a definition should use language that the majority of consumers use in their everyday lives.

Industry Comments

3.139           Similarly, industry groups have indicated on balance support for the introduction of a standard definition of flood.  In regard to the release of the discussion paper Reforming Flood Insurance — Clearing the Waters , industry groups have indicated that:

•        they welcome the release of the paper;

•        they understand that the Australian community would like improved clarity on the availability of flood insurance and how it works;

•        they have released a 10 point plan [16] to tackle disasters;

•        the adoption of a standard definition for flood is a suitable means of removing consumer confusion regarding the meaning of the term flood; 

•        the introduction of a standard definition of flood will not guarantee insurers offer this type of cover;

•        a realistic transition period is needed for insurers to amend their policy documents and remove references to the terms flood and ‘flooding’ as used previously.  Industry indicated a two year transition period would be appropriate; and

•        the adoption of any standard definition of flood will not assist consumers in assessing the risk of flood in their specific location.  This can only be achieved through the availability of appropriate flood mapping data that can be accessed by both consumers and insurers.

3.140           Insurers have indicated that the introduction of a standard definition of flood will have an impact on the pricing of insurance.  It is expected that the broader the definition is, the greater the directional pressure on pricing will be.

•        As noted previously, the Government has previously sought the views of industry and consumer groups on the impacts the introduction of a standard definition of flood might have on the price of insurance.  Information provided by these groups did not include data indicating the impact of the proposed measure beyond noting that there could be upward pressure on premium costs. 

3.141       Further to this, efforts were made by Treasury to collect data from the NDIR which might provide greater certainty about the precise number of consumers who would be impacted by this measure and any potential financial costs and benefits resulting from it but the data was unavailable. 

3.142       In submissions to the discussion paper Reforming Flood Insurance — Clearing the Waters issues have been raised in the context of Residential Strata Insurance Policies and small businesses (including but not limited to, showrooms, factories and warehouses).  Opposition and support to an expansion of the parties to be covered by a standard definition of flood was noted.  In this regard, the following statements have been made by certain industry groups:

Opposing views

•        There are an increasing number of commercial developments approved on flood prone land unsuitable for residential zoning.

-       Underwriters need flexibility to decide what aspects of      flood cover can be extended to   commercial/industrial/rural zoning.  Removing this flexibility may have the effect of reducing the ability for insurers to provide bespoke and negotiated flood coverage for commercial premises.

-       There needs to be flexibility for insurers to create special flood definitions for commercial policies.  Insurers may choose to employ the standard definition of flood in their commercial policies as a matter of consistency and simplicity. 

•        Business policy holders are more likely than homeowners to use the services of insurance brokers for advice and are less likely to be confused by language in policies.  In this instance, the knowledge of the broker is deemed to be the knowledge of the insured.

Supporting views

•        A broader category of policy holders including body corporate/strata insurance and small business insurance would benefit from a standard definition of flood. 

-        This proposal would not force insurers to offer flood cover to bodies corporate or small businesses, but it would help these consumers to understand the cover offered by their insurance policy and to consider what risks they need cover for.

•        An extension of the proposed standard definition to a broader class of premises should be undertaken as it is incorrect to assume that owners and occupants of non-residential premises are necessarily better informed regarding inundation risk.

•        A standard definition of flood would ideally be included in KFS and in Policy Disclosure Statements. 

Conclusion and Recommended Option

3.143           Anecdotal evidence suggests that the number of different definitions of flood is causing confusion amongst consumers.  It is possible that this is causing sub-optimal insurance outcomes in some situations.  However, based on the information to date and consultations it is unclear how many sub-optimal outcomes.

3.144           Nevertheless, the preferred Option is Option 2B.  A standard definition of flood as outlined in Option 2B could reduce consumer confusion regarding what is and is not included in insurance policies and avoid situations where neighbouring properties, affected by the same inundation event, receive different claims assessments because the policies covering them use different definitions of flood. 

3.145           Option 2B may improve consumers’ ability to evaluate potential insurance policies and compare ‘like’ products between different insurers, which may lead to an increase in price competition across the insurance industry and provide greater certainty for insurers about what they provide cover for. 

3.146            Further, limiting a standard definition to riverine flood is expected to be a more financially viable option for insurers compared to Options 3A, 3B, 3C, 4A, 4B and 4C.  The risk of insurers encountering difficulties securing reinsurance is expected to be reduced.  This in turn will provide greater certainty to all stakeholder groups that affordable insurance products will continue to be available to consumers.    

3.147           Option 2B aims to ensure that all relevant consumers may benefit from reduced consumer confusion by covering HBHC, strata title and small business insurance policies.  There is little to distinguish individual property owners from those consumers who purchase insurance for property owned as part of a body corporate or similarly, a small business.  In addition, insurers will be able to streamline the way they handle a broader range of clients.  However, there are no data available on the number of small business and strata title customers that access insurance brokers and the extent to which they are confused about the definition of a flood, making it unclear to quantify the benefits of Option 2B.

3.148           There are expected to be compliance costs faced by industry as a result of the introduction of a standard definition of flood including having policies rewritten and reassessed.  It is unclear how large these costs will be as industry did not provide estimates of costs when consulted.  However, industry has indicated that a two year transition period will reduce uncertainty and alleviate concerns about implementation of the measure on the commercial interests of insurers.  The full costs and benefits will only be determined once detail has been specified in the Regulations

3.149           Insurers have indicated that a standard definition could result in re-pricing of policies or in products being withdrawn.  However, they have not provided any data to determine the magnitude of re-pricing or the extent of products that are likely to be withdrawn from the market.

3.150           In conclusion, there is anecdotal evidence to suggest that there would be benefits with prescribing a standard definition of flood as outlined in Option 2B.  However, this option entails costs.  Given that there is no data on the costs or benefits of all the options it is unclear whether Option 2B would provide the highest net benefit.

Implementation and review

Implementation

Changes to the Insurance Contracts Act 1984

3.151           The legislative framework for a standard definition of flood will be introduced by amendments to the IC Act and new regulations will be required to establish the content and format once the framework is introduced.

3.152           The framework for a standard definition of flood (together with the framework for a one page fully prescribed KFS) is expected to be introduced to Parliament in November 2011 as part of a package of amendments to the IC Act.  Regulations will be made as soon as possible after the ICA Bill receives Royal Assent.

3.153           There will be a two year transition period which will commence from the date the regulations are made.  It is envisaged that a two year period will provide sufficient time for individual insurers to calculate the impact the proposed changes will have on their businesses; make the necessary amendments; and notify policy holders. 

Consultation on the regulations covering the wording and format of the standard definition

3.154           A significant amount of consultation has already occurred on the wording and format of a standard definition of flood, with industry and consumer representatives indicating broad support for the preferred definition provided in this RIS.  Further consultation will take place on the final wording and format of a standard definition of flood. 

•        Evidence provided in the form of submissions to the Government’s consultation paper ‘ Reforming flood insurance — Clearing the waters ’ suggests that support for the wording provided in this RIS is widespread amongst respondents to the consultation paper.  Based on this support it is unlikely the wording of the definition will vary considerably beyond the definition provided in Option 2B. 

3.155           Consultation is expected to occur in conjunction with the consultation process undertaken for the KFS.  In addition, any consultation undertaken on this matter will be designed to ensure the Government’s objectives are met. 

3.156           The precise format of the consultation process will be determined once the legislative framework for a standard definition of flood has been introduced.  It is expected that comments will be sought from relevant stakeholders via the provision of formal submissions and/or discussion.

Review

3.157           The effectiveness of the proposed measure and legislative amendments will be formally monitored by ASIC.  It is expected that the effectiveness and impact of the introduction of a standard definition of flood will be reviewed a few years after the transition period has ended.  The time between the commencement of relevant regulations and any review of the operation of the regulations must allow for industry and consumer groups as well as Government to have gathered sufficient data so as to contribute to a meaningful assessment of the success of the measure.



Key Fact Sheet for Home Building and Home Contents Insurance Policies

Background

4.1                   In recent times there has been a significant increase in natural disasters.  In 2009, the Black Saturday Bushfires spread across over 450,000 hectares in Victoria.  In 2010-2011, areas of Queensland, New South Wales and Victoria all experienced severe flooding.  Queensland also suffered the effects of Cyclone Yasi.   

4.2                   A substantial proportion of the cost of losses resulting from natural disasters is met by insurance.  On 28 June 2011, the Insurance Council of Australia (ICA) indicated that, in relation to the Queensland floods and Cyclone Yasi, in excess of 99 per cent of claims had been assessed and determined.  ICA member companies had received an estimated $3.64 billion in claims, with 68,300 claims due to Cyclone Yasi, and 56,200 due to the 2011 Queensland flood event. [17]  

4.3                   These catastrophic events highlight the importance of insurance and making sure that individuals, families, communities and governments have effective insurance cover in place to guard against and recover from disasters. 

4.4                   In particular, these recent events have shown the extent of underinsurance, with up to half of the homeowners and many businesses affected by the floods being underinsured [18] and the difficulties faced by people affected by natural disasters that do not have insurance or do not have the right type of insurance.

4.5                   The recent events have also highlighted that there may be some confusion around flood insurance and what is covered when a flood occurs within the community. [19]   A number of households have suffered hardship as a result of underinsurance and in some cases no insurance, for the flood event.

4.6               On 4 March 2011, in response to the escalating number of natural disasters, the Hon Bill Shorten, MP Assistant Treasurer and Minister for Financial Services and Superannuation announced an independent review into disaster insurance in Australia.  The Natural Disaster Insurance Review (NDIR) [20] has been tasked with looking at the broad issues relating to insurance in the context of the long term funding of disaster relief.  Issues such as affordability and availability of flood insurance are being addressed by the NDIR and are outside the scope of this Regulation Impact Statement (RIS). 

4.7                   On 5 April 2011, as a first step in reforming flood insurance, the Hon Bill Shorten, MP Assistant Treasurer and Minister for Financial Services and Superannuation released a consultation paper ‘Reforming flood insurance — Clearing the waters’. [21]   The consultation paper was released to engage the community on some particular suggestions for improving the regulatory framework for flood insurance and other aspects of Australia’s insurance market.

4.8                   The consultation paper contained two key proposals designed to improve clarity for consumers in relation to insurance policies and in particular, the cover provided for various types of flood, these include a standard definition of a flood and a Key Facts Sheet (KFS), which would outline the key information in relation to Home Building, Home Contents and Home and Contents insurance policies (HBHC).  This RIS covers the KFS proposal. 

4.9                    On 2 June 2011 the Standing Committee on Social Policy and Legal Affairs [22] commenced an inquiry into, and report on, the operation of the insurance industry with specific reference to extreme weather and disaster events.

4.10               In addition to the actions of the Commonwealth Government (the Commonwealth) the Victorian and Queensland governments have also responded to the recent natural disasters with the establishment of the Review of the 2010-2011 Flood Warnings and Response [23] in Victoria and the Independent Commission of Inquiry into Queensland floods in Queensland. [24]  

Current Regulation

Pre-contractual disclosure

4.11               The key laws governing pre-contractual disclosure for insurance are:

•        the ‘standard cover’ rules in section 35 of the IC Act for certain types of prescribed household/personal contracts; and

•        Product Disclosure Statement (PDS) rules for retail customers (under the Corporations Act 2001 (Corporations Act)).

Section 35 of the Insurance Contracts Act 1984 — standard cover

4.12               Section 35 of the IC Act provides that standard cover (that is, minimum levels of cover for prescribed events) will be deemed to be included in certain classes of prescribed insurance policies, including home buildings insurance and home contents insurance (other than cover notes and renewals).  The standard cover terms and conditions are set out in the Insurance Contracts Regulations 1985 (ICR).

