Financial Services Royal Commission Final Report: What the insurance industry needs to know

Since the start of hearings 12 months ago, headlines about the Royal Commission have largely focused on the banking, superannuation and financial planning sectors.

Whilst the insurance industry may have escaped close scrutiny, the Final Report made up for this with a range of recommendations that will have important ramifications for the industry.

This is the first article in our two-part series on the Financial Services Royal Commission. Our second article will provide a more in-depth review of the key recommendations.

The big picture

You don't need to read all 76 recommendations.

Four key observations pervade the Final Report. No matter what changes are made to insurance laws or to the approach taken by regulators, insurers and intermediaries should be largely unaffected if they have regard to these key observations when formulating risk frameworks, compliance and remuneration policies, underwriting and claims guidelines and simply when interacting with clients:

Neither encourage nor reward misconduct

• All industry participants should review the remuneration and other incentives they offer their officers, employees and agents and ask what behaviour they are they fostering. In an environment of online sales channels, outsourced call centres and renewals through smartphones, there are abundant opportunities to put revenue generation ahead of dealing with customers fairly. Boards and senior management are responsible for creating and cultivating the culture within their organisations not only through their own conduct but through the policies that prescribe, reward and, when necessary, punish the conduct of their personnel.

Recognise imbalances of power and knowledge

• In insurance, imbalances of knowledge and power abound. Often, the insured will know more about the likelihood of a claimable event than the insurer (hence the importance of the duty of disclosure). However, insurers and their representatives need to be conscious at all times of the imbalance that exists simply because, as we all know, insureds do not read the terms of retail policies until it is time to make a claim. The imbalance this creates is unlikely to change, despite attempts by legislators to change the status quo.

The duty of utmost good faith applies to both the insurer and the insured but the Royal Commission is a timely reminder for insurers to fulfil that duty not only when selling insurance but also when dealing with claims.

Consider in whose interests you act and respect those interests

• Once upon a time, the label 'broker' or 'agent' provided a useful indication of whether an intermediary acted on behalf of an insured or an insurer. Those days have passed and in many cases, it takes a savvy insured to identify on whose behalf an intermediary is acting when recommending a policy. It is now more important than ever that brokers identify and act on potential conflicts of interest. There is little point attempting to rely on a disclaimer in a financial services guide if your sales scripts, product literature and other interactions with clients leave them with the impression that you are acting in their best interests when pursuing a sale that is in your best interests.

Although insurers and their representatives are not under a duty to act in their insureds' best interests, the duty of utmost good faith requires fair dealing and to have regard to the interests of the insured when promoting and selling insurance as well as when handling claims.

It is incumbent on the industry to recognise that sometimes the fair and just outcome for the consumer is for them not to buy your insurance policy at all.

Expect misconduct to be called out and punished

• The business of insurance is subject to oversight by a myriad of regulators. Insurers and intermediaries should expect that their future dealings with ASIC and APRA may not reflect those of the past.

The lack of accountability on all fronts has drawn the ire of the Royal Commission and it may be more difficult in future to negotiate enforceable understandings as a palatable alternative to litigation. Plans to remediate consumers will come under much greater scrutiny and ASIC's published reports are more likely to name those considered by the regulator to be underperforming.

The vigour with which our regulators will be expected to pursue perceived misconduct will, inevitably, work both ways. ASIC, in particular, has recently suffered several prominent losses in the courts and, for its part, APRA's litigation experience could best be described as limited. Financial services licensees and regulators may find themselves forced into litigation where the only certain result is a windfall for the lawyers.

If insurers and intermediaries have regard to these principles when training, monitoring and motivating their officers/employees/agents and when dealing with retail clients — then nothing that results from the 76 recommendations should cause significant disruption to their business.

The changes that affect even the most compliant organisations

Some recommendations will result in changes even for those insurers and intermediaries who live and breathe the principles set out above. These will have the effect of:

• reducing or eliminating general and life insurance commissions in the near future;
• banning outbound telephone sales;
• deferring the sale of add-on insurance;
• watering down the duty of disclosure for many consumer policies;
• making insurers accountable through what we like to call the Financial Executive Accountability Regime or 'FEAR';
• requiring organisational policies to be reviewed regularly to ensure they promote the right culture and mitigate non-financial risks (and meet APRA requirements where applicable);
• extending the time for reporting significant breaches of the law to 30 days;
• extending ASIC's forthcoming design, distribution and product intervention powers to all financial products; and
• increasing funding for legal assistance services to help bring disputes before AFCA.

For those who like a little more detail, click here to read more about the key recommendations for the insurance industry.