On 10 December 2020 Parliament passed the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020, which included the establishment an industry-wide deferred sales model (DSM) for add-on insurance in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The deferred sales model will enable consumers to make informed decisions on add-on insurance product purchases. It will do so by introducing a pause in the sales process between the purchase of the primary product and the purchase add-on insurance. This pause, or ‘deferral period’, will enable and encourage consumers to consider the merits of the insurance offered and to compare this insurance with alternative products.
Under section 12DX of the Australian Securities and Investments Commission Act 2001, a class of add-on insurance products may be provided an exemption through regulations. An exemption may be subject to conditions.
The Treasurer has noted there may be a limited number of add-on insurance product classes that represent a very high level of value for consumers and where it would not be appropriate that they are captured by the deferred sales model. Treasury is seeking information from stakeholders to identify if any possible add-on classes could meet this high standard to inform Government decisions regarding possible exemptions.
Under section 12DY of the Australian Securities and Investments Commission Act 2001, the Australian Securities and Investments Commission (ASIC) has the power to exempt an add-on insurance product, or class of product sold by a specified person, after having regard to factors such as demonstrated product value, consumer understanding, the risk of underinsurance or non-insurance without an exemption, and differences between the add-on insurance products and similar products.
ASIC will separately consult on the implementation of the deferred sales model, including its approach to considering applications for exemptions made by specific entities. However, it is expected that ASIC will only provide exemptions in exceptional circumstances and where it would be inappropriate to provide an industry-wide class exemption for the product or class in question.
Treasury invites stakeholders 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.
Stakeholders should provide the following evidence in support of an exemption for a class of add-on insurance products:
- 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.
- 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.
- Evidence that without an exemption there is a high risk of underinsurance or non-insurance;
- 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.
- 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.
- Any other information relevant to consideration of exemptions to the Deferred Sales Model.
Exemptions provided in the regulations can only be on an industry wide class basis. Treasury would encourage stakeholders to submit evidence on that basis, particularly for quantitative data such as pay-out ratios or claim acceptance rates. While data on a product or class of products from an individual add-on insurance provider will be useful, it may be difficult for such data to be sufficiently compelling to result in a whole of industry class exemption. As such, Treasury would encourage stakeholders to consider making submissions through industry groups who can aggregate data to a whole of class level.
Add-on travel insurance
The Government has announced its intention to use the regulations to exempt add‑on travel insurance products from the Deferred Sales Model. In addition to the above request for information, Treasury also invites any stakeholder views on an appropriate definition of add‑on travel insurance products or how this product could be captured in the regulations.
Compulsory Third Party (CTP) insurance for motor vehicles
Consistent with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Government intends to exempt CTP insurance for motor vehicles from the Deferred Sales Model through regulations. In addition to the above request for information, Treasury also invites any stakeholder views on an appropriate definition of CTP insurance for motor vehicles or how this product could be appropriately captured in the regulations.
Under section 12DX of the Australian Securities and Investments Commission Act 2001, if the regulations provide an exemption for a class of add-on insurance products, this exemption can be subject to specific conditions. Treasury invites stakeholders’ views on appropriate conditions that should be attached to any class exemptions provided.
The Deferred Sales Model will be effective from 5 October 2021. Any add-on insurance products without an exemption in place at that time will be subject to the Deferred Sales Model from that date.
To provide sufficient time for consideration and drafting of any class exemptions, submissions for requested exemptions should be provided before 15 February 2021. It cannot be guaranteed that submissions received after this date can be fully considered, and exemptions provided, by 5 October 2021.
After 5 October 2021, stakeholders who wish to seek a class exemption may contact Treasury to discuss an additional process, noting compliance with the Deferred Sales Model will be required during the consideration of any additional exemptions.