4.13               By way of example, the Regulations state that standard cover in respect of home contents insurance includes loss that is:

...  caused by or results from — ...  storm, tempest, flood, the action of the sea, high water, tsunami, erosion or landslide or subsidence ...

4.14               If an insurer seeks to limit or exclude its liability in respect of the standard cover, then the insurer must prove that:

•        it ‘clearly informed’ the consumer of the limitation or exclusion in writing before the contract was entered into (or within 14 days if provision before the contract was not reasonably practicable, e.g.  telephone sales); or

•        the consumer knew of the limitation or exclusion; or

•        a reasonable consumer in the circumstances could be expected to have known of the limitation or exclusion.

4.15               If the insurer is unable to prove anyone of these three conditions, then the insurer will be liable to make good any losses suffered by a consumer that were caused by, or resulted from, any of the standard events (construed in accordance with their ordinary meanings) up to a maximum limit (usually $2 million).

4.16               There have been a number of court and dispute resolution cases in relation to the interpretation of ‘clearly inform’, which illustrate that although there could be various means to inform, provision to the insured of a policy document containing exclusions is sufficient, unless there are exceptional circumstances (for example, if the provisions in the policy are particularly confusing or complex).  The court decision most cited on this issue Hams & Ors v CGU Insurance Limited [2002] NSWSC 273   (Hams) includes the following passage:

‘a fair reading of s35(2) does not warrant the conclusion that the result need go further than to provide for the relevant exclusion in the policy wording in clear and unambiguous language and in a manner which a person of average intelligence and education is likely to have little difficulty in finding and understanding if that person reads the policy in question’. [25]

4.17               In practice, the standard cover regulations are often rendered non-applicable by the provision to the insured of a policy document (usually contained within a PDS), thereby satisfying the requirement to ‘clearly inform’ the consumer.  In a case where such a policy document was provided, the protection offered by section 35 would only be available if the terms in the policy were particularly complex or confusing. 

4.18               A common view held by consumer groups [26] is that a large proportion of policy holders do not read in detail the policy documents they receive from their insurers so the protection offered by section 35 is not, in practice, a very effective tool to ensure that consumers are informed about their cover. 

Chapter 7 of the Corporations Act 2001 — Financial services disclosure

4.19               Chapter 7 of the Corporations Act provides that clients are required to be issued a PDS when committing to a policy.  The key criterion for this obligation to apply in relation to general insurance products is that the client is a retail client, as defined in section 761G of the Corporations Act.  Section 761G provides that :

•        the acquirer of the product must be either an individual or a small business (fewer than 20 employees or 100 for manufacturing businesses); and

•        the insurance product is within one of the following classes of insurance prescribed by the legislation and as defined in the regulations:

-       motor vehicle insurance;

-       home building insurance;

-       home contents insurance;

-       sickness and accident insurance;

-       consumer credit insurance;

-       travel insurance;

-       personal and domestic property insurance; or

-       another kind of general insurance product prescribed in the regulations (currently including medical indemnity insurance).

4.20               In general terms the PDS requirements apply to contracts prescribed for standard cover purposes under the IC Act, and some other classes of insurance. 

4.21               Corporations Regulation 7.9.15E requires a PDS for a retail insurance product to contain both the policy terms (other than the policy schedule), and any information that would be required under sections 35 and 37 of the IC Act. 

4.22               A consequence of this requirement is that, for those general insurance products subject to PDS requirements, the ‘clearly inform’ requirements in sections 35 and 37of the IC Act are supplemented by a ‘clear, concise and effective’ requirement which applies generally under the Corporations Act to material in PDS documents.

Additional Comments on Current Financial Product Disclosure

4.23               In general, under the Corporations Act, a retail client must receive a PDS before acquiring a financial product.  The PDS document sets out the significant features of a financial product, including its risks, benefits and cost. 

4.24               The broad objectives of a PDS are to help consumers compare and make informed choices about financial products.  To achieve these objectives, the legislation requires that all information contained in a PDS must be worded and presented in a clear, concise and effective manner.  While ensuring increased disclosure for retail investors the requirements regarding the format of PDS are considerably flexible.  This flexibility can however lead to significant increases in the size and complexity of PDSs.

4.25               In order to overcome the adverse outcomes that may arise as a result of this flexibility, providers of simple financial products are required to issue shorter PDSs.  The shorter PDS regime currently applies to First Home Saver Accounts, margin loans and from 23 June 2011 will apply to simple Managed Investment Schemes (MIS) and superannuation products.  However, it does not apply to general insurance policies.  The shorter PDS regime has been introduced to ensure that key information is provided in clear way to allow retail investors to make effective financial decisions.  The shorter PDS regime uses an ‘incorporated by reference’ mechanism to ensure that all additional information to the key information provided in the shorter PDS is provided when or where required.

4.26               More recently, a single page format for providing consumers with key information has been considered to be an appropriate way of ensuring that retail investors are able to make more informed and timely financial decisions.  Although concerns have been raised that a new single page document outlining the key information in respect to a financial product or service could be taken as a substitute for a more comprehensive form of disclosure (a PDS or a shorter PDS), both industry and consumer groups see the merit in the single page format. [27]

The problem

Summary

4.27               Currently, some consumers may find it difficult to easily access key information within their insurance policies.  This may lead to some confusion in relation to what is and what is not covered under HBHC insurance.  In this regard, the PDS rules for general insurance, as currently implemented, may not be as effective as they could be for informing consumers about HBHC insurance policies, and enabling comparisons between these policies.

4.28               If key information about policies is not readily accessible to consumers, there is potentially a greater risk of consumers acquiring insurance that does not fully match their requirements.  This may result in consumers facing adverse outcomes when seeking to claim the replacement of, or financial remuneration for, property damaged as a result of unforseen events. 

4.29               It should be noted that there are a number of uncertainties surrounding the identification and magnitude of the problem due to the lack of data. 

 Current situation

Confusion/uncertainty surrounding insurance created due to the lack of accessibility of information 

4.30               The difficulty in accessing key information regarding HBHC policies may cause confusion and uncertainty. 

4.31               Due to the lack of empirical research into consumer understanding and confusion in respect to financial products the potential magnitude of the impact of consumer confusion cannot be fully captured at this time.  However, one area where reliable data has been collected is on disputed claims. 

4.32               It is important to note that the data provided in relation to disputed claims should be only seen as one part of the potential overall magnitude of the potential problem.

4.33                In Australia, most financial service providers have their external disputes resolved by the Financial Ombudsman Services (FOS).  FOS’s independent dispute resolution processes covers complaints about financial services including general insurance [28] , life insurance and FOS is an independent, national body which offers an information service for consumers on general insurance as well as providing free help to consumers who have disputes with their general insurance providers.

4.34               Prior to its merger with Banking and Financial Services Ombudsman and Financial Industry Complaints Service to form FOS in 2008 the Insurance Ombudsman Service (IOS) provided the independent dispute resolution processes for disputes of general insurance policies. 

4.35               In the General Insurance Code of Practice: Overview of the 2007-2008 Financial Year [29] , which is released by the IOS, statistical data is provided on its internal dispute resolution monitoring of both new business and renewals (refer table 4.1).

4.36               In this regard, the data in relation to home building and contents  insurance policies, which are combined under the heading of total home in the table 4.1 below, for the 2007-2008 financial year indicates that there were 11,363,851 new business and renewals of HBHC insurance policies.  Of the new and renewed insurance policies a total number of 1,029,971 claims were made.  The data indicates that of the 1,029,971 claims made 33,672 were rejected by members. 

4.37                The total number of new business and renewal HBHC insurance policies represent, 36.27 per cent of the entire number of personal insurance policies in the general insurance market.  This figure indicates the importance consumers place on ensuring they have HBHC insurance cover when looking at other types of general insurance policies. 

4.38               Claims made in relation HBHC make up 32.47 per cent of the entire number of claims across the personal insurance policy market, thus indicating that consumers are likely to depend more on insurance cover for their HBHC needs than for other types of general insurance policies.  However, motor vehicle insurance has percentages equivalent to those of HBHC insurance policies. 

4.39               There were 4312 insurance claims made in relation to HBHC policies taken to internal dispute resolution which represented 73.41 per cent of the total disputes taken to internal dispute resolution.  Buying insurance was the next most common reason with employee, code and catastrophe/disaster issues representing only a small proportion of the overall reasons. 

Table 4.1   General Insurance Code of Practice: New business & renewals, claims and rejected claims statistics

4.40               In the IOS 2007-2008 Annual Report [30] , the IOS provided statistical information regarding consumer disputes.  The following tables, which have been taken from that report, provide some additional insight into potential issues regarding HBHC insurance policies. 

Table 4.2   Reasons why member denied liability

4.41               When considering the data in table 4.2 (Reasons why member denied liability) exclusions/conditions was the main area of contention/dispute with 478 of the 604 claims for home buildings and 148 of the 221 claims for home contents being rejected.  This represented 75.88 per cent of all of the areas of where members denied liability.  The other two main areas of contention, but to a significantly lesser extent, can be seen to be disputed over what is not covered by the policy and quantum of the claim/payout.

4.42               Although there is no available data regarding the particular issues surrounding the reasons why members denied liability, anecdotal evidence [31] suggests that the main reasons were due to the fact that the insureds had thought they had a basis for making the claim. 

Table 4.3   Summary of outcomes by policy type

4.43               Table 4.3 (Summary of outcomes by policy type) clearly shows that the vast number of the disputes referred to the IOS are found in the favour of the insurers.  In this regard only 26 per cent of consumer in respect of home buildings and only 18 per cent of consumer in respect of home contents were found in the favour of the consumer (applicant).

4.44               Although there is no available data on the exact reasons why consumers referred disputes to the IOS, it is considered that there is a high likelihood that they were of belief that they have a legitimate basis for doing so.  The IOS data suggests that consumers are incorrect in this belief.

4.45               In summary, the data from the IOS demonstrates that:

•        only a small number of consumers make insurance claims in relation to the number of overall consumers holding HBHC insurance policies;

•        of all of the claims made only a small number were rejected;

•        HBHC and Motor Vehicles are two areas where insurance policies appear are most common and the areas in which most claims are made;

•        insurance claims are the most likely reason why disputes are taken to internal dispute resolution;

•        the main area of contention where members denied liability was that of exclusions/conditions; and

•        most but not all disputes referred to the IOS are found in favour of insurers, even though it would be assumed that consumers believed that their disputes were justified on the basis that they believed they were covered for the claims they were making.

While there may be a problem in relation to confusion in HBHC insurance policies, particularly around exclusions/condition, the problem may be seen to be small in absolute terms when considering claims where external dispute resolution has taken place.   

4.46               As stated in paragraph 4.31 above data in relation to consumer understanding and confusion in respect to financial products and the potential magnitude of the confusion cannot be fully captured at this time. 

4.47               It is important to note that the nature of insurance is to protect consumers from incurring a loss when an unforseen future event occurs.  It is only possible to establish the extent/magnitude of any problems regarding confusion when an unforseen event occurs.  Therefore any issues for consumers regarding confusion that exist outside the context of unforseen events are generally not able to be identified or reliably measured. 

Home Building and Home and Contents

4.48               In order to ensure consumers are informed regarding HBHC insurance policies, consumers should read the policy’s PDS, or at least be familiar with the key information contained in the PDS.   

4.49               However, as discussed in Australian Securities and Investment Commission’s March 2011 report ‘Financial literacy and behavioural change’ [32] , consumers are often overwhelmed by the sheer volume and complexity of investment information available to them, including disclosure material such as PDSs.  The increasing length and complexity of PDSs is also becoming a considerable obstacle for consumers when making their financial decisions.

4.50               When consumers are informed at the time of making their insurance decisions they are more likely to secure the correct amount of cover.  In an unpublished presentation to the Insurance Council, in 2010, Inside Story presented their research findings into the insurance product information needs of consumers.  This research [33] examined the level of consumer understanding of PDSs for both motor vehicle and HBHC insurance policies.

