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INSURANCE (AGENTS AND BROKERS) REGULATIONS (AMENDMENT) 1997 NO. 225
EXPLANATORY STATEMENTSTATUTORY RULES 1997 NO. 225
Issued by the authority of the Parliamentary Secretary to the Treasurer
Insurance (Agents and Brokers) Act 1984
Insurance (Agents and Brokers) Regulations (Amendment)
The Insurance (Agents and Brokers) Act 1984 (the Act) and the Insurance (Agents and Brokers) Regulations (the Principal Regulations) provide for the efficient and fair operation of the insurance industry by ensuring that standards of conduct between intermediaries and consumers are such that there is fair dealing and that any complaints that arise are dealt with promptly and efficiently.
Section 48 of the Act provides that the Governor-General may make Regulations for the purposes of the Act.
Part Ill of the Act deals with the registration of brokers.
The Financial Laws Amendment Act 1997 which commenced on 3 0 June 1997 amended a number of Sections in Part III. One of the effects of these amendments is that general insurance brokers, in order to obtain and maintain their registration in respect of business which, under the Principal Regulations, is domestic or personal insurance business, are obliged to participate in an external disputes settling arrangement which has been approved by the Insurance and Superannuation Commissioner.
The regulations add a new Regulation 4 which defines domestic or personal insurance business for the purposes of the relevant provisions in Part Ill of the Act. It is defined as the undertaking of liability under a contract of insurance that is a prescribed contract under the Insurance Contracts Act 1984. These are contracts of:
* motor vehicle insurance
* home building and contents insurance
* sickness and accident insurance
* consumer credit insurance travel insurance.
The regulations are described in detail in Attachment A
The Regulation Impact Statement in respect of these regulations is at Attachment B.
ATTACHMENT A
Insurance (Agents and Brokers) Regulations (Amendment)
Regulation 1 - Amendment
This regulation is explanatory and includes a note that the regulations commence on gazettal.
Regulation 2 - New Regulation 4
This regulation inserts a new Regulation 4, entitled "Domestic or personal insurance business", into the Principal Regulations.
The new regulation defines domestic and personal insurance business for the purposes of the relevant provisions in Part III of the Act as the undertaking of liability under a contract of insurance that is a prescribed contract under section 34 of the Insurance Contracts Act 1984.
For the purposes of Regulation 4 the term "contract of insurance" includes interim contracts of insurance within the meaning of the Act.
ATTACHMENT B
REGULATION IMPACT STATEMENT - REQUIREMENT FOR GENERAL INSURANCE BROKERS TO PARTICIPATE IN DISPUTES HANDLING ARRANGEMENTS
1. ISSUE
Self regulating voluntary disputes settling arrangements are a cost effective means of promoting good relations between the parties to contracts and for ensuring that consumers have available to them an effective means of resolving disputes. They are particularly important in the case of intangible services such as insurance, where product defects normally only become apparent during the claims process.
Part III of the Insurance (Agents and Brokers) Act 1984 (the Agents and Brokers Act) deals with the registration of general insurance brokers. It provides, among other things, that if there is in force an arrangement, approved by the Insurance and Superannuation Commissioner, for dealing with complaints against persons carrying on business as insurance brokers in relation to domestic or personal insurance business, a person must be a party to the arrangement in order to conduct that business as a broker. Domestic or personal insurance business is to be defined in the Insurance (Agents and Brokers) Regulations but this has not yet happened.
These provisions commenced on 30 June 1997 with the passage of the Financial Laws Amendment Act 1997, but unless the relevant regulations prescribe the classes of business to which the provisions apply, they have no effect.
The National Insurance Brokers Association (NIBA) has established the Insurance Brokers Disputes Facility (IBDF). The IBDF is a voluntary scheme. It has been approved by the Insurance and Superannuation Commissioner as an external disputes settling arrangement for use by brokers and their clients. It has also been endorsed by Government, and is overseen by the Insurance Intermediaries' Compliance Council which includes representatives of the broking industry, consumers, and the Government. Brokers who participate will have to establish and document an internal dispute settling process and advise their clients about that and about the IBDF.
The IBDF provides dispute settling arrangements for business which involves prescribed contracts under the Insurance Contracts Act 1984 (motor vehicles, home buildings and contents, sickness and accident, consumer credit and travel), personal and domestic property (including movables, valuables, caravans, on-site mobile homes and marine pleasure craft), small business related insurance, and any other contracts that the participating broker endorses in writing to the client as subject to it.
Despite this industry initiative many brokers are reluctant to take part in external dispute settling arrangements. At this stage, about 60% of brokers have joined the IBDF, which is having difficulty getting the remainder to join. Many who have joined recently have done so in the expectation that it will be compulsory to do so.
Most of the remainder are not members of NIBA. Without legislative intervention, the voluntary scheme will fail to ensure that appropriate dispute settling arrangements apply consistently for the clients of all brokers, and many brokers will let their participation lapse.
