Reforms to the sale of add-on insurance products

Reforms to the sale of add-on insurance products

Proposal Paper 9 September 2019

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? Commonwealth of Australia 2019

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Contents

Contents ......................................................................................................................................iii

Submissions process......................................................................................................................1

Executive summary .......................................................................................................................2

Background ...................................................................................................................................3 Pressure-selling ...................................................................................................................................3 Poor value for consumers ...................................................................................................................3 Weak competition and consumer disengagement .............................................................................4 International experience.....................................................................................................................6

1. An industry-wide deferred sales model ......................................................................................7 1.1 Scope of the deferred sales model ...............................................................................................7 1.2 Tier design .....................................................................................................................................8 1.3 Sales channel ...............................................................................................................................12 1.4 Trigger event ...............................................................................................................................12 1.5 Duration of deferred sale ............................................................................................................13 1.6 Customer initiated completion of sale........................................................................................14 1.7 Enforcement and when the deferred sales model will commence ............................................14

Submissions process

Closing date for any submissions: 30 September 2019

Email Mail

Enquiries

addoninsurance@.au

Manager Insurance Team Financial System Division The Treasury Langton Crescent PARKES ACT 2600

Manager, Insurance Team, Financial System Division

Phone

+61 2 6263 2111

The principles outlined in this paper are not yet law.

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Executive summary

Add-on insurance products and associated sales practices have received widespread scrutiny from the Australian Securities and Investments Commission (ASIC), the Productivity Commission and most recently the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission). These reviews have identified issues in add-on insurance markets including pressure-selling, poor claims ratios and low levels of consumer engagement. On 4 February 2019, the Government responded to recommendations by the Royal Commission and the Productivity Commission by agreeing to mandate an industry-wide deferred sales model for addon insurance products. The Government tasked Treasury to develop an appropriate deferred sales model.1 The Government will be consulting on the implementation of all recommendations of the Royal Commission through exposure draft legislation. However, by exception, the Government is releasing this proposal paper to support the implementation of an industry-wide deferred sales model. This is for the following reasons. First, there are no jurisdictions comparable to Australia that have an industry-wide deferred sales model for add-on insurance products. Second, the add-on insurance market is diverse and complex-- encompassing at least 28 distinct product-lines which are sold through a range of distribution channels and vary widely in how well they are understood by consumers. Third, the stakeholders likely to be affected extend well beyond the financial sector, including frontline intermediaries such as travel agents, airlines and mobile phone retailers. This paper outlines the Government's proposal for an industry-wide deferred sales model for add-on insurance products. In line with the Royal Commission recommendation the model will capture all add-on insurance products by default and minimise exemptions. Exemptions should only arise where there is strong quantitative evidence of product value and consumer understanding. Any feedback on the proposed model should be provided by 30 September 2019 and should specifically address the request for feedback boxes. Feedback should be focussed on how the measure can best be implemented, not whether it should be implemented. Submissions not consistent with this will not be considered. The Government intends to consult on and introduce legislation by 30 June 2020 to implement the model.

1 `Restoring trust in Australia's financial system' February 2019.

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