Other matters raised
5.1
During the inquiry, participants raised a number of other matters of
concern; including, the exemption of insurance from the unfair contract terms
regime, the payment of insurance commissions to strata managers, and the role
of disaster mitigation in lowering insurance premiums. This final chapter
provides an overview of these matters.
Unfair contract terms
5.2
As noted in chapter 2, insurance contracts, including those for general
insurance products such as home and motor insurance, are currently exempt from
the unfair contract terms (UCT) provisions under the Australian Securities
and Investments Act 2001 (ASIC Act).[1]
The UCT provisions apply to all other standard form contracts of the financial
services sector.
5.3
The UCT provisions were introduced as part of the broader national
Australian Consumer Law.[2]
They provide consumer protections from terms in standard form contracts which
unfairly advantage a trader over a consumer, and which cause the consumer
detriment.
5.4
Several inquiry participants raised strong concerns regarding the
exemption of insurance contracts from the UCT regime, arguing that this
exemption creates a significant gap in consumer protections.[3]
For example, Ms Emma King from VCOSS commented that:
It is astonishing that insurance contracts are currently the
only type of consumer contract that are excluded from the protections of
consumer law. This means fundamentally, many insurance contracts sold are
simply not worth the paper they are written on.[4]
5.5
The Financial Rights Legal Centre (Financial Rights) contended that
'arguably insurance is the area where consumers most need protection from
unfair terms because consumers insure their main assets'.[5]
CHOICE echoed this view in its submission, asserting that the complexity of
general insurance contracts requires 'an additional layer of protection against
harmful terms':
Contracts extend over pages of information, few people read
or understand them, and they contain complex terms which most consumers are
unlikely to understand. As a consequence, consumers suffer detriment by having
claims denied due to the mismatch between what they thought the policy covered
and what was actually covered.[6]
5.6
Mr Gerard Brody from the Consumer Action Law Centre (Consumer Action)
contended that 'insurance policies are riddled with terms which on their face
could be unlawful if unfair contract term laws applied to insurers'. Mr Brody
provided the example of cash settlement clauses in home insurance policies:
[Cash settlement clauses] allow many insurers to settle a
home building claim with a one-off cash payment. This means that if someone
loses their home or a flood of fire, an insurer can get a quote on the rebuild
with all their bulk trade discounts and just pay that amount. It can bear
little resemblance the real costs for someone rebuilding their home. The unfair
contract regime has resulted in fairer contracts and industry practices across
the board in other consumer markets. To us it is a no-brainer that it has to be
extended to insurance.[7]
5.7
ASIC also expressed its support for the extension of the UCT provisions
to insurance contracts, telling the committee that 'we think it would add to
the regulatory regime in a beneficial way for consumers'.[8]
5.8
Insurance contracts are currently excluded from the UCT regime on the
grounds that consumer protections are adequately met by the 'duty of upmost
good faith' obligations under the Insurance Contracts Act (see paragraph 2.16).
5.9
When questioned by the committee about whether insurance contracts
should be included under the UCT regime, Mr Rob Whelan from the Insurance
Council of Australia (ICA) advised that 'we have long held that there are very
ample protections for consumers under the existing legislation. The Insurance
Contracts Act offers many remedies for consumers and protections already'.[9]
Representatives from IAG concurred with this view, commenting that 'we believe
there is sufficient regulation and contractual protection in the existing
regime'.[10]
5.10
However, some submitters argued that the duty of upmost good faith
obligation does not provide sufficient protection for consumers and that
application of the law has proved to be ineffective.[11]
5.11
CHOICE contended that, compared to the UCT provisions, the duty of
upmost good faith 'is unclear and jurisprudence is imprecise'. Similarly,
Consumer Action submitted that the mechanism of upmost good faith 'has proved
inaccessible, ineffective, or both', and that 'it does not protect consumers
from broad exclusions or other clauses in insurance contracts that would likely
be "unfair"'.[12]
5.12
Moreover, Consumer Action indicated that not only does the duty of
upmost good faith provide little protection for consumers, it can bias judicial
proceedings in favour of insurers:
The duty of utmost good faith provides very little to customers,
as far as we can tell. We have looked at court decisions and ombudsman
decisions, and very rarely has that helped a consumer in a dispute with an
insurer. What the duty does do is help insurers deny claims on the basis of
alleged fraud or where someone is not cooperating with a claims process or not
providing information. There is no evidence that the duty of utmost good faith
is working as a consumer protection, as far as we can tell.[13]
Committee view
5.13
General insurance plays an important role in maintaining the financial
stability of consumers, and indeed, of the Australian economy. Given this,
effective protections are essential during all stages of a consumer's
relationship with an insurer. The committee is of the view that the exemption
of general insurers from the unfair contract terms provisions contained in the
ASIC Act is unwarranted and creates a significant gap in consumer protections.