4.51               As part of their research Inside Story examined the way consumers used or failed to use PDSs both before and after purchasing an insurance policy.  In this regard:

•        49 per cent of respondents indicated that they had never read a PDS document before taking out a motor vehicle or HBHC insurance policy.  Of the respondents that had read a PDS before entering into a policy, 5 per cent read the first few pages only, 46 per cent went straight to particular sections, 30 per cent flicked through the majority of the document and 19 per cent read most or all of the PDS. 

•        32 per cent of the respondents indicated that they had not referred to a PDS document after taking out a motor vehicle or HBHC insurance policy.  Of the respondents that had referred to a PDS after entering into a policy, 6 per cent read the first few pages only, 43 per cent went straight to particular sections, 36 per cent flicked through the majority of the document and 15 per cent read most or all of the PDS.

4.52               These findings indicate that a number of consumers fail to recognise the importance of reading their PDS or at least being aware of the key information regarding their HBHC insurance policies both before and after their purchase. 

4.53               The issues surrounding the availability of information in, and the useability of, PDSs have been highlighted in recent assessments regarding the introduction of a shorter form PDS for a number of simple financial products, such as the First Home Savers Account and the introduction of a KFS for home loans. 

4.54               The supporting material to the Corporations Amendments Regulations 2010 (No. 5) [34] states that:

‘In recent years, there has been considerable discussion about the overall effectiveness of current PDSs.  A particular concern is that the effectiveness of disclosure has been compromised by a tendency for suppliers of financial products to provide excessive information, generally over and above what the reasonable consumer would need to make a product purchasing decision.  Disclosure documents can vary significantly in their length, design and structure.’

4.55               In chapter 6 of the explanatory memorandum [35] to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 states that:

‘studies also show that lengthy precontractual disclosure documents do not assist consumers and instead overloads them with information ...  ... Consumers generally focus on the headline information, such as amount repayable each month, interest rates and whether insurance is required’

4.56               The inability for consumers to easily access key information can be seen to be leading to increased levels of confusion, which in turn, is leading to inappropriate decisions being made.

4.57               Confusion can be seen to exist whenever consumers are faced with a large amount of information in relation to a particular decision or action.  While researchers currently differ on a precise definition for consumer confusion [36] , the research indicates that three factors are generally present when consumer confusion occurs.  These factors are:

•        a perceived similarity in the product or service;

•        an overloading of information; and

•        ambiguity surrounding the information being presented.

4.58               Research undertaken by Inside Story (as discussed above)   revealed that the current level of consumer understanding of PDSs for motor vehicles and HBHC insurance policies was poor at the best. 

4.59               In this regard, when respondents were asked ‘how easy is it to understand the information in your HBHC insurance policy product disclosure statement’:

•        Only 10 per cent indicated that they found that PDSs to be very easy to understand. 

•        40 per cent indicated that PDSs were somewhat easy to understand.

•        24 per cent indicated that PDSs were neither easy nor difficult to understand. 

•        22 per cent indicated that PDSs were somewhat hard to understand. 

•        4 per cent indicated that they found PDSs to be very difficult to understand. 

4.60               In response to why PDSs were hard to understand, of the relevant respondents:

•        52 per cent indicated that the use of big words and jargon needed to be simpler.

•        42 per cent indicated that PDSs were too detailed, longwinded and contained too much information.

•        8 per cent indicated that the fine print was confusing, complicated and contradictory.

•        7 per cent indicated that the information contained in PDSs is not clear or understandable. 

4.61               When looking at these findings, it is clear that some consumers are not able to access or effectively understand all of the information in PDSs covering HBHC insurance policies.  This is particularly the case when looking at the wording and length of PDSs. 

4.62               In 2000, the Australian Securities and Investments Commission (ASIC) released a report ‘Consumer understanding of flood insurance’ outlining areas where improvements in disclosure in respect of flood insurance should be made. [37]   The report identified the types of problems faced by consumers, undertook an analysis of the relevant disclosure documentation and reviewed a number of external dispute resolution scheme panel determinations. 

Problems faced by consumers

•        Consumers often have a limited understanding of the level of flood cover they have in their HBHC insurance policy. 

•        Consumers are not always aware of the requirement to have additional cover for flood damage as part of their HBHC insurance policy.

•        Policy documentation can be confusing and ambiguous in its language with technical meanings often given to common words.

•        Consumers are not always aware of the distinction between the types of damage and whether they are covered. 

•        The assessment of claims for flood damage is often more complex than for other events covered by HBHC insurance policies.

Analysis of the relevant disclosure documentation

•        Document format — a policy may be comprised of a number of documents, requiring the consumer to read a number of different documents (including the application, schedules, endorsements, the insurance contract and the Product Disclosure Statement (PDS)). 

•        Type of policy — the structure of the policy may, in some instances, make it harder for a consumer to work out the extent of their home and contents insurance coverage.

•        Definitions and terms — participants in the insurance industry currently use differing definitions for key words, making it harder for consumers to make effective comparisons between HBHC insurance policies.  Key terms are not always defined at the start of the relevant policy documentation making it harder for consumers to fully understand their cover.

External resolution scheme panel determinations

•        There are examples of the effect of layout and presentation of a document affecting  a consumer’s ability to understand the terms of the policy:

‘The policy document is somewhat cluttered in its appearance.  It explains that flood is excluded from home building cover at page17 of a 40 page document and at page 21 it explains that contents cover excludes flood.  The definition of flood appears at page 8.  Whilst an insured’s attention is not immediately arrested by these references there is nothing confusing about them.  The policy is reasonably well indexed.  The Panel is thus of the opinion that the policy document satisfies the statutory requirement to clearly inform’. [38]

•        The effect that prominence given to particular items in a policy document can have on the statutory requirement to clearly inform:

‘In this case the reference in the policy to the exclusion of flood first appears at page 13 of the policy document.  It is not highlighted and is not particularly prominent.  However, the term appears in the definition section and appears under the part of the policy that identifies what is not covered by the policy.  The index draws attention to three entries of the term.  Although the term could have been more prominently identified within the policy a person looking to see if flood is covered would have no difficulty in finding the answer.  In the Panel’s opinion, the insurer has satisfied its obligations pursuant to Section 35 of the Act’. [39]

4.63               ASIC’s report illustrated that whilst from a legal position the statutory requirement to clearly inform may be satisfied, the current requirements under the IC Act and Corporations Act do not address the confusion experienced by consumers when looking at HBHC insurance policies.  Recent experience in natural disasters demonstrates that confusion surrounding HBHC insurance policies in this context still exists.

Cooling off period

4.64               Another area of confusion/uncertainty surrounding HBHC insurance policies is that of the cooling off period. 

4.65                 In order to provide consumers with protection after an HBHC insurance contract is entered into, insurers are required to provide a sufficient time period for the consumer to consider the policy, or have an adequate cooling off period in respect to the policy. 

4.66               The cooling off period provides consumers with the time to fully consider their decisions free from any pressure or impulse.  This allows consumers to evaluate all of the key information in relation to the particular policy. 

4.67               In essence the cooling off period gives a consumer with the ability to think over the advantages and disadvantages of a policy to ensure they have obtained the appropriate policy for their requirements. 

4.68               In an examination of five HBHC insurance providers the length of the cooling off period provided by the particular HBHC insurance policy was found between pages 5 and 47 of the PDS. [40]    

4.69               The qualitative findings of the research undertaken by Inside Story indicate that when taking out car or home insurance 28 per cent of respondents were unaware that there was a legal cooling off period during which time they could cancel their policy at no cost if they were not happy with their decision. 

4.70               The remaining 72 per cent of respondents indicated that they were aware there was a legal a cooling off period.  However the length of the cooling off was thought to range from 7 to 30 days [41] with 25 per cent of respondents correctly identifying the legal cooling off period provided under the Corporations Act of 14 days. 

Adverse outcomes arising as a result of confusion/uncertainty 

4.71               The main adverse outcomes that can be seen to arise as a result of confusion surrounding HBHC insurance policies are of a financial nature.

4.72               In a recent unpublished report [42] into a better PDS regime, it was noted that although, from the industry’s perspective, the risk of consumers making poor decisions was relatively small, consumers still make seemingly ‘poor’ choices in relation to their insurance. 

4.73               These poor decisions were generally seen to be made in relation to:

•        insufficiencies in the sum insured to cover replacement costs;

•        failure to take into account other incidental costs in the sum insured; and 

•        failure to cover for specific risks such as flood.

4.74               These poor decisions can potentially lead to financial distress/difficulty for the affected consumers in both the short and long term.  In this regard, when discussing the recent Queensland floods [43] , Legal Aid Queensland indicated that many of their clients were unaware that there were limitations to their home insurance cover and did not understand their insurance policies.  Some clients discovered that although their claims were accepted, the fine print in their insurance policies limited their pay-outs to capped amounts which represented a decrease in the sum available for re-building. 

4.75               It is important to note that when looking at reasons why consumers may make poor decisions in relation to their insurance cover, other factors may also play a role.  These include confusion about the policy, poor assessment of their individual risks’ and poor assessment of their likely damage in the event of an event occurring. 

Current regulation and its effectiveness

4.76               As outlined previously, HBHC insurance policies are regulated by the IC Act.  Section 35 of the IC Act prescribes the minimum statutory requirements for the cover provided under the policy, one of which is the provision of flood cover.

4.77               However, insurers are able to derogate from the prescribed minimum terms by offering a lower level of cover provided they ‘clearly inform’ the derogation to the customer before the consumer commits to the policy.

4.78               In addition to the requirement to ‘clearly inform’ any derogations under the IC Act, the Corporations Act requires insurers to provide consumers with a PDS for each policy.  The PDS is required to contain both the policy terms (other than the policy schedule), and any information that would be required under sections 35 and 37 [44] of the IC Act.

4.79                 The insurance provider must also ensure that the consumer has adequate time to read and fully understand the policy before committing, or the provider must have an adequate cooling off period [45] in respect to the policy.

4.80               Although there is some standard content for insurance contracts the format of the relevant documentation can vary significantly.  These variations can lead to situations where the wording of the documents can be confusing and ambiguous especially when it comes to derogations such as exclusions for specific types of flood or floods in general. 

4.81               The requirements for pre-contractual disclosure should help to prevent policyholders being ‘surprised’ by exclusions or conditions.  However, although the current requirements provided under the IC Act and Corporations Act go some of the way to preventing consumers being surprised, gaps still remain evident. 

4.82               It is common for consumers to find themselves in situations where they are totally unaware that they are not covered for certain events or are only covered for certain events such as particular types of flood.  The  practical limitation that can be seen to arise in relation to pre-contractual disclosure has been recently commented on by the Chair of the Claims Review Panel of the then Insurance Ombudsman Service when he remarked that:

‘The fundamental principle relevant to all insurance disputation on which all parties agree is that no-one ever reads the policy before a claim is made.’

Conclusion

4.83               Some consumers may find it difficult to access key information on particular policies.  This may be seen to occur cross all types of insurance policies but HBHC insurance policies appear to be of particular concern. 

4.84               The key points to note about the problem are that:

•        there may be an amount of confusion regarding HBHC insurance products in respect to:

-       the extent of coverage (what is covered);

-       the exclusions that exist (what is not covered); and

-       other technical information such as the cooling off period.

•        some consumers may find it hard to access the key information regarding their HBHC insurance policies, as the information contained in the PDSs may not be readily accessible for some consumers.

•        the current disclosure requirements for HBHC may not be effective in providing consumers with the information they require in order to make effective decisions regarding their HBHC insurance policies; and

•        if consumers make ineffective decisions regarding their insurance needs, adverse outcomes may arise for both the individuals affected and society as a whole.

