The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) released its final report into the insurance industry's practices that impact small businesses on 9 December 2020. The report is partially based on a survey of 800-plus small businesses.
The Ombudsman concluded that far too many small businesses are on the brink of collapse because they cannot secure the insurance products necessary for their operation. The report addresses what the Ombudsman believes is an imbalance in the insurance market, one which requires a multi-faceted and focused response.
The Ombudsman makes a suite of recommendations designed to provide clarity and certainty for small businesses, rebalance risks for insurers, and allow businesses greater access to the insurance products they require.
The report and its findings should give all general insurers pause to consider their SME portfolios, the issues raised by Ombudsman and potential solutions to these issues. The report is also likely to provide the industry with some much-needed data into the customer experience and satisfaction levels for the insurance products that SME businesses use.
In their submission to the Inquiry, the Insurance Council of Australia (ICA) accepted that issues of affordability and availability of key insurance products are real concerns for small business. They also stated that any solution would require open collaboration and innovation between the insurance industry, governments and small businesses.
The answers to these issues are likely to be far-reaching and involve the use of technology designed to streamline claims processes, increased public-private partnerships and review of state government's taxation on insurance products.
The affordability and availability of public liability was a central issue for the Inquiry. A substantial proportion of claims expenses come from legal costs. Clyde & Co is well equipped to be part of the conversation around providing innovative solutions to try and lower claims costs and to consider how to improve business customer satisfaction levels.
Key takeaways from the report include:
- the need for further tort law reforms;
- whether the government has a further role to play as an insurer of last resort;
- whether the Australia Reinsurance Pool should be further expanded to include reinsurance for all natural disasters for commercial property insurance;
- regulating the insurance industry's conduct, particularly in improving the disclosure of coverage and fees and to improve the timeliness;
- providing AFCA with further powers to deliver improved dispute resolution and enforcement;
- consideration of alternative insurance arrangements for small business and industries including Discretionary Mutual Funds.
The Inquiry was announced on the 28th of July 2020. The Inquiry's purpose was to examine complaints by small businesses that they cannot access the insurance they need to run their business, and without such insurance, they may be unable to operate and may face closure.
The Inquiry looked at 7 primary issues:
- The availability and coverage of insurance policies provided to small businesses;
- Other issues affecting availability and coverage;
- The role of brokers in getting the right coverage;
- The use of contract changes that have not been agreed to and their potential treatment as Unfair Contract Terms;
- The timeliness of payment of insurance payouts and the effectiveness of dispute resolution frameworks for insurance disputes;
- The effectiveness of relevant codes of conduct and legislation, including the adequacy of applicable penalties; and
- Any other relevant matters.
Key Findings and Recommendations of the Inquiry
1. Inconsistent definitions of small business
Finding: Relevant legislation, regulators and codes of practice use different definitions of ‘small business’ and ‘small business insurance products’ thereby creating gaps in protections for small businesses. The Australian Financial Complaints Authority (AFCA) also lacks dispute resolution coverage of some categories of insurance.
Recommendation: the definition of “small business” should be standardised across all insurance legislation, regulations and codes to cover businesses with (a) turnover of less than $10 million per annum or (b) less than 100 employees, and AFCA's rules should be expanded to cover all insurance products (including wholesale insurance) purchased by small businesses for claims assessed at $1 million or less.
2. The failure of self-regulation
Finding: The insurance industry’s service and practice standards set by voluntary codes of are rarely enforced and are often unheeded by industry.
Recommendation: Both the General Insurance Code of Practice and the Insurance Brokers Code of Practice should be mandatory and should provide for AFCA to deliver dispute resolution and enforcement, including the ability to apply significant financial penalties for breaches.
The General Insurance Code of Practice should include changes across responsibilities of subscriber’s boards and staff training requirements, and the Insurance Brokers Code of Practice should be amended to require the disclosure of fees and costs as well as communication timeline parameters. Conflicted remuneration for insurance brokers should be banned with a phased transition period.
Critical Insurance Products
1. Lack of availability of public liability and professional indemnity insurance
Finding: Businesses report being unable to obtain public liability and professional indemnity insurances. The open-ended nature of injury claims and potential for large damages mean that insurance availability is becoming limited.
