ASIC has outlined the findings of its recent review of TMDs for general and life insurance products. In this update, we explore the key takeaways of the review. Insurers must carefully consider the recommendations and guidance given, as ASIC flags follow-up action and ongoing scrutiny of compliance with the DDO regime more broadly.

Background to the ASIC review

The design and distribution obligations (DDO) regime set out in the Corporations Act 2001 (Cth) (Act) took effect on 5 October 2021. As part of the DDO regime, a target market determination (TMD) for an insurance product must be in writing, must describe the class of retail clients that comprises the target market, specify any distribution conditions and specify review triggers that would suggest the TMD is no longer appropriate (among other requirements).

The Australian Securities & Investments Commission (ASIC) has declared its strategic focus on reducing the risk of harm to consumers caused by poor product design, distribution and marketing as part of its Corporate Plan 2022 – 2026.

Giving effect to this, ASIC has recently completed what it has described as a ‘targeted’ and ‘risk-based’ review of over 100 TMDs across general and life insurance products, assessed against the requirements set out in the Act and Regulatory Guide 274: Product design and distribution obligations.

Regarding the general insurance component of the review, the exercise focused on products considered to be potentially higher risk and lower value, such as mortgage protection, mobile phone, travel and pet insurance. On 18 July 2023, ASIC wrote to the Insurance Council of Australia, the Council of Australian Life Insurers and the Financial Services Council, outlining the findings of its review. Those letters are published on ASIC’s website.

In this article, we explore the key takeaways of the review relevant to TMDs for general insurance products. ASIC has foreshadowed that it is considering follow-up action arising from the review, as well as ‘ongoing scrutiny of general insurers’ compliance with the DDO regime more broadly’. ASIC has also already issued its first interim stop orders for deficiencies in TMDs for pet insurance products.

Insurers must carefully consider the latest recommendations and guidance given and ensure that TMDs are regularly (and rigorously) assessed for compliance with the requirements. Such reviews should form part of what ASIC describes as ‘well embedded DDO compliance processes, robust information flows with distributors and whole-of-product life cycle DDO governance’.

The key takeaways of the review

Defining the target market for the product

• Some TMDs fail to describe the consumer’s financial situation (i.e. their ability to pay premiums and other costs that may be incurred under the policy), or fail to explain why the product is likely to be consistent with the likely objectives, financial situation and needs of consumers in the target market. If a TMD uses a broad statement to describe the target market, there is a greater responsibility to demonstrate how the product is likely to be suitable for such a wide range of consumers.
• Examples of good practice include describing the target market with reference to objective and tangible parameters (i.e. product eligibility requirements and other elements of cover, details about the consumer’s financial situation and a clear definition of a ‘negative target market’), considering the extent to which a product provides value to consumers in the target market, and considering value metrics (i.e. claims ratios) when preparing and reviewing TMDs.

Distribution conditions

• Some TMDs fail to sufficiently specify how distribution channels and conditions ensure distribution will be within the target market. Simply referring to tailored application processes or distribution via authorised representatives (without further explanation) may not be sufficient.
• Good practice includes ensuring that TMDs explain why the distribution conditions will make it likely the distribution will be within the target market (i.e. the use of call scripts, staff training and accreditation, staff monitoring, ‘knockout questions’). Without such explanation, the insurer is unlikely to be able to reasonably conclude that its distribution conditions will direct distribution to consumers in the target market.

Review triggers'

• TMDs should not describe review triggers too broadly, without objective and granular detail (i.e. ‘significant changes in the product metrics’, ‘the claims experience of this product’ or ‘unexpectedly high number of complaints’).
• Good practice involves identifying review triggers using data (i.e. claims ratios, number of policies sold, policy lapse and cancellation rates, average claim durations, claims denied and withdrawn and the nature and number of complaints), which will differ based on the nature of the target market. Granular metrics should be considered part of the TMD reviews' internal governance process.

Distributor reporting requirements

• Some TMDs do not include a specific reporting period for when the distributor must provide information to the insurer about the number of complaints about the product – these should be explicitly stated.

Review periods

• When specifying review periods, insurers should consider an initial review period of one year for new TMDs, and ongoing review periods of no less than two years. A significant impact on the product (such as a change to the TMD based on a review trigger, a significant dealing outside the target market or a change in the distribution channel) indicates a TMD review should occur within the next 12 months.

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