Recommendation 11
5.14
The committee recommends that the government introduce the legislative
changes required to remove the exemption for general insurers to unfair
contract terms laws.
Commission payments to strata managers
5.15
Some inquiry participants raised the matter of commission payments made
to strata managers—also known as body corporate managers depending on the
relevant state or territory legislation—in return for purchasing insurance on
behalf of the members of a strata title scheme. In particular, some inquiry
participants raised concerns about the transparency of disclosure of
commissions to strata scheme members, and whether such arrangements represent a
conflict of interest.
5.16
The following section briefly describes the regulatory framework that
applies to strata managers with regard to purchasing insurance and the
disclosure of commissions received for performing such functions. An overview
of concerns raised and comments made during the inquiry in relation to insurance
commission payments is then provided.
Regulatory framework
5.17
By purchasing into a strata title scheme, the owners of strata title
properties become members of a legal entity commonly referred to as a body
corporate.[14]
Normally, the functions, duties and powers of a body corporate, including the
purchase, renewal and management of statutory insurances, are delegated to a
strata managing agent. This delegation is provided for in the relevant state or
territory strata legislation. A strata manager is appointed by a body corporate
by entering into a strata management agreement.
5.18
With regard to the purchase of insurance, market practice is that a
strata manager will negotiate cover through an insurance broker or specialist
underwriting agency. Under a strata management agreement, strata managers can
be paid a commission as remuneration for arranging and managing insurance on
behalf of a body corporate. Such commissions are legally paid to strata
managers in their capacity as either an authorised or distributor representative
of an Australian Financial Services (AFS) Licensee;[15]
in this case, an insurance broker or underwriting agency. As explained by
Allianz:
In terms of insurance commission payments, generally
speaking, insurance brokers and underwriting agencies are paid a commission by
the relevant insurer for placement of insurance business, and the insurance
broker or underwriting agent may then pay on part of that commission to the
strata manager who assisted in placing that insurance business in the capacity
as their representative – in accordance with the terms of the agency agreement
between them.[16]
5.19
With regard to the disclosure of remuneration arrangements, including
insurance commissions, strata managers are bound by federal financial services
legislation. Under the Corporations Act, strata managers appointed as
representatives of an AFS Licensee are required to provide a body corporate
with a Financial Services Guide (FSG). In accordance with the Act, an FSG must
include:
(f) information
about the remuneration (including commission) or other benefits that any of the
following is to receive in respect of, or that is attributable to, the
provision of any of the authorised services:
(i)
the providing entity;
(ii)
an employer of the providing entity;
(iii)
the authorising licensee, or any of the authorising licensees;
(iv)
an employee or director of the authorising licensee, or of any of the
authorising licensees;
(v)
an associate of any of the above;
(vi)
any other person in relation to whom the regulations require the
information to be provided...[17]
5.20
Information about product pricing must also be disclosed to the body
corporate in a Product Disclosure Statement (PDS) for the relevant strata
insurance product. Moreover, as representatives of an AFS Licensee, strata
managers are obligated under the Corporations Act to 'have in place adequate
arrangements for the management of conflicts of interest that may arise' in the
provision of financial services.[18]
5.21
In addition to federal legislation, strata managers are also bound by
the disclosure requirements set out in the relevant state or territory
legislation. For example, in New South Wales, the Strata Schemes Management
Act 2015 (NSW) requires commission arrangements to be disclosed at
the annual general meeting of a body corporate.