4.85               While there may appear to be a problem in relation to confusion, the magnitude of the problem cannot be clearly established through empirical evidence.  Therefore it must be recognised that, at this time, it is not possible to conclude that any Option considered in this RIS will be able to be seen to address the problem.

Objectives of Commonwealth Government action

4.86               The Commonwealth’s aim is to assist consumers with understanding the basic terms of their HBHC insurance policies (combined and separate policies), including the nature of cover and any key exclusions. 

Options that may achieve the objectives

4.87               There are many possible options for providing consumer access to key information and addressing confusion surrounding and regarding HBHC insurance policies.  However, no option will ever completely solve this problem as there will always be some consumers that fail to fully consider the impact of not taking the steps required to make effective decisions regarding their insurance needs.

4.88               In addition, it is also important to note that as the magnitude and the cause of the problem cannot be clearly established through empirical evidence as discussed in paragraph 4.32   above, it is not possible to conclude that any Option will address the problem and result in a net benefit. 

Option A: Maintain the Status Quo 

4.89               Maintaining the status quo allows both consumers and industry to continue to make decisions/operate in accordance with the current law.  While this option has no cost implications for the Commonwealth or industry, it will not remove the current costs being felt by some consumers.  In this regard, some consumers may continue to be unable to access the key information regarding their HBHC insurance policies, which may result in these consumers having to face adverse outcomes if/when an adverse event, such as a flood occurs.

Option B: Introduce a KFS

4.90               The introduction of a KFS will enable Government to meet its objective by providing consumers with easy access to the basic terms of the insurance policy, including the nature of cover and any key exclusions. 

4.91               This Option provides consumers with the key information on HBHC insurance policies.  The KFS can be used as a guide to help consumers understand the different aspects of their HBHC insurance policies both before and after purchase.

4.92               This may enable easier comparison between different insurance policies and should also result in the chosen insurance policy better reflecting the consumer’s preferences/requirements. 

4.93               When considering the introduction of a KFS a number of Sub options can be considered.  These include:

•        Option B1 — A fully prescribed one page KFS: to provide consumers with a quick reference guide to enable a basic understanding of the policy type and what the policy does and does not cover. 

•        Option B2 — A fully prescribed one page KFS that refers to the PDS : to provide consumers with a quick reference guide that can also be used as a mechanism for consumers to become fully informed in relation to the policy type and what the policy does and does not cover. 

•        Option B3 — A partially prescribed KFS: to provide consumers with a quick reference guide similar to those in options B1 and B2.  In addition, insurers will also be able to include or exclude certain information they deem to be or not be required by the consumer.

•        Option B4 — A non-prescribed document containing key information in relation to HBHC insurance policies : to provide customers with a document to be used as a guide regarding the key information of the HBHC insurance policy.  The document will be based on a general framework specified in the legislation but it will not be prescribed. 

Other options

4.94               There are many possible options for providing consumer access to key information and addressing confusion surrounding and regarding HBHC insurance policies.  However, no option will ever completely solve this problem as there will always be some consumers that fail to fully consider the impact of not taking the steps required to make effective decisions regarding their insurance needs. 

Consumer education program/campaign

4.95               Consideration was initially given to an education program/campaign to inform consumers of the benefits of reading and understanding the information contained in HBHC insurance policy PDSs. 

4.96               There may be a number of benefits to consumers from an education program/campaign including encouraging consumers to:

•         ask questions about their insurance policies;

•        seek advice when they fail to understand particular jargon/terminology; and

•        become more active in the decision making process.

4.97               Although, an educational program/campaign may have a number of benefits, it was considered that it would not meet the Commonwealth’s objective to assist consumers with understanding the basic terms of the insurance policy, including the nature of cover and any key exclusions.  For the reasons outlined below, this option was not considered further.

4.98               An educational program may not be able to provide all of the key information in relation to all HBHC insurance policies currently in the insurance market and may potentially be seen as a promotion campaign for the insurance industry. 

4.99               An educational program/campaign would need to be broad in order to address issues such as financial literacy and consumer engagement.  A program/campaign that merely encourages consumers to read their insurance policy may potentially be of little benefit.  The program/campaign may need to identify ways that consumers can demonstrate that they have read and understood their policies and other relevant documentation, on an ongoing basis. 

4.100           There are also concerns about the duration of a successful education program/campaign.  As most insurance policies last for short periods (usually one year), it may be difficult to effectively engage consumers as to the benefits of familiarising themselves with the detail of their policy documents each time they are required to renew or update their policies.

4.101            While it is recognised that the recent adverse outcomes experienced by consumers may prompt consumer engagement in the short term, this momentum may not continue in the longer term. 

4.102           The effectiveness of an educational campaign/program as a standalone option has also been questioned.  In a recent ASIC report into financial literacy and behavioural change [46] , ASIC stated that:

‘while raising people’s level of financial knowledge forms the basis of many financial literacy initiatives around the world, there is a growing body of research suggesting that knowledge is only one factor when considering how to help people make positive financial decisions’

4.103           Finally, the introduction of educational program/campaign may not improve the accessibility of the key information in PDSs or act as a mechanism for improving the wording and format of disclosure documents. 

4.104           While an educational campaign/program may not meet the Commonwealth’s objectives on its own, it could be used together with other measures to meet the Commonwealth’s objectives. 

A targeted educational note/warning

4.105           It may also be possible for a targeted education note to be provided with insurance contracts.  The provision of advice to consumers that the HBHC insurance policy contain a number of exclusions and that the PDS pertaining to the HBHC insurance policy should be read as it may reduce consumer confusion. 

4.106           Furthermore, a standard educational note provided with policies may be less costly for industry (it must be noted that industry has not confirmed this at this stage), and may remind consumers that terms differ between policies, while leaving it to individual consumers to check the terms that matter to them. 

4.107           While a targeted approach may be a useful tool to encourage consumers to familiarise themselves with the detail of any insurance product, this option was considered to have limited benefit when used in isolation from other measures.

4.108           In addition, a targeted note or warning would not improve the accessibility of the key information in PDSs or improve the understanding of the content of the PDS for some consumers.

4.109           However, it was recognised that the provision of instructions to consumers directing them to read the product disclosure statement and any other relevant material and/or ask questions of the insurer to satisfy themselves that they have an appropriate policy for their needs may contribute to a reduction in consumer confusion.

Inclusion in the Shorter PDS regime

4.110           When initially looking at the problems regarding confusion and the ability for consumers to access key information, consideration was given to including insurance policies in the Shorter PDS (SPDS) regime. 

4.111           The SPDS regime has been designed to provide consumers with a shorter document for simple financial products.  The SPDS regime currently applies to First Home Saver Accounts, margin loans and from 1 July 2012 will apply to simple Managed Investment Schemes (MIS) and superannuation products.

4.112           When considering this option the objectives of the proposal were, once again, carefully considered.  It was recognised that the SPDS regime would potentially be an option that may achieve the objectives.

4.113           A benefit from having HBHC insurance policies in the SPDS regime is that consumers would have easier access to key information.  In this regard, consumers will be more likely to be able to access key information in relation to HBHC insurance policies when the information is contained in a 4-8 page document. 

4.114           Another benefit of moving HBHC insurance policies into the SPDS regime is that it may be less costly for industry than other options as a SPDS would replace the existing PDS and not be required to be provided in addition to the PDS.   However it must be noted that initial costs incurred in developing a new shorter 4-8 page full disclosure document would be greater than the initial costs incurred for producing a one page document that does not provide full disclosure.

4.115           However, although this option had a number of benefits, for the reasons outlined below it was not considered further. 

4.116           The SPDS regime has only recently been introduced into legislation and while it is expected to result in increases in consumer awareness in relation to the products covered, the effectiveness of the SPDS regime has not been fully established at this time. 

4.117           Moving insurance products into the SPDS regime requires changes to the Corporations Act; in order for this to occur, extensive consultation and consideration would be required to ensure the underlying principles of the Corporations Act are maintained.  This may increase the lead in time for any changes in the disclosure requirements for HBHC insurance policies.   

4.118           The ability to target particular products is not easily achieved under the SPDS regime; therefore consideration would be required to be given to the inclusion of all general insurance policies (this goes beyond the intended scope of the current Commonwealth objectives).  However, it is recognised that General Insurance products may be suitable for inclusion in the SPDS regime at a future time.

Assessment of options

Option A - Keep the current requirements under sections 35 and 37 of the IC Act and Chapter 7 of the Corporations Act (Status Quo)

Impacts

Consumers

4.119           By maintaining the status quo, consumers will continue to be presented with a PDS containing large amounts of information.  Key information required for consumers to make decisions about their HBHC insurance policies will continue to be provided but difficult to access in the PDS and policy documentation.

4.120            In addition, a PDS will continue to contain an amount of additional information that the insurer deems to be required by the consumer.  Inclusion of this additional information by insurers may be seen by some consumers to add increased complexity and ambiguity which may lead to increased confusion.  The effect of this confusion may be that consumers will have a lower level of protection than was originally intended in the legislation.  Costs in the terms of time and effort may persist as consumers who choose to be adequately informed may continue to be required to read long and complex PDS documents.

4.121           More importantly, the current regime might encourage misguided decisions about the insurance cover provided under particular policies especially for consumers with low levels of financial literacy. 

Industry

4.122           There will be no transition costs for HBHC insurance policy providers if the status quo maintained.  Insurance policy providers are already developing insurance policy documents and PDSs in accordance with the sections 35 and 37 of the IC Act and Chapter 7 of the Corporations Act, so they are familiar with the current disclosure requirements. 

4.123           The confusion surrounding insurance policies as a result of the current disclosure requirements may be seen in some circumstances to be potentially leading to poor decision making by some consumers and as such may be resulting in underinsurance in some instances. 

Commonwealth  

4.124           Under Option A, there will be no change in benefits or costs regarding HBHC insurance policies. 

Table 4.4   Impact assessment of Option A (status quo)

 

Benefits

Costs

Consumers

No change

Some consumers will continue to be unable to access the key information regarding their HBHC insurance policies.  This may in turn lead to adverse outcomes. 

Industry

No change

No change

Commonwealth

No change

No change

Option B — Introduce a KFS

General Impact 

4.125           The KFS is intended to provide information that is concise and easier to understand to assist consumers with their decision making.  This may enable them to take out an insurance policy that best reflects their preferences. 

4.126           The KFS will be required to be issued by insurers as soon as practicable after a consumer has requested information on a particular HBHC insurance policy, or in conjunction with the PDS (if the consumer has not previously obtained the KFS); and to have a copy of the KFS on their website for consumers to access.

4.127           The introduction of a KFS is expected to improve accessibility of the key information regarding HBHC which is expected to in turn reduce the current confusion surrounding these policies.  Improvements in financial decision making have been recognised when financial disclosure documentation has been shortened. 

4.128           In this regard.  Chapter 6 of the Explanatory Memorandum to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011  stated that:

‘Empirical studies show that simplified and timely disclosure can improve consumer comprehension of credit contracts as well as improve decision making processes, such as encouraging them to consider a wider range of options and choosing the right option for them.’ 

4.129           Further, in mid May 2010 a final report was released, Simplification of Disclosure Regulation for the Consumer Credit Code: Empirical Research and Redesign.  The report covered a number of elements of disclosure documentation on home loan products, the report indicated that:

•        simplified precontractual disclosure greatly assisted consumers with improving their understanding of the cost of the credit contract;

•        comprehension tests based on simplified disclosure was improved by factors of between 400 per cent and 1,800 per cent; and

•        when exposed earlier to simple disclosure of key facts, consumers find comparison of products easier and make more informed choices. 