Recommendations: Liability for personal injury should be subject to statutory caps.
The Federal Government, in coordination with the states and territories, should urgently progress work on a National Insurance Injury Scheme (as recommended by the 2011 Productivity Commission Inquiry Report into Disability Care and Support).
The Federal Government should also provide an insurance scheme of last resort for small businesses where there is only one or no insurers left in a professional indemnity market.
2. Lack of availability of natural disaster insurance
Finding: Businesses report being unable to obtain natural disaster insurance, or being offered policies where the cost is prohibitive.
Recommendations: The Australia Reinsurance Pool should be further expanded to include reinsurance for all natural disasters for commercial property insurance.
Local Councils and State and Territory Governments that release new land for development, or rezone existing land for further development, must undertake an assessment of all land (assessed for a 1 in 100 year risk) before commercial release and publish the results of the assessment prior to land release. Where land is released with known issues that are not disclosed to a purchaser or are otherwise not apparent, the relevant authority should carry the liability for the known issue in perpetuity.
3. Refusal on basis of industry, location or other generic factors
Finding: Businesses report being unable to obtain insurance based on industry, location or other generic factors. As insurance is an “essential service” for business, the provision of insurance should not be denied to legal businesses on arbitrary “ethical” and other bases.
Outcome: The ASBFEO will continue its work on a federal essential services regime. Insurance will form a critical component of this work that covers that essential service providers should not be able to discriminate against legal, legitimate and regulated businesses based on generic factors.
Disclosure of Coverage and Fees
1. Insurance products are difficult to navigate
Finding: Small businesses are unaware of all commissions, fees and taxes that make up significant portions of their insurance premiums. Insurance product documentation can be difficult for some purchasers to navigate; therefore small businesses often purchase unsuitable policies or obtain inadequate cover.
Recommendations: All insurance quotes should include a clear breakdown of commissions, fees and taxes, including administrative costs and broker fees.
Insurance product documentation on creation and renewal should be expanded to include industry standardised definitions (particularly covering natural perils), clearer and more prominent detail around exclusions, limitations and conditions, be written in Australian legal terminology, explain common reasons why claims are denied, and set out the most common mitigations that businesses can make to premises and how they operate to reduce their premiums and ensure continued coverage.
1. Claims decisions are not always made promptly
Finding: Small businesses can be left in limbo while insurers assess their claim, leading to uncertainty of business survival and reduced resilience.
Legislation is currently before parliament to require people conducting claims handling to hold an Australian Financial Services License or be an authorised representative of a licensee.
Recommendation: Decisions about claims should be shortened for general timeframes from 4 months to 3 months, and from 12 months to 4 months for ‘extraordinary catastrophes’.
Barriers to Switching and Market Entry
1. Notification periods for renewal terms are too short
Finding: The current 14-day statutory notice period for renewal terms or the non-renewal of insurance is not long enough for businesses to make informed decisions, change insurers and secure insurance. Small businesses would benefit from data portability that allows them to more easily compare and change insurers. This could be facilitated by the expansion of the Consumer Data Right system (CDR) from banks and utilities to insurance products for small business.
Recommendations: Expand the statutory notice period to 60 calendar days for a renewal refusal, premium increases above 15%, or changes in exclusions or excesses. Notifications should contain a reason for the change and details of modifications that a business can make to continue their insurance or reduce premiums, exclusions and excesses.
The Government should give priority to the extension of consumer data rights into the insurance market.
2. Insurtech has failed to gain broad-based industry traction
Finding: The insurance industry has high potential for benefits to small business by embracing technology. However, where there is innovation, existing insurance companies commonly purchase that innovation for their self-use (for example, algorithms that are purchased for use to de-risk existing insurance business). This means that innovation is lost to the broader market and market concentration is fortified.
Recommendation: The Australian Securities and Investments Commission should explicitly include insurtech as a category in its communications and online guidance for its innovation hub to enhance awareness of existing support mechanisms.
Outcome: The ASBFEO will include investigation of the treatment of innovation in the insurance industry in its work to eliminate unfair business practices arising out of the Ombudsman’s Access to Justice report.