5.22
In some jurisdictions, strata managers are also subject to codes of
conduct enshrined in the applicable strata legislation. For example, in
Queensland, strata managers are bound by the 'Code of conduct for body
corporate managers and caretaking service contractors' contained in the Body
Corporate and Community Management Act 1997 (Qld). This code
requires that in performing their functions, strata managers 'act honestly,
fairly and professionally' and 'in the best interests of the body corporate
unless it is unlawful to do so'.[19]
Stakeholder views
5.23
In its submission to the inquiry, the Owners Corporation Network (OCN)
expressed concern that body corporates tend to rely on strata managers for
financial advice regarding strata insurance. This is despite strata managers
not generally being legally licenced to provide such advice:
Ideally, insurance brokers would be recognised as the
independent experts who can properly identify the building's specific needs and
answer detailed questions about the alternative product offerings. Unfortunately,
committees view SM's as the experts in the management of strata plans so many
look to them to assist in selecting their insurance cover. Few committees know
the questions to ask, and few SM's are qualified legally to give Personal
Advice.[20]
5.24
The OCN also suggested that insurance commissions are a disincentive for
strata managers to act in the best interests of body corporates when arranging
insurance, and that this represents a 'clear conflict of interest':
And those [strata managers]—the vast majority—who receive a
commission for dealing and arranging insurances have a clear conflict of
interest, and a disincentive to increase the excess to reduce the premium.[21]
5.25
Moreover, the OCN submitted that 'disclosure, as required by law, is not
common', and that limited experience and expertise among body corporates can
result in a lack of awareness regarding commissions:
In reality, many committees, comprised of unskilled
volunteers from all walks of life, simply do not have the interest, time,
expertise or experience to master the strata insurance product offerings.
Committees therefore tend to rely on their SM's for advice without realising
that the SM may receive commissions and therefore may not be truly independent.[22]
5.26
Mrs Margaret Shaw echoed these concerns, also noting that body corporate
members are not informed of the extent of insurance commissions paid to strata
managers:
In your management agreement with your body corporate
manager, you quite often get a section that says if they arrange insurance with
you via certain insurance companies or certain brokers they will get five to 20
per cent commission. When it is actually arranged, you do not know if you have
paid five or 20 per cent...They are not brokers. They do not have a licence from
ASIC, but, because they are getting a commission from the insurance company, I
feel that they are acting as an agent on behalf of that insurance company and
not necessarily in the best interests of their clients. It is a conflict of
interest. Are they going to get quotes from insurance companies that do not pay
them a commission? No, they are not.[23]
5.27
When questioned by the committee about evidence suggesting the existence
of commission payments directly from insurance companies to strata managers,
representatives from IAG advised that:
That would only occur as a commission payment as part of a
distribution agreement, which would be covered by the Financial Services Guide
and an expectation, as part of that agreement, that that needs to be disclosed
to the body corporate. So that is in not in any way hidden; it is quite upfront
and overt to the body corporate.[24]
5.28
In its response to questions taken on notice, the ICA emphasised that
'commissions are legitimately and legally paid to distribute product offerings,
a service which needs to be paid for whether by the insurer or otherwise'.[25]
5.29
The ICA also made the point that insurance commissions compensate strata
managers for functions performed on behalf of a body corporate, further
contending that:
In the absence of such commission payments, these functions
would (contractually) still need to be performed by the strata manager and
remunerated, for example if not commissions, possibly by strata fee increases.[26]
5.30
With regard to disclosure practices around commission payments, Allianz
informed the committee that:
It is also standard practice—in the case of underwriting
agencies—to include details of commission amounts payable to strata managers on
insurance quotations and other insurance schedule documentation, which is
addressed to the body corporate.[27]
5.31
However, Allianz also acknowledged that 'there is still room for
improvement in the industry in terms of disclosure' and that this 'may also
account for some of the ongoing perceptions about lack of transparency on
insurance commissions'. Allianz suggested that:
A simple solution to this perception would be to enforce a
requirement for all insurance intermediaries to provide 'dollar-value'
information on insurance quotations—that is, at or before the time the decision
is made by the body corporate to select a particular insurer—not only after the
decision has already been made. Ideally this information would display each
component of the total price payable by the body corporate as a separate line
item—including amounts attributable to base premium, taxes and levies,
commissions payable to strata managers and/or insurance brokers, and broker