4.130           A reduction in the number of disputes regarding the key facts of particular HBHC insurance policies is also expected to occur.  As indicated in table 4.2 and table 4.3 the issues surrounding dispute claims are most likely to be related to consumers understanding of what exclusions/coverage they have under their HBHC insurance policies.  It is expected that if consumers increase their knowledge and awareness of the key facts contained in their policies PDS they may make more effective decisions and as a result may secure adequate insurance cover for their needs. 

4.131           The idea that effective disclosure is more likely to be achieved through shorter and sharper documents such as a shorter PDS document or KFS has been widely supported.  This can be seen in the Supporting Material to the Corporations Amendment Regulations 2010 (No. 5) where it states:

‘ The Government considers effective financial disclosure important so that consumers receive adequate information to make more informed and efficient choices, and have a higher level of accountability for their investment decisions.  Effective disclosure then, means that the information is provided in such a way that consumers can easily locate and understand all the key information they require to make an informed decision’

4.132           The precise content and format of the KFS will be contained in Regulation and will be established through extensive consultation with key stakeholders to ensure effective policy outcomes are achieved.  Therefore, it must be noted that the effectiveness and any potential benefits of this option cannot be fully measured at this time.

4.133           It is important to note, that even in cases where the presentation of financial information is succinct and assessable, consumers approach financial decisions with different levels of financial literacy. [47]   This can affect the effectiveness of a KFS and means that, even if a KFS is introduced, the desired benefits may not apply to consumers uniformly.  That is, there may still be a number of consumers that may not even read a one page document prior to making their insurance decisions.

4.134           In this regard, it must be made clear that the introduction of a KFS in the following options will not be a substitute for the requirement for insurers to issue a PDS under the Corporations Act.  Rather, insurers will be required to provide a KFS as well as a PDS.

Costs

4.135           The introduction of a KFS has received broad support from industry.  However requiring industry to provide consumers with a document stating the key facts/information relating to their policy would impose additional compliance costs; primarily in the form of transitional costs. 

4.136           The specific amount of compliance costs would be difficult to calculate as the complex nature of HBHC insurance policies would require different amounts to be calculated for each particular insurance policy and would depend on each insurance provider's current disclosure procedures. 

4.137           The compliance costs for producing a KFS for home and content insurance policies has been estimated by the ICA, after consulting with a number of its members [48] ,  to be approximately $1.2 million in the initial year and $1.2 million every year thereafter.  The compliance costs will be incurred in the establishment (statement development and legal costs), implementation (systems changes, website updates and front line staff training costs) and ongoing annual costs (printing and distribution costs) of the KFS.

4.138           It is important to note that the initial and ongoing costs associated with the KFS are the estimated total combined cost for the insurers consulted and not for each individual insurer consulted.  These costs are not to be taken to be the estimated costs for the entire insurance industry. 

4.139           When looking at these estimates it is important to note that they are based on the assumption that the KFS is likely to be a highly prescribed document, provided together with the PDS and able to be provided electronically (and otherwise on request/on insurer’s web page). 

4.140           It is important to note that the cost of the introduction of the KFS would be likely to spread across insurance policies as insurers are unlikely to only allocate costs particular groups of consumers. 

4.141            It must be made clear that under this option the total cost identified is likely to result in cost increases across all policies to address confusion concerns in relation to only a percentage of policy holders. 

4.142           It is once again important to note that the nature of insurance is to protect consumers from incurring a loss when an unforseen event occurs.  An insurers’ business is to provide consumers with this protection for unforseen events for periods for which policies apply not to periods prior to that time. 

4.143           The costs associated with the introduction of the KFS as outlined in the preceding paragraphs are expected to be minimal for most insurance providers.  However, one HBHC insurance provider stated in their submission [49] to the ‘ Reforming flood insurance: Clearing the waters ’ consultation paper that the introduction of a KFS

‘might be advantageous in terms of simplicity, it would of course come at a significant cost for the industry and have prudential implications’

4.144           This statement however was not supported in any other submission to the ‘Reforming flood insurance: Clearing the waters’ consultation paper.  T he expected costs are considered to be on a proportional basis the same for both small and large insurers. [50]  

4.145           While the actual costs incurred by industry are expected to be passed onto consumers, they are not expected to be a material consideration in the determination of HBHC insurance policy premiums.  The introduction of a KFS is not expected to have a material impact on cost of HBHC insurance for consumers.

Expected content of the KFS 

4.146           Submissions received on the proposal [51] have highlighted some of the key information that should be included in the KFS.

Type of policy

4.147           Outlining the type of policy (policy cover) provided by the HBHC insurance policy is considered to be one of the most significant aspects of the KFS.  The exact format of how the policy type (policy cover) will be outlined has not been fully determined at this time.  The approach currently being considered (outlined in the ‘ Reforming flood insurance: Clearing the waters ’) is that insurers will be required to outline which of three categories the policy falls under (sum insured, sum insured plus margin and total replacement). 

4.148           While it has been indicated that this approach has merit, some industry representatives have raised the concern that it may not reflect the level of diversity offered in relation to HBHC insurance policies.  Consultation will be undertaken in order to determine the exact format for outlining what type of cover policy information on the KFS. 

What is covered?

4.149           Currently, the ICR contain prescribed events that are required to be covered (standard cover events), unless a derogation applies.  These events include, amongst others, fire or explosion, lighting or thunderbolt, earthquake, impact by a falling tree of part of a falling tree and riot or civil commotion.  Although ideally the ‘what is covered’ section of the KFS would outline all of the standard cover prescribed events, limiting the KFS to one page renders this impossible.  Further, not all of the prescribed events listed in the standard cover will be of significant consumer interest.

4.150           Consultation will be undertaken in order to determine which of the prescribed events should be outlined on the KFS.  In this regard, current feedback indicates that the main prescribed events of standard cover such as fire or explosion, storm, flood, accidental damage (in accordance with standard cover) are expected to be outlined on the KFS. 

What is not covered?

4.151           Currently, the ICR contain prescribed events that are considered to be exclusions.  These events include, amongst others, depreciation, wear and tear, rust or corrosion and the actions of insects or vermin.  However in order to establish what is included in the ‘what is not covered’ list is not as easy as outlining all of these exclusions.  Consideration is also required to be given to the prescribed events of standard cover that are not to be included in the ‘what is covered’ list.  Consultation will be undertaken in order to determine which of the prescribed events that are considered to be exclusions and those other events that are not included in the ‘what is covered’ section are to be outlined on the KFS. 

Cooling off period

4.152           Currently, it is proposed to include a short statement simply stating that a cooling off period applies to HBHC insurance policy which enables consumers to cancel the policy within that period.  This allows flexibility for insurance provides to enable them to provide cooling off periods in excess of the statutory period.

How to use a KFS 

4.153           Currently, it is proposed to include a simple statement indicating how a KFS is to be used.  The statement will emphasise that it is only a guide and should not be used as a substitute for a PDS as a basis for making a purchasing decision. 

Supplementary consideration for extending the application of a KFS

4.154              Initial consideration was given to potentially extending the KFS application to small business and strata title insurance policies.  However, due to a number of potential issues, raised in consultation (paragraphs 4.204 and 4.209), associated with extending the KFS to these policies, this option was not considered further.

4.155           In this regard, insurance policies covering small business and strata title are usually tailored and are not required to address the standard cover obligations set down in the IC Act.  This is in contrast to HBHC insurance policies which are substantially standardised and are required to the standard cover obligations set down in the IC Act. 

Option B1 — the introduction of a one page, fully prescribed, KFS

Impacts

Consumers

4.156           The introduction of a one page fully prescribed KFS may facilitate increased simplicity, consistency and comparability when consumers are making decisions regarding the purchase of HBHC insurance policies.

4.157           A one page fully prescribed KFS will outline the key information in relation to the insurance policy in an easy to read and consumer friendly layout (determined through consumer testing).  This layout may enable consumers to access the key information in a simple and effective way. 

4.158           Having the KFS fully prescribed also provides consistency in the formatting and content of the KFS.  This consistency provides consumers with a further level of familiarity (knowing what to look for and the meaning of certain words and concepts) that results, in more effective decision making. 

4.159           The consistency provided in KFSs may allow consumers to easily compare one policy with another through the identification of the key facts and other relevant information. 

4.160           The ability for consumers to be able to compare one insurance policy with another may result in increased competition within the insurance industry (however in must be recognised that the contents of the KFS may not necessarily include all matters that are of relevance to individual consumers) and provide potential financial savings for consumers.  However, these potential benefits must be balanced with the potential costs for a consumer associated with the process of shopping around for the best policy for the consumer’s needs. 

4.161           Although the introduction of a KFS facilitates increases in simplicity, consistency and comparability, there is no guarantee that consumers will take advantage of these improvements.  In order for consumers to obtain the benefits from the introduction of a fully prescribed KFS, consumers must still consider all of the key information, including that which is contained in the PDS, prior to making any insurance policy decisions. 

4.162           What is and what is not covered under an insurance policy sometimes involves complex considerations [52] .  A fully prescribed KFS may not be able to cover all information that may need to be considered by individual consumers.  The potential for relevant information, to be omitted, may result in consumers in particular circumstances making decisions based on incomplete information leading to adverse outcomes. [53]  

Industry

4.163           A fully prescribed KFS provides industry with a straightforward legislative process to facilitate the disclosure of the key facts of their HBHC insurance policies to consumers. 

4.164           The benefits of Option B1 that have been identified in relation to consumers, that is, simplicity, consistency and comparability, can also be indentified for industry.  In this regard, once KFSs for HBHC insurance policies become part of standard industry practice (as required under this Option) HBHC insurance policy providers may have a simple and consistent way of communicating key product information to consumers. 

4.165           Under Option B1the KFS will be fully prescribed.   While this allows the insurance industry to formulate standard procedures and methods for informing consumers it does not provide the same flexibility that is offered in Option B3.   The insurance industry will only be required to provide consumers with a document containing key policy information (in addition to their current requirements under the Corporations Act and IC Act), which may minimise the increased compliance costs. 

4.166           The cost expected to be incurred in regard to this Option have been outlined in the costs section of the introduction of a KFS paragraphs 4.135 to 4.150 above.  This option is considered to have no other material costs for industry. 

Commonwealth

4.167           Under Option B1 the Commonwealth will incur consultation, testing and implementation costs:

•        Consultation costs will be incurred during the process of forming and finalising the  Regulations that will give effect to the KFS. 

•        Consumer testing cost will be incurred during the development of the KFS. 

•        Implementation costs associated with both the introduction of the legislative framework and Regulations will also be incurred. 

4.168           In addition to the initial costs associated with introduction of a KFS, ongoing costs will be incurred for monitoring of the KFS.  In this regard ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Table 4.5   Impact assessment of Option B1 (One page, fully prescribed, KFS)

 

Benefits

Costs

Consumers

Easy to read and consumer friendly layout (determined through consumer testing).

Increased consistency as a result of prescribed formatting and content of the KFS.

Easy to compare one policy with another through the identification of the key facts and other relevant information.

A fully prescribed KFS will not be able to cover all information relevant for individual consumers or consumer groups.  This may result in decisions being made on some, but not all, of the relevant information. 

There is a potential risk that the KFS to be seen as a substitute for PDS. 

Any costs incurred by industry for producing a KFS is likely to be passed onto consumers through increases in premiums. 

Industry

A simple and consistent way of communicating key product information to consumers.

A mechanism to reduce the number of inferior HBHC insurance policies.

Initial costs associated with the introduction of the KFS, including assessment of HBHC insurance policies.

Increased ongoing cost, including printing, production and distribution costs.

Commonwealth

 

Consultation, consumer testing and implementation costs will be incurred. 

Monitoring costs will also be incurred as ASIC will administer the standard definition in line with its current responsibilities under the Insurance Contracts Act.

