ASIC has taken a firm stance on the sale of add-on insurance products in a recent report (REP 492), asserting serious market failures. The report, which focuses on insurance distribution through car dealers, highlights concerns about low claim payouts relative to premiums and dealer commissions, poor product value and design and sales processes that inhibit good consumer decision-making.
On 13 September 2016, sixteen life and general insurers applied to the ACCC for authorisation to enter arrangements to limit commissions and benefits paid through motor dealers to 20% of premiums. This cap is consistent with the cap under section 145 of the National Credit Code for consumer credit insurance. The application proposes implementation through an industry code of conduct, with accompanying ASIC reporting requirements relating to prices, claims payouts and loss ratios. Allowing for a transition period of just 3 months, the authorisation has been sought for ten years or until a regulatory or legislative instrument becomes effective.
While a code of conduct will bind subscribing insurers, a regulatory or legislative change would be required to impose a cap more broadly. ASIC could make a Class Order under sections 926A or 992B to modify the effect of the Corporations Act 2001 (Cth) for example by declaring that paying commissions in excess of 20% is ‘unconscionable conduct’ under Division 7 of Part 7.8. However, ASIC has traditionally employed class orders to provide relief and not to impose new obligations. Alternatively, ASIC could impose new licence conditions to give effect to a cap.
If the cap is not mandated by law, industry stakeholders will need to consider the extent to which existing distribution contracts would allow a cap to be unilaterally imposed.
If dissatisfied with the industry’s response, further and more specific enforcement action is anticipated. Add-on insurance products could also become the test case for the use of the product intervention power if, as recommended in the Financial System Inquiry Final Report, it is granted to ASIC.
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This article was written by Andrew Galvin, Partner and Katherine Montano, Solicitor.