fees. Such a sensible, common-sense and targeted reform initiative should be
easy for insurance intermediaries to implement, and would immediately improve
consumer outcomes in terms of disclosure and transparency around product
pricing.[28]
5.32
Noting that strata insurance is a state mandated product, some inquiry
participants suggested that state and territory governments are best placed to
force better disclosure around the financial incentives strata managers
receive. QBE noted that New South Wales has recently implemented legislation in
this regard,[29]
indicating that this could provide a possible template for reform in other
state and territory jurisdictions.[30]
Committee view
5.33
The committee is concerned that the current disclosure requirements
relating to the payment of insurance commissions to strata managers are
insufficient and do not provide adequate transparency to body corporate
members. The committee notes that it did not receive any specific evidence to
suggest that strata managers are not complying with disclosure legislation.
However, given the significant growth of strata as a form of property ownership
in Australia, the committee believes that regulatory change to improve
transparency on insurance commissions is justified.
Recommendation 12
5.34
The committee recommends that the government strongly consider
introducing legislation to require all insurance intermediaries disclose
component pricing, including commissions payable to strata managers, on strata
insurance quotations.
Recommendation 13
5.35
The committee recommends that state and territory governments strengthen
disclosure requirements in relation to the payment of commissions to strata
managers.
The role of mitigation
5.36
As discussed in chapter 2, recent increases in premiums for home and
strata insurance have largely been driven by the rising claims costs associated
with increased incidence of natural catastrophes. In relation to this, some
industry stakeholders argued that investment in disaster mitigation is the only
way to sustainably reduce insurance premiums over the long term.[31]
5.37
Mr Whelan from the ICA noted the recent destruction caused by Cyclone
Debbie and contended that it is catastrophe events such as these that highlight
'the case for urgent investment in permanent, well-designed mitigation for
disaster-prone communities'. Mr Whelan further commented that:
When mitigation does not exist or poor decisions remain about
the design, floods have proved devastating. Insurers have to price to risk
where these events occur and, where the risk is high, so too are the premiums.
In some respects, insurance is the canary in the coalmine. Premiums alert
individuals and governments about high risk and low risk of living in certain
areas. These signals should spur action in the form of mitigation and
resilience measures and better town planning to prevent inappropriate
development and improvements to building codes.[32]
5.38
Representatives from IAG expressed a similar view:
Every time there is a natural disaster it highlights the need
for mitigation funding to protect life, property and the Australian economy,
and we have been advocating for some time that there needs to be a different
approach to natural disaster funding, with more focus on upfront mitigation to
avoid some of the impacts we are seeing, including from the most recent
devastation caused by Cyclone Debbie.[33]
5.39
Following a significant number of natural disasters between 2009 and
2014, the government requested that the Productivity Commission (PC) undertake
an inquiry into National Disaster Funding Arrangements. One of the central
terms of reference for the PC's inquiry was to identify:
Options to achieve an effective and sustainable balance of
natural disaster recovery and mitigation expenditure to build the resilience of
communities, including through improved risk assessments. The options should
assess the relationship between improved mitigation and the cost of general
insurance.[34]
5.40
In its final report to government, released in May 2015, the PC noted
that insurance is an important risk management option in regards to natural
disasters, specifically stating that:
Insurance markets in Australia for natural disaster risk are
generally working well, and pricing is increasingly risk reflective. Insurers
can and should do more to inform households on their insurance policies, the
natural hazards they face and the indicative costs of rebuilding after a
natural disaster.[35]
5.41
However, the PC also found that:
Governments overinvest in post disaster reconstruction and
underinvest in mitigation that would limit the impact of natural disasters in
the first place. As such, natural disaster costs have become a growing,
unfunded liability for governments.[36]
5.42
While responsibility for managing the risks associated with natural
disasters lies with state and local governments, the bulk of funding for
disaster relief invariably comes back to the Australian Government. The PC
found that the cost-sharing funding arrangements (federal to state) 'matter
because they impact the incentives to manage risks' appropriately,[37]
also noting that 'some natural disasters are unforeseen and their impacts are
unavoidable, but in many cases the consequences of natural disasters can be
mitigated'.[38]
5.43
The PC recommended, among other things, that:
Australian Government post disaster support to state and
territory governments (states) should be reduced, and support for mitigation
increased. Greater budget transparency and some provisioning is also needed.