Option B2 — the introduction of a one page, fully prescribed, KFS that refers to the PDS

Impacts

Consumers

4.169           The introduction of a one page fully prescribed KFS that refers to the PDS may facilitate increased simplicity, consistency and comparability when consumers are making decisions regarding the purchase of HBHC insurance policies.

4.170           The referencing aspect of Option B2 essentially creates an intrinsic link between the key information in the KFS and the disclosure information in the PDS.  In effect the KFS will have two purposes; the first to provide consumers with a summary of the key information on the particular insurance policy and the second, to act as a potential guide to more detailed information contained in the PDS. 

4.171           The incorporation of referencing enables consumers to access additional information on areas in the KFS that they consider to be crucial when making decisions.  Consumers are able to increase their knowledge and awareness of their policy in accordance with the level of complexity they wish to adopt.

4.172           Although the introduction of a fully prescribed KFS that refers to a PDS facilitates increases in simplicity, consistency and comparability there is no guarantee that consumers will take advantage of these improvements.  Furthermore, some consumers may see the inclusion of PDS referencing as just additional information that can be disregarded and as such fail to recognise its additional benefits. 

4.173           In order for consumers to obtain the benefits from the introduction, consumers must still consider all the key information on the KFS and where possible all the other relevant information in the PDS prior to making any insurance policy decisions.

Industry

4.174           A one page fully prescribed KFS that refers to the PDS may provide industry with a straightforward legislated process to facilitate the disclosure of the key facts of their HBHC insurance policies to consumers.  In addition, it may provide insurers with the ability to increase customer knowledge and awareness.

4.175           The benefits of Option B2 that have been identified in relation to consumers, that is, simplicity, consistency and comparability, can also be identified for industry.  In this regard, once KFSs for HBHC insurance policies become standard industry practice (as required under Option B2) HBHC insurance policy providers may have a way of communicating key product information that is seen by consumers to be simple and easy to understand. 

4.176           While this allows the insurance industry to formulate standard procedures and methods for informing consumers it does not provide the same flexibility that is offered in Option B3.

4.177           Under Option B2, HBHC insurance providers will be required to have references to the full PDS.  This requirement may result in a reduction in the number of disputes from consumers having policies that fail to provide them with the appropriate cover.  The reduction in disputes can be seen to be achieved though the increased level of knowledge and awareness displayed by consumers as a result of the easy access to the key information in the PDS.

4.178           The costs expected to be incurred in regard to Option B2 have been outlined in the costs section of the introduction of a KFS paragraphs 4.135 to 4.150 above.  However, under Option B2 there is a potential for the costs to increase as a result of the inclusion of PDS referencing.  In this regard, if the two documents (the PDS and KFS) are intrinsically connected any change in one document would require a change in the other.  In order to address this issue insurers would be required to:

•        implement new IT procedures and or practices to integrate the two documents, potentially creating a one-off compliance cost; or

•        make individual changes to the documents as they occur, creating ongoing compliance costs. 



 

Commonwealth

4.179           Under Option B2 the Commonwealth will incur consultation, testing and implementation costs:

•        Consultation costs will be incurred during the process of forming and finalising the Regulations that will give effect to the KFS. 

•        Consumer testing cost will be incurred during the development of the KFS. 

•        Implementation costs associated with both the introduction of the legislative framework and Regulations will also be incurred. 

4.180              In addition to the initial costs associated with introduction of a KFS, ongoing costs will be incurred for monitoring of the KFS.  In this regard ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

Table 4.6   Impact assessment of Option B2 (One page, fully prescribed, KFS, that refers to PDS)

 

Benefits

Costs

Consumers

Easy to read and consumer friendly layout (determined through consumer testing).

Increased consistency as a result of prescribed formatting and content of the KFS.

Ease of comparing one policy with another through the identification of the key facts and other relevant information. 

Ability for consumers to gain an increased knowledge and awareness of all aspects of their HBHC insurance policies.

 

That while a fully prescribed KFS that refers to the PDS will be able to cover all information relevant for individual consumers or consumer groups, there is a potential that consumers may not see its benefits and fail to look beyond its general content.  This may result in decisions being made on some, but not all, of the relevant information. 

There is a potential risk that the KFS to be seen as a substitute for PDS. 

Any costs incurred by industry for producing a KFS are likely to be passed onto consumers through increases in premiums. 



 

 

Benefits

Costs

Industry

A simple and consistent way of communicating key product information to consumers.

A mechanism to reduce the number of inferior HBHC insurance policies. 

Insurance providers should be able to reduce the number of disputes over the level of cover of its policies. 

 

Initial costs associated with the introduction of the KFS, including assessment of HBHC insurance policies.

Increased ongoing cost, including printing, production and distribution costs.

Additional costs will be incurred as new IT procedures and or practices to integrate the two documents (KFS and PDS) will have to be established.

Commonwealth

 

Consultation, consumer testing and implementation costs will be incurred. 

Monitoring costs will also be incurred as ASIC will administer the KFS in line with its current responsibilities under the IC Act.

Option B3 — the introduction of a partially prescribed KFS

Impacts

Consumers

4.181           The introduction of a partially prescribed KFS may facilitate an increased level of simplicity when consumers are making decisions regarding the purchase of HBHC insurance policies.  Consistency and comparability may also be increased in the areas of the KFS that are prescribed.

4.182           If the KFS is partially prescribed consumers will have access to more tailored information for the insurance policy that they are considering/assessing.  Under Option B3 a number of key aspects of the particular HBHC insurance policies will be prescribed [54] ; however the KFS may be tailored to include information (specific to the particular insurance policy)  to be disclosed in order to provide consumers with more relevant information. 

4.183           The tailoring of particular insurance policy information allows consumers to make more simple and effective decisions as only the relevant information is required to be considered.  However, the benefit of this tailoring is dependent on the consumer’s use of the information. 

4.184           The introduction of a partially prescribed KFS may provide increases in comparability for consumers but not to the same extent as Options B1 or B2.  This is due to the fact that the non-prescribed sections of the KFS may potentially contain a diverse range of additional information.  The loss of comparability under Option B3 may be contained as a result of the one page format. 

Industry

4.185           The benefits of Option B3 that have been identified in relation to consumers, that is, simplicity, consistency and comparability can also be indentified for industry.  In this regard, once KFSs for HBHC insurance policies become standard industry practice (as required under Option B3) HBHC insurance policy providers may have a simple and consistent way of communicating key product information to consumers. 

4.186           Option B3 also provides industry with a level of flexibility while still maintaining a level of comparability.  This is achieved through the incorporation of both prescribed sections and non-prescribed sections.  The prescribed sections of the KFS allow consumers and industry to compare products while the non-prescribed sections allow increased flexibility to include product specific information when required. 

4.187           The costs expected to be incurred in regard to Option B3 have been outlined in the costs section of the introduction of a KFS paragraphs 4.135 to 4.150 above.  However, under Option B3 there is a potential for compliance costs to increase as a result of the inclusion of the non-prescribed sections of the KFS.  In this regard, insurers may be required to undertake further individual analysis of each of their HBHC insurance policies to determine the required content of the non-prescribed sections. 

Commonwealth

4.188              Under Option B3, the Commonwealth will incur consultation, testing and implementation costs:

•        Consultation costs will be incurred during the process of forming and finalising the Regulations that will give effect to the KFS. 

•        Consumer testing cost will be incurred during the development of the KFS. 

•        Implementation costs associated with both the introduction of the legislative framework and Regulations will also be incurred. 

4.189           In addition to the initial costs associated with introduction of a KFS, ongoing costs will be incurred for monitoring of the KFS.  In this regard ASIC will administer the standard definition in line with its current responsibilities under the IC Act.

 

Table 4.7 Impact assessment of Option B3 (One page, partially prescribed, KFS)

 

Benefits

Costs

Consumers

Easy to read and consumer friendly layout (determined through consumer testing).

Consumers will have access to more tailored information for the insurance policy that they consider/assess.

Consumers may be able to make more simple and effective decisions as all relevant information is included.

Provides some increases in comparability for consumers. 

There is a potential risk that the KFS to be seen as a substitute for PDS. 

Increases complexity as more information may be contained in some insurance policies.

Not all the additional information included may be relevant to some consumers (the additional information will only be relevant if the consumer values it).

Any costs incurred by industry for producing a KFS are likely to be passed onto consumers through increases in premiums. 

Industry

A simple way of communicating key product information to consumers.

A mechanism to reduce the number of inferior HBHC insurance policies.

The ability to provide consumers with all relevant information thus reducing disputes over cover provided under the insurance policy.

Initial costs associated with the introduction of the KFS, including assessment of HBHC insurance policies.

Increased ongoing cost, including printing, production and distribution costs.

Insurers will be required to assess what additional facts (outside the facts already prescribed) should be.

 

Benefits

Costs

Industry (continued)

 

provided to consumers. 

This will increase compliance costs and reduce certainty. 

Commonwealth

 

Consultation, consumer testing and implementation costs will be incurred. 

Monitoring costs will also be incurred as ASIC will administer the KFS in line with its current responsibilities under the IC Act.

Option B4 — the introduction of a framework for the provision of a document that contains key information regarding a HBHC insurance policies (a non-prescribed KFS)

Impacts

Consumers

4.190           The introduction of a framework for the provision of a document that contains key information regarding HBHC insurance policies may improve consumer knowledge and awareness when making decisions regarding HBHC insurance policies.

4.191           Currently, disclosure for HBHC insurance policies is provided through the provision of the insurance policy and an accompanying PDS.  The PDS regime is essentially a framework for disclosure of financial products.  As discussed previously under the PDS regime a consumer may receive a 30 page, or longer PDS document. 

4.192           The introduction of a framework to be used to produce a document that outlines the key facts may effectively ensure that the key information is contained in a manageable document, thus increasing simplicity and improving consumer knowledge and awareness.  The framework will set out what type of information should be included in the KFS in a similar way to that of other disclosure documents such as PDSs and Shorter PDSs. 

4.193           This may result in consumers being in a better position to make informed decisions regarding their insurance options and cover than is currently the case.  This is because consumers may receive simpler, more readable and standardised guidance on key facts regarding HBHC insurance policies. 

4.194           While providing similar benefits to the first three options, Option B4 fails to adequately address the issue of confusion.  The introduction of a framework will not require insurers to adopt a particular format or level of content that may result in the same increases in simplicity, consistency and comparability as the other options.  It allows insurers to make judgements about what information they think consumers require in order to make effective decisions.

4.195           Furthermore, insurers may, in endeavouring to ensure that they meet the requirements under the framework, include more information than is required.  The inclusion of this additional content may create further complexities that increase the current level of confusion surrounding HBHC insurance policies. 

Industry

4.196           The benefits of Option B4 revolve mainly around the ability for insurers to customise the content and format of their KFS.  Increased customisation allows insurers to increase the level of knowledge and awareness through the provision of specific policy information. 

4.197           The ability to effectively determine the compliance cost under Option B4 is more complex than with the other potential options.  This is due to the fact that under Option B4 the actual compliance costs are dependent on:

•        the current practices of each individual insurance provider; and

•        the changes insurance providers decide to make to their practices (this will depend on the amount of key information the insurance provider decides to include/not include). 

4.198           In order to provide consumers with some level of increased simplicity, consistency and comparability the insurance industry may be required to introduce guidance regarding the format and content of the KFS (this may be accomplished through changes to the insurance industry’s code of practice). 

4.199           Although Option B4 is not strictly a KFS document the costs expected to be incurred are similar to those outlined in the costs section of the introduction of a KFS paragraphs 4.135 to 4.150 above.  In this regard the cost saving that may be achieved through the increased amount of flexibility Option B4 provides to insurers.  The costs associated with establishing what level and type of information required to be included is considered to substantially offset these savings.    

