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INSURANCE REGULATIONS (AMENDMENT) 1997 NO. 224
EXPLANATORY STATEMENTSTATUTORY RULES 1997 NO. 224
Issued by the authority of the Parliamentary Secretary to the Treasurer
Insurance Act 1984
Insurance Regulations (Amendment)
The Insurance Act 1973 (the Act) and the Insurance Regulations (the Principal Regulations) establish a scheme of prudential supervision of the general insurance industry.
Section 132 of the Act provides that the Governor-General may make Regulations for the purposes of the Act.
Section 113 of the Act was inserted by the Financial Laws Amendment Act 1997 which commenced on 30 June 1997.
The regulations amend the Principal Regulations to prescribe the classes of insurance business in respect of which authorised insurers, pursuant to Section 113 of the Act, are required to be party to a code or codes of practice which have been approved by the Insurance and Superannuation Commissioner.
The classes of insurance business are the prescribed contracts of insurance for the purposes of Part V of the Insurance Contracts Act 1984, including interim contracts such as cover notes. These prescribed contracts are for;
* motor vehicle insurance
* home building and contents insurance
* sickness and accident insurance
* consumer credit insurance
* travel insurance
Section 113 and the amendment to the Principal Regulations are aimed at enhancing the operation of insurers so that appropriate standards of behaviour and service are encouraged, and associated complaints mechanisms are in place.
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 Regulations
Regulation 1 - Amendment
Regulation 1 is explanatory, and includes the note that these regulations commence on gazettal.
Regulation 2 - New Regulation 26A
Regulation 2 inserts a new regulation 26A into the Principal Regulations, for the purposes of section 113 of the Act. The new regulation prescribes the classes of insurance business for which an insurer operating in such a class must belong to a code or codes of practice approved by the Insurance and Superannuation Commissioner.
The classes prescribed are the undertaking of liability under a contract of insurance that is a prescribed contract for the purposes of the Insurance Contracts Act 1984.
For the purposes of Regulation 26A the term "contract of insurance" includes interim contracts of insurance within the meaning of the Act.
ATTACHMENT B
REGULATION IMPACT STATEMENT - REQUIREMENT FOR INSURERS TO PARTICIPATE IN AN INDUSTRY BASED CODE OF PRACTICE
1. ISSUE
Self regulating voluntary codes of practice 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.
Under Section 113 of the Insurance Act 1973 it is an offence for an insurer to carry on the class of insurance business prescribed in the Insurance Regulations if a code or codes of practice have been approved by the Insurance and Superannuation Commissioner in relation to that business and the insurer is not a party to an agreement to comply with the code or codes. The classes of insurance business have not yet been prescribed.
This provision 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 provision applies, it has no effect.
The Insurance Council of Australia (ICA), which represents the majority of general insurers has developed a voluntary General Insurance Code of Practice. The Code has been approved by the Insurance and Superannuation Commissioner and is endorsed by Government. The Code requires participating insurers to participate in a Claims Review Panel Scheme operated by Insurance Enquiries and Complaints Ltd. (IEC), the body which also monitors insurers' adherence to the Code. The Board of IEC includes representatives of industry, consumers, and the Government.
The Code and the Claims Review Panel Scheme provide a standard of business practice and a dispute settling arrangement for prescribed insurance business 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) and any other contracts that the individual insurer determines. In addition, the Claims Review Panel Scheme extends the external dispute settling arrangements to claims concerning small business insurance.
Only one or two authorised insurers remain outside the General Insurance Code of Practice. Those that have not joined are taking steps to do so in the expectation that the legislation will take effect. However, without legislative intervention, the coverage of this code is unlikely to be complete.
2. OBJECTIVE
To promote good relations between insurers and consumers and to protect consumers of personal and domestic general insurance products by ensuring that insurers 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 code of practice and dispute settling arrangements across the insurance 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 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.
Under this option 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.
