Overview

In her 12 October 2023 address to the Insurance Council of Australia Conference Australian Securities and Investments Commission (ASIC) Deputy Chair Karen Chester reiterated previous calls for insurers to prioritise addressing ASIC's concerns in the three key areas (outlined below) as a necessary 'precursor' to addressing the various structural challenges facing the sector.  

The key message underpinning the speech is that: 

'…absent the right basics, aspirations can easily go awry (think AI, think product innovation).  Or can prove elusive (think government policy intervention and investment).  So today our focus remains on getting the basics right.  And we think it ought to be yours, as a priority, and collectively so'.

1.  Delivery of pricing promises 

Addressing the issues identified in ASIC report 765: When the price is not right: Making good on insurance promises (REP 765) (summarised) was the first area flagged by the Deputy Chair.  

Specifically, Ms Chester called on insurers to prioritise addressing these three areas of concern:

• 'unnecessary complexity in pricing promises and pricing practices' 
• 'persistent underinvestment in product governance, systems, controls and data, including controls over product distributors'
• 'insurers’ inaction over years to act on earlier risk flags'.

Ms Chester acknowledged the work already being undertaken by insurers– for example Ms Chester said that ASIC has observed insurers are creating centralised repositories for pricing promises and establishing dedicated roles assigned for reviewing pricing promises – but made clear that ASIC considers more work remains to be done.  

In particular, Ms Chester observed that:

'Many insurers still have multiple and legacy systems outpaced by the complexity of their products and distribution channels.  Underinvestment here will continue to get in the way of delivering on pricing promises'.

From an enforcement/compliance perspective, Ms Chester said that ASIC stands ready to take 'targeted enforcement action' to address potential misconduct where this is identified pointing to the regulator's record of doing so to date in illustration.  Ms Chester also flagged that further insurance pricing investigations are underway.  

Pricing transparency should be an area of continuing board focus

Looking ahead, Ms Chester said that ASIC has:

'broadened our focus to pricing transparency. Premium transparency is paramount for customers to clearly understand your promises. And to restore customer trust in its delivery'.

Ms Chester also emphasised ASIC's expectation that boards have an ongoing focus on the issue.  Ms Chester said:

'Ultimately, there are four questions boards should be critically asking on pricing transparency – and regularly so – of management:

• Are we delivering our pricing promises and discounts?
• Is our pricing clear and transparent, and is the pricing system auditable? Can we follow the promise?
• Can our consumers see the promise delivery?
• Can they see the impact of any mitigation steps on their premium?'

2.  DDO compliance 

The second priority area identified was DDO compliance.  Referencing ASIC's initial insurance DDO findings (which focused on product design and target market determinations (TMDs) (summarised), Ms Chester observed that ASIC 

'found compliance with the obligations to be nascent at best…Many got the basics wrong. Target market descriptions were vague or overly broad. Most did not properly consider or explain how the product issuer considered a consumers’ financial situation, objectives and needs'.

Ms Chester called on boards to consider the following three questions when monitoring the state of DDO compliance within their organisation:

• 'For each product, is our target market clear? Is it a real target or too broad?'
• 'Are we confident the product will meet the financial situation, needs and objectives of people in the target market, and how do we test this regularly?'
• 'How does the product account for the financial needs of distinct consumer cohorts residing within the target market, for example – flood or bushfire prone consumers, or low-income consumers?'

ASIC has proven itself willing to take action to enforce compliance

Ms Chester observed that DDO 'has become a "go to" regulatory tool and a compliance compass across ASIC', pointing to ASIC's record of issuing stop orders – including 39 interim stop orders in the insurance context – in support.  

Ms Chester added that ASIC has commenced four civil penalty proceedings over alleged DDO breaches to date with other investigations on foot.  

Looking ahead, Ms Chester said that ASIC will extend its focus to compliance with the 'reasonable steps' obligation (distribution) and will also focus on 'low value insurance products'.  

Unfair contact terms

Ahead of upcoming changes to the unfair contact terms regime set to apply from November 2023 (see: Beefed up unfair contract terms regime to commence next year) and in line with ASIC's 2023 enforcement priorities, Ms Chester said that ASIC is also focused on unfair contract terms (UCT). 

At this stage, ASIC is monitoring potential unfair terms relating to maintenance and 'wear and tear' in home insurance.  

3.  Claims handling

Addressing the five areas for improvement identified in Report 768 Navigating the storm: ASIC's review of home insurance claims (REP 768) (summarised in Governance News 16/08/2023 at p17) was the third priority area identified.  To recap, these five areas are:

• 'better communications to customers about decisions, delays, and complications
• better project management and oversight of third parties
• better recognition and handling of complaints and expressions of dissatisfaction
• better identification and treatment of vulnerable consumers, and
• better resourcing of claims handling and dispute resolution functions'.

On the issue of claims handling resourcing, Ms Chester emphasised ASIC's expectation that insurers 

'further analyse the resourcing of claims handling and immediately address the identified under-resourcing of their complaints handling (dispute resolution) functions'. 

From an enforcement perspective, Ms Chester stated that ASIC is 'actively monitoring claims handling practices' and has commenced 'several investigations' as well as undertaking 'supervisory work to identify and address inadequate internal and external dispute resolution arrangements this financial year'.  

Ms Chester further observed that claims handling will be subject to parliamentary scrutiny by the House of Representatives Standing Committee on Economics inquiry into insurers’ responses to 2022 major floods claims which is due to report by 30 September 2024.  Among other things, the inquiry is expected to consider the timeframes for resolving claims and insurer communication with policyholders. 

In addition, the inquiry will also consider ASIC's review of home insurance claims (Report 768) and the Insurance Council of Australia's (ICA's) external review of insurers’ responses to the 2022 floods.

ASIC considers boards have a key role to play 

In making these points Ms Chester underlined ASIC's expectations around the role boards are expected to play:

'…it’s up to your boards to take ‘whole of business’ accountability for getting the basics right. And with that the trust of consumers, communities and government preserved.  So, your aspirations – to do things better and differently – ought to be supported, secured and safe'.

[Source: Speech by ASIC Deputy Chair Karen Chester, ‘The Princess and the Pea’: Getting the basics right in insurance', Insurance Council of Australia (ICA) Annual Conference 12/10/2023]