-
States need to shoulder a greater
share of natural disaster recovery costs to sharpen incentives to manage,
mitigate and insure against these risks. The Australian Government should
provide a base level of support to states commensurate with relative fiscal capacity
and the original 'safety net' objective of disaster recovery funding, with the
option for states to purchase 'top up' fiscal support.
-
Australian Government mitigation
funding to states should increase to $200 million a year and be matched by the
states.
-
These reforms would give state and
local governments autonomy in how they pursue disaster recovery and mitigation.
The reforms should be supported by performance and process based accountability
mechanisms that embed good risk management.[39]
5.44
The ICA expressed its disappointment in the Australian Government's
response to the PC's inquiry, noting that the government did not take up the
recommendation to increase mitigation funding to $200 million per year, matched
by the states and territories.[40]
5.45
When questioned by the committee about the correlation between disaster
mitigation and reductions in insurance premiums, Mr Whelan provided the
following example:
The best guarantee I can give you is an actual case study of
where that has occurred. Roma in Queensland is highly subject to floods. It
flooded I think five times in the last six or seven years, devastatingly so—for
community and growth as well—and it was subject to very high premiums to the
point where a number of insurers were thinking very hard about whether they
could maintain a product there. The council in their wisdom decided to act on
it, and with some assistance in funding they were able to build a levee. After
the completion of that levee and some review of the statistics on the flood
risk, which we were then able to calculate into underwriting risk, the premiums
in some parts of that area decreased by over 90 per cent. So the facts are that
where you reduce the risk the premiums will follow, because it is that
equation. The premiums must reflect the risk. If you are able to reduce the
risk, we are able to reduce the premiums.[41]
5.46
However, the disproportionate spending between mitigation and
post-disaster expenditure remains unchanged since the PC's final report.
Federal mitigation spending was approximately three per cent of post-disaster
expenditure in recent years.[42]
The PC noted that 'the reform imperative is greatest for states most exposed to
natural disaster risk, like Queensland'.[43]
Committee view
5.47
In the aftermath of the recent devastation caused by Cyclone Debbie, the
committee acknowledges that some disasters are unforeseen and their impacts
unavoidable. However, in many cases the consequences of natural disasters can
be mitigated. Accordingly, the committee believes that there is an urgent need
for governments at the Council of Australian Governments to address investment
in targeted disaster mitigation. As well as the obvious benefits mitigation
provides with regard to protecting life and property, the committee agrees with
industry stakeholders that increased investment in well-designed mitigation by
all governments should help reduce home and strata insurance premiums over the
long term.
Recommendation 14
5.48
The committee recommends that the Australian Government reconsider its
response to the Productivity Commission's inquiry on National Disaster Funding
Arrangements.
Recommendation 15
5.49
The committee recommends that, as a matter of urgency, the
Australian Government work with states and territories through the Council of
Australian Governments to reform national disaster funding arrangements.
Senator
Chris Ketter
Chair
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