2. OBJECTIVE
To promote good relations between brokers and consumers and to protect consumers of domestic and personal general insurance products by ensuring that brokers adopt appropriate standards of behaviour and have approved external dispute settling arrangements in place.
3. OPTIONS
3.1 No Action.
This means that the relevant provisions of the Act will have no effect and that the protection of consumers must rely on the successful operation and coverage of the industry initiated dispute settling arrangements across the broking industry.
3.2 Assist efforts made by industry to date by promoting the current voluntary codes and schemes.
This might be done through seminars, speaking opportunities, and education campaigns.
3.3 Imposition of the requirement on specific classes of domestic and personal insurance business
The Insurance Contracts Act 1984 (the Contracts Act) and its Regulations establish standard forms of contract (prescribed contracts) for classes of insurance business which are broadly *recognised by the insurance industry and consumers as domestic and personal business. At present these are motor vehicles, home buildings and contents, sickness and accident, consumer credit and travel. The possibility of including recreational marine insurance is currently under review with the industry.
The legislative requirement could be limited to those classes of domestic and personal insurance that are prescribed contracts under the Contracts Act.
3.4 Imposition of the requirement on classes of general insurance which are domestic, personal and small business insurance.
The prescribed classes of insurance under the Contracts Act do not include some forms of insurance often taken out by small business. Examples would include insurance for fire risk, commercial vehicles, and professional indemnity.
Classes such as these could be prescribed as domestic and personal insurance for the purposes of the relevant provisions of the Agents and Brokers Act.
3.5 Imposition of the requirement on insurers and brokers when writing any general insurance business.
The regulations could prescribe that all general insurance business as defined in the Insurance Act 1973 is domestic and personal insurance for the purposes of the relevant provisions of the Agents and Brokers Act.
4 ASSESSMENT OF IMPACT
At December 1996 there were 1021 general insurance brokers and while some of these are major players (the top 20 brokers write about 80% of broking business), the vast majority of these are small businesses.
A little over half (53%) of the gross premium income of private sector general insurers (excluding premiums for reinsurance and other specialist business) in the 1995/96 year of income was attributable to classes of business within the prescribed classes under the Contracts Act, ie generally of a personal or domestic nature. About 39% was attributable to insurance more typical of business, such as fire, employers' special risk etc..
During the 1995/96 year, money paid into general insurance broking accounts from insureds and intending insureds, less payments to brokers (eg commissions), amounted to 35% of the gross premium income of general insurers discussed in the previous paragraph. This serves as an indication of the proportion of general insurance business written by brokers. All brokers would arrange some domestic or personal insurance.
Option 3.1
This option will have no impact on brokers or on the Insurance and Superannuation Commission (ISC). On the other hand, the clients of the about 400 insurance brokers will not benefit from being linked to a dispute settling arrangement.
The benefit of this option is the avoidance of further regulation affecting business.
The cost of this option to brokers is nil. The cost to some consumers could be significant because 40% of brokers have not yet voluntarily participated in the IBDF. Without the legislation in operation, it seems likely that many who are participating will let their membership lapse. There would be a cost to the ISC in the form of managing complaints from disaffected clients, made either directly or to Ministers.
Option 3.2
This option will involve little additional cost because ISC staff have been promoting the IBDF to insurance brokers for several years. There is no significant cost to insurers or brokers.
Unfortunately, notwithstanding this promotion, many brokers are yet to participate. Experience to date has pointed to the difficulty in getting many brokers to take advantage of public education endeavours. The ISC and the NIBA conclude that this strategy is unlikely, on its own, to achieve the objective.
Option 3.3
This option will ensure that consumers of most domestic and personal insurance products will have more certainty about the standards of good practice and service to be expected from brokers, and of having access to an effective dispute resolution mechanism. Brokers will also benefit because the requirement will assist the promotion of good relations with consumers across the whole industry, at least at the domestic and personal insurance level, and this should help the industry to grow.
Another benefit of this option is that the specific classes of business that are prescribed classes under the Insurance Contracts Act 1984, are clearly described and well understood in the industry, and are specifically part of the intended coverage of the disputes settling arrangements. There is not likely to be much call on resources required to interpret the coverage by either Government or industry. Also, as most brokers arrange this sort of business, it will have the effect of bringing them into the dispute settling arrangement and subject, in respect of their other business, to that discipline.
The minority of brokers (about 40%) who have not yet participated in the IBDF will face some rearrangements and costs when they join as a consequence of the legislation. The IBDF fee for brokers who are riot members of NIBA is $375 per year, renewed on 1 January each year. This outcome supports those small brokers who have already voluntarily entered the scheme, which was actively promoted to build coverage and critical mass. The effect of the fee will be further considered by the Insurance Intermediaries Compliance Council in early August 1997. In addition to the annual fee, if the IBDF arranges a conciliation conference for the broker and client there is a charge of $50, and if the dispute goes to a referee organised by the IBDF, there is another charge to the broker of $200.
