A clearing for change - Design and Distribution Obligations

Professionals across the insurance industry are bracing for a busy year with the implementation of new regulations, such as the Design and Distribution Obligations (DDO), which take effect from 5 October.

How the changes will affect the industry is yet to be seen, but a key question is how insurers and brokers can address the compliance challenges.

This is one of the issues to be addressed in an upcoming ANZIIF webinar, ‘Design and Distribution Obligations’.

With insights from industry leaders, such as Annabelle Butler, Head of Regulatory Change at Suncorp, and Dallas Booth, CEO of National Insurance Brokers Australia, the webinar will cover the key obligations that brokers will need to understand and implement within their business operations.

ON THE HORIZON

'The DDO regulations are the result of the financial system inquiry and mirror law in other jurisdictions. 

Implementation was delayed due to the COVID-19 crisis, however the date is now set for early October.

In broad terms, the obligations require insurers and brokers to ensure sufficient governance and oversight of their products so that they target consumers who may genuinely benefit from them.

This is known as making a 'target market determination' (TMD).

‘The purpose is to make sure that the products are appropriately designed and distributed to customers to meet their needs,’ says Butler.

‘In some instances, products like consumer credit insurance, and some motor products, like gap and tyre and rim, were found to not give consumers value,’ she says. ‘In some cases, consumers didn't even to know that they'd bought them because they were often sold with finance.’

EVEN PLAYING FIELD

Benjamin Karalus, Principal, McCabe Curwood, says the regulations may also create a more even playing field in the market.

‘In the absence of regulations of this sort, we’ve had different players doing different things without adhering to a common standard,’ he says.

'I think it will probably create a common understanding and a level playing field for those in the insurance market.’

THE DDO REGIME

Issuers and distributors of retail financial products are captured under the DDO regime — it extends beyond insurance to credit and other products.

Obligations for insurers as issuers include making and reviewing a TMD, which must be publicly available.

They are also required to keep records about TMDs and notify ASIC about 'significant dealings' in relation to a retail client that doesn’t fit within the prescribed market.

IMPORTANCE OF TMD

Brokers cannot distribute retail products without an appropriate TMD. They must also take reasonable steps to ensure distribution is in accordance with the TMD and notify the issuer of any significant dealings outside of it.

‘It's going to be really important for the insurers to develop TMDs that give very clear guidance, not only to brokers but also ultimately to clients, as to where the products are intended to operate and where they are not,’ says Booth.

Under the DDO regulations, issuers must identify a class of consumers that can gain value from their product.

‘Issuers need to inform the distributor who the product is suitable for, so they can make sure when they're distributing that the customer is within the target market and can gain value from the product,’ says Butler.

DEFINING THE MARKET

A TMD includes descriptions of distribution chains and how they work, as well as reporting requirement for distributors who must report back to issuers on a regular basis.

‘It really pushes responsibility back onto the issuer, but it also changes the dynamic between the distributor and the issuer,’ says Butler.

‘In the instance of an open-market broker, who acts for the customer and not for the insurer, the relationship starts to shift, because they've been quite independent up to this point,’ she says.

‘However, there’s now an obligation on insurers to make sure that they distribute within the target markets. This is because while the broker has requirements under the law, ultimately, the issuer is responsible.'

ADDRESSING THE CHALLENGES

The implementation of DDO presents challenges across the industry.

‘I think the biggest challenge is going to be for insurers to work out how they're going to develop and prepare their TMDs,’ says Booth.

'At the end of the day, the brokers, as distributors, follow the process, which comes from the insurers.

‘So, the responsibility for brokers will be understanding the product offerings from insurers and to make sure that they operate within the TMD that the insurer has set.’

CLASSIFYING CONSUMERS

Butler says another challenge will be how granular insurers need to get when classifying consumers.

‘How far can you go to match the needs? That's the piece that's been a little tricky for us to understand,’ she says.

‘Most direct insurers work on an non-advice model, so up to this point, we haven’t ascertained customer circumstances, financial situation and needs because it wasn't relevant to us. It’s still something we’re working on as an industry.’

MARKET COMPLEXTITY

Booth says DDO works well with investment products, but presents challenges for general insurance products.

‘Investment products have a risk profile that is reasonably obvious to a financial planner or investment advisor, so they can match the risk profile of the product with the risk appetite of the investor,’ he says.

‘But, when it comes to general insurance, most insurers offer motor vehicle insurance to anyone who has a car.

'Insurers might have six or eight target markets in their motor portfolio. This means they’ll have to have six or eight TMDs, which they’ll have to explain to brokers and consumers.’

‘We will require some training programs before October to ensure that brokers and insurers are clear on their obligations,’ says Booth.

THE ROLE OF TRAINING

Training will be vital and, to help the industry understand the new obligations coming into effect this year, ANZIIF is launching a short course called, ReACT: Regulation and the law, what you need to know now.

‘At its heart, the course will provide a sound and comprehensive overview of the regulatory obligations for insurers and brokers following the Royal Commission,’ says Karalus, who is reviewing the course material.

The course will include DDO regulations and anti-hawking measures.

POWER IMBALANCE

‘The reason the hawking prohibition has been put in place is that, often, when sales have been conducted by telephone or by meeting in person, there’s a power imbalance between the person making the sale and the consumer,' says Karalus.

‘The new rules don’t apply to contact via email, letter or brochure. These exemptions are there to permit people to consider and engage with an insurer in their own time, rather than through the immediacy of a phone call.'

Karalus says anyone working in insurance will benefit from the ReACT: Regulation and the law, what you need to know now short course.

‘It gives you an overview of the regulatory framework, but also provides some very good working examples of how the new regulations will impact the industry.'

A MATTER OF TIME

A thorough understanding of your obligations will be vital in overcoming one of the greatest DDO challenges: time.

‘Although the regulations come into effect in early October, renewals will generally be sent out to consumers six weeks prior to this,’ says Butler.

‘It means that we will have to be compliant by mid August.

‘Given the challenges the industry has faced with things like the Unfair Contract Terms regime, there is still much work to do,’ she adds. ‘But we’ll get there. If it’s not perfect the first time, we’ll do it again.’