Commonwealth

4.200           Under Option B4 the Commonwealth will incur only minor consultation, implementation and ongoing monitoring costs. 

Table 4.8 Impact assessment of Option B4 (framework for the provision of a document that contains key information regarding a HBHC insurance policies)

 

 

Benefits

Costs

Consumers

Key information regarding HBHC insurance policies will be contained in a manageable document, increasing simplicity and readability. 

Consumers will be able to make informed decisions regarding their insurance options and cover. 

While providing greater simplicity than the status quo option (Option A), Option B4 fails to adequately address the issue of consumer confusion.

Simplicity may increase as a result of the introduction of a framework, however, this is not guaranteed as insurers may include more information than is required thus actually increasing the complexity. 

Any costs incurred by industry for producing any additional disclosure documentation are likely to be passed onto consumers through increases in premiums. 

Industry

Minimal changes are required to meet the new requirements of the regulations. 

Initial compliance costs associated with the introduction of the framework. 

Commonwealth

 

Minor consultation, implementation and monitoring costs will also be incurred as ASIC will administer the KFS in line with its current responsibilities under the IC Act.

Consultation

Government consultation with insurance industry

4.201           The Government met with the insurance industry on numerous occasions.  Many of these meetings have involved the Assistant Treasurer and Minister of Superannuation and Financial Services. 

•        14 January 2011 — 1st meeting with insurance industry heads, and Qld government in Brisbane.  This meeting focused on immediate response issues.

•        27 January 2011 — ICA issues 10 point plan in response to natural disasters.  Calls for standard definition and improved disclosure.

•        3 February — 2nd meeting with the full ICA Board .

-       The Government and the ICA discussed the 10 point plan issued by the ICA.

-       The discussion included consideration of standard definition and one page key facts statement.

•        18 February 2011 — 3rd meeting with the full ICA Board. 

-       The Govt and ICA reached in-principle agreement at this meeting to work towards a standard definition and one page key facts statement. 

•        4 March 2011 — 4th meeting with the full ICA Board. 

-       Further consideration of the details around a standard definition and one page key facts statement. 

-       This conversation assisted the Government in developing ‘ Reforming flood insurance: Clearing the Waters ’, the consultation paper containing a proposal in relation to a standard definition and one page key facts statement and seeking submissions.

•        5 April 2011 — Government released ‘ Reforming flood insurance: Clearing the Waters ’ at a public forum in Ipswich.

-       This forum was jointly attended by the Minister, the ICA and Qld Legal Aid.

-       It was attended by hundreds of local people affected by the floods and included many representations in relation to consumer confusion in relation to flood coverage.  Many people thought that they were covered for flood and weren’t.

•        5 April 2011 — ICA publicly supports a standard definition and one page key fact statement.

•        16 May 2011 — ICA lodged submission to Clearing the Waters.  Supportive of both standard definition and one page key facts statement.

•        14 July 2011 — ICA makes submission to the NDIR.  .

Government consultation with consumer groups

•        January 2011 — jointly, consumer groups issue a 12 point plan which includes recommendation to implement a standard definition of flood and a one page key facts statement.

•        31 March 2011 — Meeting with consumer group representatives re standard definition and one page key facts statement.

•        May 2011 — consumer groups make joint submission to Clearing the Waters.  Strongly argue for standard definition and key facts statement.

Reforming flood insurance — Clearing the waters

4.202           On 5 April 2011, the Commonwealth released a consultation paper ‘ Reforming flood insurance — Clearing the waters ’ that identified issues and a number of options for improving the regulatory framework and other aspects of Australia’s insurance market. 

•        The consultation paper contained two key proposals for consideration:

-       To introduce a standard definition (in plain English) for flood across HBHC insurance policies in order to ensure  HBHC insurance policies are more easily understood, so consumers are not surprised when they try to make a claim.  Under the proposal, the term flood would only appear in an insurance policy if it is defined as the standard meaning of the term.

-       The introduction of a single page KFS for HBHC insurance policies, to allow consumers to see at a glance, the key elements of the policy — what is covered and what is not.

4.203           Several submissions were received from interested stakeholders and of these 13 submissions were able to be made public and can be found on the Australian Treasury website: www.treasury.gov.au.  Submissions indicated a broad level of support for an adoption of a standard definition of flood and a KFS.  Submissions made a number of constructive observations and suggestions in response to the questions in the paper. 

4.204           There were no substantial disagreements from either consumer groups or industry regarding the introductions of the KFS for HBHC insurance policies.  There was however some disagreement regarding the exact content and format of the KFS with the main points of contention being that of providing references to the insurance policies PDS and the ability to have more flexibility regarding what is to be included in the ‘what is’ and ‘what is not’ covered sections of the KFS. 

4.205           One area in which significant disagreement may have arisen was in relation to the potential for KFSs to be extended to Residential Strata Insurance Policies (RSIP). [55]   There was a clear concern that as the fundamental nature of RSIP were different to that of HBHC the ability for RSIP providers would not be able  to comply with the KFS requirements.  The extension of the KFS to RSIP was not pursued due to their fundamentally different nature to HBHC insurance policies.  That is, RSIP policies are usually tailored and are not required to address the standard cover obligations set down in the IC Act.

4.206           In addition, in relation to the costs associated with the introduction of a KFS, only one insurer, as discussed in paragraphs  4.143-4.144, stated that:

‘it would of course come at a significant cost for the industry and have prudential implications’

4.207           However as stated in paragraph 4.144 this statement was not supported in any other submission to the ‘Reforming flood insurance: Clearing the waters’ consultation paper.

Consumer Comments

4.208           Consumer groups have indicated that they generally support the introduction of a KFS.  Consumer groups consider that a KFS will:

•        give consumers a better understanding of what their policy covers and what it does not, accepting the reality that very few people read and understand their PDS;

•        help consumers shop around for insurance by allowing easy comparison between competing policies, thereby improving competition; and

•        give consumers important information relating to their policies including information relating to under-insurance.

4.209           In relation to the type of KFS that should be introduced consumer groups have indicated that:

•        a KFS must set out the most important points of the policy clearly and simply.  By providing consumers with two documents, a KFS and a PDS detail will be retained but clarity and accessibility will be improved.  This will lead to  better decision making by consumers regarding insurance coverage, which is good for consumers, the industry and the community at large;

•        they strongly support a fully prescribed KFS, as this will ensure clarity about what is and is not covered by the policy, and will allow easier comparison between products; 

•        by prescribing the events covered, exclusions for key events will be made clearer;

•        if a KFS is not fully prescribed, insurers may simply avoid mentioning events that they do not cover, thus leading to unfavourable outcomes for consumers;

•        if a partially prescribed KFS is adopted there must be a limit on the additional matters that insurers might otherwise choose to include in the 'what is covered' list but that are not essential to the consumer's understanding of the most important features of the product;

•        if the KFS is not fully prescribed there is a potential for insurers to choose to list a number of matters on the KFS that are not essential to the policy that will make it harder for consumers to read and understand;

•        although fully prescribing the list may not effectively capture all aspects of insurance cover under the policy, the greater risk is that insurers would provide too much information.  Consumer groups have highlighted that it should be made clear that a KFS will not replace a PDS (as it cannot provide the same level of detail);   

•        if in the future the nature of insurance changes and different events emerge that are of more importance, the Regulations can be changed to allow other events to be included in the KFS; and

•        cross referencing with the PDS should be included in the KFS to encourage consumers to read at least the sections of the PDS that are relevant to the insurance related decisions. 

Industry Comments

4.210           The insurance industry has indicated its general support for the introduction of KFSs.  The ICA released a media release [56] supporting the Commonwealth’s release of the  discussion paper ‘Reforming Flood Insurance — Clearing the Waters’ stating that:

•        they welcomed the release of the paper;

•        they understand that the Australian community would like improved clarity on the availability of flood insurance and how it works;

•        they have released a ten point plan [57] to tackle disasters; and

•        significant progress has been made on key issues outlined in the ten point plan.  In particular, work is well progressed on:

-       a standard definition of flood;

-       improved disclosure; and

-       flood mapping.

4.211           In relation to the type of KFS that should be introduced the insurance industry has generally indicated that:

•        the KFS should be prescribed and determined by Treasury in consultation with the Financial Services Disclosure Advisory Panel (with input from industry and consumer advocates);

•        prescribing events has a number of advantages including:

-       certainty about the minimum amount of information required to be given;

-       reducing the possibility of disputes between consumers and insurers; and

-       protecting against allegations of misleading and deceptive conduct in relation to the content of the statement.

•        the disadvantage of prescribing a KFS is that it will only ever facilitate comparability at the minimum coverage level and the content level of the KFS;

•        not prescribing certain aspects of the KFS such as ‘what is covered’ means that insurers will be required to determine what goes into the document and this will result in insurers being  exposed to the risk of unintentionally misleading consumers;

•        one major difficulty with prescribing what is key information is that what is a key fact for one person is not for another.  As such the Commonwealth should identify what it believes needs to be dealt with at a minimum;

•        in situations where other exclusions/conditions in the policy are not included in the KFS where they would be required to be included for a particular consumer/consumers, it would be appropriate for the insurance industry and in particular insurance brokers to provide this additional information;

•        the KFS should not refer to specific pages or paragraphs in the PDS.  Apart from taking up additional space, specific references may change, making the statement inaccurate.  Referring to specific pages/paragraphs could also cause consumers to read their contract in parts or in isolation; and 

•        referring to the PDS could create additional costs to the product if the insurer changes its policy wording and then has to also amend the KFS each time as well. 

4.212           However a number of issues have been raised in the particular context of Residential Strata Insurance Policies (RSIP).  In this regard, the following statements have been made:

•        Whilst the proposed approach appears logical to allow comparison of HBHC insurance policies, doing so on a prescribed events-basis would be misleading in the case of Residential Strata. 

•        To satisfy all the various state based statutory requirements relating to Residential Strata insurance cover, insurers must provide cover via an ‘Accidental Damage Policy’. 

•        Accidental Damage policies provide broader cover and additional benefits to consumers not otherwise available via a prescribed/defined event loss cover.

•        As RSIP are Accidental Damage Policies subject to exclusions, the differentiating factors from a Body Corporates perspective are the additional benefits provided by each insurer.

•        Therefore in the case of RSIP it would be necessary to include ‘other’ covers to allow the Body Corporate to differentiate between products.  Without an option to include ‘other’ covers the KFS would be misleading.

Conclusion and Recommended Option

4.213              Option B1 is the recommended Option.  However, it is not possible at this time to conclude that Option B1 will address the problem and result in a net benefit as the size and the reasons for the problem are not shown through empirical evidence. 

4.214           Further, it is important to note that the precise content and format of the KFS will be contained in Regulations and will be established through extensive consultation with key stakeholders.  As such the effectiveness and benefits of this option cannot be fully measured at this time.

4.215           Option B1 is the most likely option to achieve the objective to assist consumers with understanding the basic terms of the insurance policy, including the nature of cover and any key exclusions.

4.216           Some potential benefits to consumers include:

•        increased simplicity, consistency and comparability when consumers are making decisions regarding the purchase of HBHC insurance policies;

•        an easy to read and consumer friendly document (determined through consumer testing); 

•        more effective decision making through an increased level of familiarity (knowing what to look for and the meaning of certain words and concepts) as a result of the introduction of the KFS; and 

•        increased financial and time savings from the increase in competition within the insurance industry. 

4.217           Some potential benefits for industry include:

•        a straightforward legislated process to facilitate the disclosure of the key facts pertaining to their HBHC insurance policies; and

•        a simple and consistent way of communicating key product information to consumers. 

