On 10 December 2020 Parliament passed the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, which included, amongst other changes, the establishment an industry-wide deferred sales model (DSM) for add-on insurances.
The rationale for the change is that consumers should not be pressured into buying add on insurance at the time of a purchase transaction. ASIC Reports over many years have found that in many instances “add on insurances” represented poor value for consumers – one such early report (in 2016) being: REP 471 The sale of life insurance through car dealers: Taking consumers for a ride.
The deferred sales model introduces a pause in the process on selling such products providing that such products cannot be sold for a period of four days after the sale/supply of the main product.
However, it is not appropriate that a deferred sales model be implemented for all type of add on insurances. Some add on insurances are critical to the sale of the main product and of great benefit to consumers, such as:
- Add-on travel insurance
- Compulsory Third Party (CTP) insurance for motor vehicles
Treasury has recently consulted on what other types of add on insurance should be exempt from the deferred sales model. Stakeholders were asked to provide evidence for any classes of add-on insurance products that represent a very high level of consumer value where it would not be appropriate that they be captured by the deferred sales model.
If it is determined that the deferred sales model is not appropriate for certain classes of add on insurances then a class exemption will be made by regulation under section 12DX of the Australian Securities and Investments Commission Act 2001.
Exemptions provided in the regulations will only be on an industry wide class basis.
However, it is evident from the Treasury consultation paper that exemptions will not lightly be given. To support any application for an exemption Treasury requires submissions to include the following comprehensive information:
1. A description and suggested legal definition of the class of add-on insurance product proposed to be exempted. The description should identify the key cover, exclusions and conditions of that class of add-on insurance product.
2. Evidence that the class of add-on insurance product has been historically good value for money for consumers. This would be demonstrated by:
2.1. Quantitative indicators of consumer value for the class of add-on product, including payout ratio (claims paid to insured party / premium), gross loss ratio, claims acceptance rates; and policy cancellation rates;
2.2. The amount of commission paid / received;
2.3. Relative value of the class of product compared with like products in the stand-alone market;
2.4. Any other qualitative or quantitative evidence which demonstrates the class of add-on insurance product has been historically good value for money for consumers.
3. Evidence that without an exemption there is a high risk of underinsurance or non-insurance;
4. Evidence that the product is well understood by consumers;
4.1. Level of consumer understanding of the class of add-on product
4.2. Level of complexity of the class of add-on product;
4.3. Degree of material difference in terms in individual products within the proposed class.
5. Evidence of any differences between the class of add-on insurance and similar products that are sold on the standalone market, including any differences in remuneration arrangements.
It will be interesting to see what types of exemptions will be granted. No time has yet been set for Treasury to finalise its views.