The Financial Services Royal Commission recommended in February that Treasury develop an "industry-wide" Deferred Sales Model for the sale of all Add-on Insurance products. Treasury's Proposal Paper, released on 9 September 20191, sets out details of the model.
Treasury's proposal is to apply a simple, uniform Deferred Sales Model to all types of Add-on Insurance across all channels through which they are distributed, and subject to very limited exceptions.
The Model will operate as follows:
- Insurance information is not to be put to the consumer until they have made a financial commitment to purchase the primary good or service, or to arrange finance over that good or service.
- The distributor can then provide prescribed information about the Add-on Insurance product to the customer.
- A four-day deferral period must then pass before the distributor is able to contact the customer.
- The customer will be entitled to reduce the deferral period to a single day at their initiative. In order to do so, the customer would need to contact the distributor to complete the purchase of the insurance product.
Let's look at some of the points coming out of this.
What products are caught?
The Model is to apply to all "Add-on Insurance", other than where it has been expressly exempted. As such, it is important that we have clarity on what is meant by Add-on Insurance. Treasury suggests the following definition:
"Those insurance products that are offered or sold at the same time as when a consumer purchases the primary product or finance for which the insurance covers associated risks."
The Code Governance Committee's June 2018 report into general insurance2 provides a good analysis of what might fall within such a definition. It identified 28 different types of Add-on Insurance products. Examples of those sold outside of motor vehicle dealers and financial institutions included:
- travel insurance;
- ticket event/cancellation insurance;
- mobile phone insurance;
- pet insurance;
- marine pleasurecraft insurance;
- rental bond insurance;
- rental vehicle excess insurance;
- transit insurance; and
- jewellery insurance.
Distribution channels for these products could take a wide variety of forms. Examples would include travel agents, airlines, ticket sellers, mobile phone retailers, real estate agents and transport companies. Significantly, Treasury refers to it including online sales, where that sits alongside the sale of the primary product or service.
Obviously, some of the products referred to above are also sold in circumstances where they would not be Add-on Insurance, for instance through direct sales. Treasury accepts that this will occur and provides an example in its paper. It notes that pet insurance will be Add-on Insurance if it is offered "at the same time or in conjunction with" the purchase of a pet that it covers, or services provided in relation to that pet (eg. veterinary services), but not if it is sold on a standalone basis.
Are any Add-on Insurance products exempt?
Treasury envisages that some Add-on Insurance products will be exempt from a deferred sales period3, though it warns that that will only be the case where there is strong quantitative evidence of product value and consumer understanding. Treasury proposes that ASIC will take the lead role in determining exemptions, having regard to matters such as:
- historical good value for money;
- strong competition;
- high risk of underinsurance; and
- well understood by customers.
The Royal Commission expressly noted that comprehensive motor insurance should not be subject to a deferred sales period. Any other exemptions would presumably need to have similar characteristics.
How will the customer's "financial commitment" trigger work?
Treasury's proposal to use the customer's "financial commitment" to purchase the primary product or service, or to take out finance, as the trigger for providing insurance information is a middle ground between options previously put to and considered by ASIC. What constitutes that "financial commitment", though, needs to be clear.
Overall, Treasury says that what is needed is a "concrete" decision by the customer. Plainly, payment for a product or service would meet the test. Treasury states that paying a deposit would also be enough. In relation to finance, it says that lodging an application form would be an appropriate trigger. No doubt there will be other situations which might need clarification; for instance, would the reservation of a flight, held for a period without payment, trigger the right to provide insurance information?
What "prescribed information" will need to be given?
Treasury has proposed that ASIC would also determine what needs to be given to the customer, though it states that this could include:
- basic product information such as premium, policy duration and details of significant features and benefits, significant and unusual exclusions or limitations;
- information regarding when the customer can purchase the product;
- the product claims ratio;
- a notice that the product is sold by other distributors; and
- a link to the ASIC MoneySmart website page on the product if available.
I would expect that development of a useful and uniform approach to presenting this summary information will take some thought; past attempts to provide valuable summaries of insurance product terms have proved challenging.
Whether the Product Disclosure Statement and Financial Services Guide (or policy wording for non-retail products) are also to be provided at this point is unsaid. Presumably, it would be useful for consumers to also have those documents made available to them during the deferral period.
If a claims ratio is to be included for the product, customers would likely benefit from an explanation of what it means in the context of the product concerned.
How is the four-day deferral period to be counted?
Based on a diagrammatic representation of the Model in Treasury's paper, the day on which the consumer is given prescribed information about the product will be counted as day one. The distributor will be entitled to contact the customer on day four so, in fact, the deferral is for two clear days.
It is noteworthy that the four-day deferral period is less than the seven-day period recommended by the Productivity Commission4, and considerably less than other proposals considered. Treasury's position on this recognises the risk that, if left for too long, customers might disengage altogether from the decision whether to purchase insurance, with the risk that they will end up without insurance that they need.
How can the customer be contacted after the deferral period?
Treasury has proposed that contact with the customer after completion of the deferral period be limited to one approach in writing. This might be done, for instance, through an email. If this does not evince a response, no further approach can be made.
The UK experience
The proposed model is similar to the one implemented in 2015 for guaranteed asset protection (GAP) insurance in the United Kingdom. The Financial Conduct Authority carried out a review of that model's effectiveness in 20185 and found:
- The model reduced Add-on Insurance sales materially, though with evidence of improved customer outcomes.
- Standalone market sales increased, though by less than expected. Consumers did not seek out alternatives as much as had been hoped.
- Product prices fell and loss ratios rose, though again by less than expected.
This is not to say, of course, that the Australian experience will be the same.
To finish, here are a few thoughts on the implications of the Model:
- The Model will be easier to implement in situations where the process for purchasing the primary product or service takes at least a few days, as would normally be the case for new motor vehicles, than where the sale is made on a single occasion.
- Its impact is likely to be material for online sales, where many transactions are instantaneous. Consumers who know they want insurance are unlikely to wait for a deferral period when other providers are only a click away.
- It may be challenging to comply with the Model at all for some Add-on Insurance products (for instance, travel insurance benefits attached to credit cards).
- It will likely become more difficult for consumers to include insurance premiums in their finance arrangements. To do so would presumably involve an adjustment to the loan (or at least the loan application) after completion of the deferred sales period.
- Insurers and distributors will need systems capable of capturing the key elements of the Model, including the occurrence of a financial commitment trigger, provision of prescribed information and records of subsequent consumer communications. These may form part of the broader systems and processes currently being implemented to meet Product Design and Distribution requirements.
- Compliance with distribution conditions needed to meet Product Design and Distribution requirements, such as asking consumers knock-out and qualifying questions, will in many cases need to follow completion of the deferred sales period. This could result in some consumers being advised that they are outside of the target market for the product after completion of that period.
- It is possible that implementation of the Deferred Sales Model will result in the growth of direct competition to some products which traditionally have only been sold as Add-on Insurance. Based on the UK experience, though, this might need an innovative approach to distribution.
Treasury has invited submissions on its proposal, though has offered only a short period, asking for them to be made by 30 September 2019. Treasury notes that feedback should be focussed on how the measure can best be implemented, not on whether it should be implemented.
Draft legislation is to be introduced into Parliament by 30 June 2020. Treasury has signalled that that will include a transition period, though without stating how long that will be.