The Australian Financial Complaints Authority (AFCA) has made a determination requiring an insurer to lower the premium offered on a home and contents insurance policy - read it here.
The relevant complaint was made in response to a renewal notice from the insurer that included a sharp increase in premium from the previous year (of about 38%). According to the insurer, the increase in premium was based on internal modelling that suggested the property was at risk of flood.
The first issue to be considered by AFCA was whether it had jurisdiction to consider the complaint. The complaint was initially made to the Financial Ombudsman Service (FOS) (the body that preceded AFCA) and was therefore subject to the FOS terms of reference. Under those terms of reference, a dispute in relation to an insurance premium could not be considered unless the dispute concerned:
“non-disclosure, misrepresentation or incorrect application of the fee, premium or interest rate by the Financial Services Provider having regard to any scale or practices generally applied by that Financial Services Provider or agreed with that Applicant;”
The insurer submitted that the complaint fell outside of the FOS’ jurisdiction given that it involved the calculation of a premium. However, AFCA rejected that submission, concluding that the complaint related to the practices adopted by the insurer to calculate the premium and therefore was captured by the FOS terms of reference.
After dealing with the jurisdictional issue, AFCA considered the question of whether the insurer had “correctly” assessed the premium. The complainant produced evidence indicating that the subject property was at least 1.8 metres above the 200 year flood level. However, the insurer submitted that its internal modelling showed the property to be located within the “probable maximum flood level”.
In reaching its final determination, AFCA concluded that the insurer did not provide sufficient information to justify the increase of premium. While accepting that the complainant was free to decline the renewal and the insurer was entitled to apply its own modelling to determine its premiums, AFCA concluded that the insurer had not exercised its discretion in setting premiums fairly or consistent with good industry practice. AFCA also found that the insurer did not act in accordance with its own internal practices when assessing the flood risk at the property.
On the basis of its findings, AFCA determined that the insurer should reduce the proposed premium increase by 50%, pay the complainant’s out of pocket expenses (approximately $150) and pay the complainant an additional $500 for non-financial loss/inconvenience.
The determination is a significant one for insurers. Importantly, the FOS terms of reference dealt with by AFCA in this determination are almost identical to the AFCA Rules that will apply to future complaints. Therefore, AFCA’s position as to its jurisdiction to delve into an insurer’s assessment of an appropriate insurance premium will be relevant to any future complaints received by AFCA. The significance of the determination is likely to only be compounded by the recent expansion of AFCA’s powers generally as discussed here and here.