Apart from these specific charges, a broker participating in the IBDF scheme is required by the rules of the scheme to have a fully documented internal process for handling disputes with their clients, make the documentation available to all clients, and allow clients free access to the process.
These charges and the costs of establishing internal dispute settling arrangements can theoretically be passed on to clients as part of brokerage charged. It is unlikely to amount to a great deal per client even if passed on in full. Competitive pressure in the industry will cause many brokers to absorb the extra cost.
The additional costs to the ISC include the need to modify the approved form used by brokers to apply for and renew their registration, and modify broker inspection procedures and training, so as to test broker participation in approved external dispute settling arrangements.
Another disadvantage is the fact that the prescribed classes of business under the Contracts Act do not include all classes of business that are covered by the IBDF. An example is small business related insurance, which often has similarities with personal and domestic insurance. Reliance must be placed on the ability of the broking industry to successfully manage the dispute settling arrangement in respect of all the business that it covers.
Option 3.4
The additional benefit of this option is that it would ensure that the approved dispute settling arrangements would extend to small business consumers of general insurance.
Difficulties will arise in settling with the industry on exactly what is "small business insurance". This will involve resource cost for the ISC and the industry.
Option 3.5
This option has the benefit of clarity in that the meaning of general insurance is fairly clear to industry and interpretation is unlikely to be a problem. It would catch the business usually written to cover small business risks as well as domestic and personal, without the problem of definition that might arise in discussions to decide what insurance is typically "small business".
However, it would be pointless to impose this when the coverage of the IBDF does not extend as far as this. Without such specific coverage by the voluntary arrangement it would be pointless to require brokers to participate in it in respect of this business. A cost to the Government, and to the industry, will be the need to reopen negotiations with the broking (and insurance) industry to have the industry code of practice and dispute settling arrangements extended beyond their current coverage in time for the gazettal of the regulations.
Impact on small business
Most brokers are small employers and can be described as small business. The specific impact of the options on brokers as small businesses are:
Options 3.1 and 3.2. No impact
Options 3.3, 3.4 and 3.5 For the minority of brokers who are not already participating in the IBDF, there will be an immediate fee of $375. The fee is paid annually. There is an additional fee of $50 for using the IBDF conciliation facility, and $200 if a dispute is referred to an IBDF referee. There is also some cost associated with organising and documenting an internal dispute settling procedure.
5. CONSULTATION
The nature of the proposed regulations has been discussed with NIBA.
NIBA was concerned that the requirement on brokers to participate in the IBDF scheme did not extend to all business covered by the IBDF scheme, including the insurance of small business, although they conceded that in practical terms, any brokers which belong to the IBDF and Code of Practice in order to comply with the legislation will thereby be subject to IBDF and Code concerning other business.
The ISC response was that the objective of the work leading to the IBDF scheme was to seek as broad as possible coverage. However the underlying legislation and regulations need to set minimum standards and be both clear and straightforward. The prescribed classes of business in the Contracts Act provide well accepted definitions which are understood and effective. To extend the legislative requirement by regulation to cover small business insurance creates a tension with the head of power in the Agents and Brokers Act and gives rise to definitional problems.
6. CONCLUSION AND RECOMMENDED OPTION
Option 3.1 has the benefit of imposing no regulation on the industry. This benefit is outweighed by the cost to consumers of not benefiting from a broadly based external disputes settling arrangement.
Option 3.2 also has the benefit of imposing no regulation on the industry. Again, this benefit is outweighed by the limited likely success of further public education in getting many brokers to participate in the absence of a legislative requirement.
Option 3.3 does place a requirement on brokers involved in prescribed classes of business under the Contracts Act. However it has the benefit that most brokers will be affected which means that most consumers will also benefit from their brokers being participants in the dispute settling arrangement and thereby subject to the discipline of that arrangement in respect of business which goes beyond the prescribed classes.
Options 3.4 also places a requirement on brokers, and while it has the potential to achieve the benefits of Option 3.3, it has the drawback of introducing the potential for lack of clarity in the legislation.
Option 3.5 also places a requirement on brokers but has the potential to achieve the benefits of Option 3.3. However it also means immediately reopening costly negotiations with the industry about the coverage of the voluntary dispute settling arrangements.
Option 3.3 is the recommended option.
7. IMPLEMENTATION AND REVIEW
The types of business which are included as prescribed contracts under the Insurance Contracts Act 1984 are continually under review. Consideration is currently being given to the inclusion of recreational marine insurance, in consultation with the Insurance Council of Australia and consumer groups.
The effectiveness of the IBDF scheme will be kept under continual review through the contact already developed and continuing between NIBA, consumer groups, and the ISC.