4.218           In adopting Option B1 some costs will be incurred.  The costs for consumers relate to the fact that the cost for insurers of providing a KFS is likely to be passed onto consumer through increased premiums :

4.219           The costs for industry for adopting Option B1 are primarily the costs associated with the:

•        initial assessment of the policy required in order to establish the key information of the HBHC policy that is required to be included on the KFS; and

•        printing, production and distribution of the one page fully prescribed KFS.

4.220           In conclusion, while there is no empirical evidence supporting the benefits of Option B1, qualitative and anecdotal evidence suggests that there may be benefits for both consumers and industry.  Therefore Option B1 is the recommended Option. 

4.221           However, as stated in paragraph 4.213 above, due to the fact that the magnitude and the cause of the problem cannot be clearly established through empirical evidence, it is not possible at this time to conclude that Option B1 will address the problem and result in a net benefit. 

Implementation and review

Implementation

Changes to the Insurance Contracts Act 1984

4.222           The legislative framework for a one page fully prescribed KFS would be introduced by an amendment to IC Act.  New regulations would be required to be made to the Insurance Contracts Regulation 1985 (ICR) to establish the content and format once the framework was introduced. 

4.223           The introduction of a framework for a one page, fully prescribed KFS would be expected to be introduced into Parliament in November 2011 as part of a package of amendments to the IC Act. 

4.224       There will be a two year transition period which will commence from the date the regulations are made.  It is envisaged that a two year period will provide sufficient time for individual insurers to calculate the impact the proposed changes will have on their businesses; make the necessary amendments; and notify policy holders. 

Consultation on the regulations covering the content and format of the KFS

4.225           Extensive consultation will take place on the content and format of the KFS.  Consistent with comments received in submissions to the ‘ Reforming flood insurance: Clearing the waters ’ consultation paper, the main consultation process would be expected to take place through the Financial Services Advisory Panel (FSAP).

4.226            In addition to consultation on the content and format of the KFS, consumer testing would be undertaken in order to ensure the Commonwealths objectives are met.  The precise format of the consumer testing would be determined once the legislative framework for the KFS had been introduced. 

4.227           There will be public consultation on the draft regulations so that consumer groups and industry representatives would be able to provide comment on the proposed content and format for the KFS. 

4.228           Issues that will be consulted on include the use of certain sized text, prescribed wording, sections and terminology.  Using the main industry consultation group would ensure that all key stakeholders dealing with HBHC insurance policies are properly consulted and will produce a more robust product. 

4.229           It is expected that once the content and format of the KFS has been finalised, an implementation RIS will be prepared prior to the new regulations being made.

Review

4.230           The effectiveness of the proposed measure and legislative amendments would be monitored by ASIC.  It is expected that the effectiveness and impact of the introduction of a one page fully prescribed KFS would be reviewed after a sufficient period of time had elapsed. 

4.231           In this regard the time between the commencement of relevant regulations and any review of the operation of the regulations must allow for industry and consumer groups, as well as the Commonwealth, to have gathered sufficient data so as to contribute to a meaningful assessment of the success of the measure.

 




[1]     The terms of reference of the NDIR can be found on the National Disaster Insurance Review website: www.ndir.gov.au

[2]     Standing Committee on Social Policy and Legal Affairs website: http://www.aph.gov.au/house/committee/spla

[3]     http://www.floodcommission.qld.gov.au/

[4]     http://www.floodsreview.vic.gov.au/

[5]     Finity Consulting Pty Limited Flood and other natural perils p3.

[6]     Natural Disaster Insurance Review Submission by the Financial Ombudsman Service Limited http://www.ndir.gov.au/content/submissions/issues_paper_submissions/Financial_Ombudsman_Service_Limited.pdf

[7]     Submissions made to the Queensland Floods Commission of Inquiry can be viewed at http://www.floodcommission.qld.gov.au/submissions Submissions made to the National Disaster Insurance Review can be viewed at http://www.ndir.gov.au/content/Content.aspx?doc=home.htm The submission made by Legal Aid Queensland contains a number of relevant case studies.

 

[8]     ACCC Chainman, Mr Graeme Samuel

[9]     Ibid

[10]   Regulation 10(a)(xi) of the Insurance Contracts Regulations 1985

[11]   Hams & Ors v CGU Insurance Limited [2002] NSWSC 273

[12]   Report 230 ‘Financial literacy and behavioural change’ released March 2011, http://www.financialliteracy.gov.au/media/218309/financial-literacy-and-behavioural-change.pdf

 

 

[13]   noun 1.  a great flowing or overflowing of water, especially over land not usually submerged. www.macquariedictionary.com.au/ viewed 8 September 2011

[14]   See paragraph  4.34

[15]   See Suncorp submission to ‘Reforming flood insurance - Clearing the waters’ http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1995 last viewed 8 September 2011

[16]   Industry Continues Work on Flood Reforms, 5 April 2011, viewed 18 July 2011, http://www.insurancecouncil.com.au/Portals/24/Media%20Centre/2011%20Media%20Releases/ICA%20Media%20Release%20Flood%20Insurance%20050411.pdf

[17]   ICA, ‘Insurance Claim Payments on the Increase’, media release, 28 June 2011

[18] Insurance News.com.au, ‘fortnightly premiums payments - why not’ http://www.insurancenews.com.au/analysis/fortnightly-premium-payments-why-not

[19] JVIB News ‘Time for a change - calls to review ‘flood’ definitions’

[20]   The terms of reference of the NDIR can be found on the National Disaster Insurance Review website: http://www.ndir.gov.au

[21]   The ‘Reforming flood insurance: Clearing the waters’ consultation paper can be found at:  http://www.treasury.gov.au/contentitem.asp?ContentID=2039&NavID=037Archive

[22]   Standing Committee on Social Policy and Legal Affairs website: http://www.aph.gov.au/house/committee/spla

[23]   Information on the review can be found at: http://www.floodsreview.vic.gov.au

[24]   Information on the Commission can be found at: http://www.floodcommission.qld.gov.au

[25]   Hams & Ors v CGU Insurance Limited [2002] NSWSC 273 

[26]   Joint submission to Reforming Flood Insurance: Clearing the Waters discussion paper, 13 May 2011, http://www.legalaid.vic.gov.au/xfw/rc_Joint_Submission_-_Reforming_Flood_Insurance_-_May_2011.pdf

[27]   Insurers back flood definition but wary of ‘key facts’,

      http://www.insurancenews.com.au/local/insurers-back-flood-definition-but-wary-of-key-facts

 

[28]   General insurers in Australia also operate under a code of practice that is monitored by the Financial Ombudsman Service (FOS). Under the code of practice insurers have 10 business days from lodgement of all required claims materials in which to communicate an initial assessment of your claim. There are options under the code of practice for consumers if this timeline is not met.

[29]   General Insurance Code of Practice: Overview of the 2007-2008 Financial Year can be found at: http://www.fos.org.au/centric/home_page/publications/general_insurance_code_of_practice_yearly_overview.jsp

[30]   Insurance Ombudsman Services (IOS) 2007-2008 Annual Report can be found at: http://www.fos.org.au/centric/home_page/publications/annual_reports_archive.jsp

[31]   Ministerial correspondence

[32]   Report 230 ‘Financial literacy and behavioural change’ released March 2011,  http://www.financialliteracy.gov.au/media/218309/financial-literacy-and-behavioural-change.pdf

[33]   Inside Story, 2010, an unpublished presentation to the ICA, ‘Consumer Insurance Product Information Needs’ project number 3259.

[34]   The supporting material to the Corporations Amendments Regulations 2010 (No. 5) is the Regulation Impact Statement (RIS) for the introduction of the shorter PDS regulations for superannuation products and MIS, which satisfied OPBR RIS requirements. A copy of the supporting material to the Corporations Amendments Regulations 2010 (No. 5) may be found at: www.comlaw.gov.au/Details/F2010L01585/Supporting%20Material/Text  

[35]   Chapter 6 of the Explanatory Memorandum to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 contains that Regulation Impact Statement (RIS). The Office of Best of Best Practice and Regulation indicated that the RIS that was prepared prior to the final decision satisfied their requirements a copy of the RIS can also be found at: http://www.ris.finance.gov.au/2010/12/21/competitive-and-sustainable-banking-system-%E2%80%93-%E2%80%98key-facts%E2%80%99-document-treasury/

[36]   ‘Towards a Conceptual Model of Consumer Confusion’, Vincent-Wayne Mitchell, Gianfranco Walsh and Mo Yamin.

[37]   ASIC, Report 7 ‘Consumer understanding of Flood Insurance’ ,

      http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/floodreport.pdf/$file/floodreport.pdf

[38]   IEC Determination Referral No 299 047 211

[39]   IEC Determination Referral No 299 047231

[40]   On page 21 of NRMA’s PDS ‘Home Insurance Buildings and Content Product disclosure statement and policy booklet’, on page 5of  youi’s PDS ‘Home Product Disclosure Statement’, on page 47 of ANZs PDS ‘ANZ Home Insurance Product Disclosure Statement

 and Policy Document’, on page 7 of CommInsure’s  PDS ‘CommInsure Home Contents Product Disclosure Statement (PDS) and on page 11 Westpac’s PDS ‘Love is. A hot bath. A good book. Your sofa.’ Home and Contents Insurance Product Disclosure Statement and policy wording.

[41]   Currently the IC Act requires any document required to be provided to the policy holder, to be provided either personally or to the policy holder’s postal address. Therefore, although 78 per cent of respondents indicated that they were aware of the legal cooling off period a number of consumers may still be under the belief that if they fail to receive the disclosure documentation for their policy within 7 days, the cooling off period would not be able to be relied upon.    

[42]   The Allen Consulting Group, 2009, unpublished draft report to the ICA ‘A better Product Disclosure Statement Regime’

[43]   Legal Aid Queensland, ‘Preliminary submission to Queensland Floods Commission of Inquiry re paragraph 2(b) of the Terms of Reference’, submission, 4 April 2011

[44]   Section 37 of the IC Act relates to the notification of unusual terms. For ‘non-prescribed’ types of contracts (which would include, for example, commercial buildings and contents), there is no standard cover regime. However, insurers still need to ‘clearly inform’ policy holders in writing, before a contract is entered into, of the effect of any terms ‘of a kind that are not usually included in insurance contracts that provide similar insurance cover’. Failure to clearly inform an insured of such a clause (for example, an unusual exclusion or limitation) means the insurer is not permitted to rely on it later. Section 37 only applies to provisions ‘not usually included in contracts of insurance that provide similar cover’. So, if an exclusion or limitation is generally used in relation to the type of cover concerned, section 37 offers no protection even if the insured was not clearly informed of the term.

[45]   The Cooling off Period for Retail Clients (as defined in the Corporations Act 2001)

[46]   Report 230 ‘Financial literacy and behavioural change’ released March 2011, http://www.financialliteracy.gov.au/media/218309/financial-literacy-and-behavioural-change.pdf

 

 

[48]   Which, as asserted by the ICA, represent a significant proportion of the home and contents insurance policy market.

[49]   The RACQ submission and other industry submissions can be found at: http://www.treasury.gov.au/contentitem.asp?ContentID=2039&NavID=037

[50]   Smaller insurers generally have a stronger website focus and as such will provide consumers with online access to their KFSs therefore potentially minimising printing and distribution costs.    

[51]   As outlined in ‘Reforming flood insurance : Clearing the waters’

[52]   National Insurance Brokers Association of Australia - Insurance Contracts Act Issues Other Than Section 54 (submission) ,

      http://icareview.treasury.gov.au/content/_download/submissions_post_issues/niba.pdf

[53]   Insurance providers will however continue to be required to provide a PDS.

[54]   The prescribed section will be established through consultation with industry and consumer groups. It is envisioned that both the type of cover and the basic information regarding what is covered and what is not covered under the policy will be prescribed.

[55]   The extension of the application of the KFS discussion regarding the consideration of this extension may be found in paragraphs 4.154 and 4.155.