A key recommendation of the Hayne Royal Commission — that insurance claims handling should become a financial service under the Corporations Act 2001 (Cth) — has, like so many slated regulatory initiatives, been delayed because of the COVID-19 pandemic.
Consultation for draft claims as a financial service (CFS) legislation was released last November and ended 10 January 2020.
The intention was for legislation to have been passed by now, however the Treasurer announced a six-month deferral of the legislative response to many royal commission recommendations in May.
WHEN WILL THE CHANGES HAPPEN?
Raj Kanhai, a Principal of Finity Consulting and lawyer who has worked in general and life insurance claims operations, training and compliance and dispute resolution for more than 20 years, presented an ANZIIF webinar on 9 September to discuss what the mooted changes will mean for insurance professionals.
Kanhai estimates that COVID will push out the original timeline by at least six months, with legislation passing on or around October, the regulatory guide issued up to six months later and becoming law January next year.
‘The transition to Australian Financial Services Licensing (AFSL) has also been postponed so that those who lodge applications with ASIC should have their AFSL determinations completed and transition period concluded late next year or in early 2022, with full implementation of the new regulatory regime by mid-2022,’ Kanhai says.
‘It is important to note that some provisions, including the Statement of Cash Settlement Options, will likely apply before the end of the transition period; that is, come into effect at some point early next year,’ he adds.
In particular, two case studies detailing insurer misconduct in the handling and settling of life and general insurance claims presented at the royal commission stand out as examples of the need for the changes.
‘Round 6 of the royal commission, which considered the handling of claims following natural disasters and severe weather events in general insurance highlighted the case of family claiming on a home and contents policy with AAI.
'It came to light that it took three years for a resolution that involved both internal dispute resolution (IDR) and the Financial Ombudsman Service.
‘AAI accepted that a lack of effective communication, decisive action or a dedicated claims handler were all to blame for the protracted process,’ says Kanhai.
LIFE INSURANCE FOCUS
Concerning life insurance, an insured applied for an income protection product from TAL in February 2009 and claimed on it in May 2010 for stress-induced depression and anxiety related to her workplace, including a letter from her GP that explained her generalised anxiety disorder was a ‘new onset illness’.
As part of the claim process, TAL obtained her medical records and determined she had had a pre-existing history of work-related stress, so declined the claim for non-disclosure.
It took until the royal commission for TAL to admit that it breached its duty of utmost good faith towards the insured, its own professional standards by intruding on her privacy, and engaged in conduct that was misleading.
WHAT WILL INSURERS HAVE TO CHANGE?
The upshot will be that insurers will have to handle claims in a consistently timely, unintrusive, fair and transparent way that ensures adequate support, particularly for vulnerable customers.
Kanhai explains that this means no undue delays and balancing the negative effects of delay on insureds with reasonable requirements for handling and settling an insurance claim.
‘The claims handling process should not be onerous for the insured, and requesting information and undertaking other assessment methods should be strictly relevant to the claim.
‘“Fair and transparent” means providing information about the handling and settling process, the reason for information requests, and reasons for decisions,’ he adds.
The proposed CFS changes also mean that insurers, loss assessors or adjustors acting on their behalf must hold an AFSL that covers claims handling, or become an authorised representative.
This also applies to any ‘insurance fulfilment provider with authority to reject any part of a claim, third-party administrators, brokers and anyone who provides financial advice to an insured and who handles a claim for an insurer’.
If there is an offer to settle all or part of claim with cash, the above would also have to provide a ‘Statement of Claim Settlement Options’ to retail clients.
‘The Corporations Act’s AFSL-holder requirements mean that claims will need to be handled and settled ‘efficiently, honestly and fairly’,’ Kanahai says.
‘In addition obligations exist including conflict of interest management, compliance with financial services laws and licence conditions, adequate resources.
'Insurers are expected to maintain competence through the, training of staff and authorised representatives, plus have internal dispute resolution in place as well as membership of AFCA for external dispute resolution.’
The benefits for policy holders should be fair treatment when they make claims.
'Vulnerable customers should receive due care and regard, claims processes must be more efficient and better explained and communicated,' Kanhai says.
'Insurers need to implement more accessible complaint mechanisms, streamline disputation processes and ensure they are adequately resourced with competent staff and suppliers.
‘Also, they should only be carrying out surveillance and further investigations when necessary, and setting KPIs that are balanced and properly weighted to customer satisfaction and outcomes,’ Kanhai says.
‘An insurer should think about how it wants to create a competitive advantage in claims handling,’ says Kanhai.
‘This begins with the claims philosophy and values of the organisation — do you strive for minimal compliance or doing what is best for the customer?’
Kanhai adds that the delays to the CFS implementation should give those impacted the opportunity to test their ability to consistently handle claims ‘efficiently, honestly and fairly’.
‘This should focus on your competence in claims handling and settlement and your compliance measures, processes and procedures — including your supply chain and any outsourced providers of claims services on your behalf.’
COST IS NOT AN EXCUSE
Although the pressure on premiums will probably grow from the additional compliance cost and burdens, Kanhai says the industry should hope to see better customer outcomes and less friction around claims.
Paraphrasing Commissioner Hayne, he says 'having an additional cost to bear is not a justification to not do it because at the end of day, this is for customer benefit.’
He also concedes that the new CFS regime will have some knock-on effects in other areas of insurance, such as policy underwriting and product design, which could be discussed in further ANZIIF webinars.
Meanwhile, the ramifications for educators and trainers in insurance claims handling need to be thought through.
CODE IS A GOOD PLACE TO START
Kanhai says a good place to start is the General Insurance Code of Practice, which already outlines claims obligations in detail.
‘This industry Code is a different instrument to legislation but my argument is that if you fulfil the Code, you are largely along your way to fulfilling the upcoming legislated requirements,’ he says.