Under this option, classes such as these could be prescribed for the purposes of Section 113 of the Insurance Act 1973.
3.5 Imposition of the requirement on insurers when writing any general insurance business.
Under this option, the regulations could prescribe that all general insurance business as defined in the Insurance Act 1973 is a class of business for the purpose of Section 113 of that Act.
4 ASSESSMENT OF IMPACT
At December 1996 there were 121 private sector insurers directly underwriting general insurance business in Australia. Few 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, employer's special risk etc.
Option 3.1
This option will have no impact on insurers, and little impact on the Insurance and Superannuation Commission (ISC).
The benefit of this option is the avoidance of further regulation affecting business.
The cost of this option to insurers is nil. The cost to some consumers could be significant because a small number of insurers are reluctant to join without the legislative necessity. Without the legislation in operation it seems likely that coverage of domestic and personal business by the code of practice would be incomplete. There would be a cost to the ISC in the form of managing complaints from some disaffected consumers, made either directly or to Ministers.
Option 3.2
This option will involve little additional cost because ISC staff have been promoting the Code of Practice for several years. There is no significant cost to insurers as most have already joined.
Unfortunately, notwithstanding this promotion, those remaining few insurers who are contemplating participation in the expectation of this legislative requirement are unlikely to participate if the requirement is not put in place.
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 insurers, and of having access to an effective dispute resolution mechanism. Insurers 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 classes of business that are prescribed 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 approved code of practice and the disputes settling arrangements. There is not likely to be much call on resources to interpret the coverage by either government or industry. Also, as most insurers write this sort of business, it will have the effect of bringing them into the codes and dispute settling arrangements and subject, in respect of their other business, to the same discipline of those codes.
There will be little overall cost to industry or to the ISC because most insurers have already joined the General Insurance Code of Practice.
A 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 codes and arrangements, and reliance must be placed on the ability of the industry to successfully manage the codes and dispute settling arrangements in respect of all the business that they cover.
A further disadvantage is that it does not extend the legislative requirement to cover some sorts of business usually written for small business consumers, whose circumstances are often similar to those of consumers of domestic and personal insurance.
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.
Furthermore the General Insurance Industry Code of Practice does not cover small business insurance unless insurers elect to voluntarily adopt it for this business. This is partly because of the cost issues stemming from the codes requirement for "plain language" in policies.
Without such specific coverage by the voluntary code it would be pointless to require insurers 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 insurance industry to have the General Insurance Code of Practice specifically extend to small business insurance in time for the gazettal of the regulations. This would also be premature because the Code is due for review, by agreement with industry, in 1998.
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, as in option 3.4, it would be pointless to impose this when the coverage of the codes and dispute settling arrangements themselves do not extend as far as this, so it suffers the same disadvantages and costs as option 3.4 concerning the need for immediate re negotiation of the codes and dispute settling arrangements.
Impact on small business
Insurers, generally speaking, cannot be classified as small business.
5. CONSULTATION
The nature of the proposed regulations has been discussed with the ICA. The ICA was asked to discuss the proposal with members of the Board of IEC. Both organisations are comfortable with the proposal.
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 industry code of behaviour.
Option 3.2 also has the benefit of imposing no regulation on industry. This benefit is outweighed by the limited likely success of further public education alone in getting a number of insurers to continue to participate.
Option 3.3 does place a requirement on insurers involved in prescribed classes of business under the Contracts Act. The prescribed classes do not cover all general insurance business, but they are written by most insurers. This means that most consumers will also benefit from their insurers being participants in the codes and dispute settling arrangements and thereby subject to the discipline of those codes and arrangements in respect of business which goes beyond the prescribed classes.
Options 3.4 and 3.5 do place a requirement on insurers, and while they also have the potential to achieve the benefits of Option 3.3, they both have the drawback of introducing potential lack of clarity in the legislation, and the need to immediately reopen costly negotiations with industry about the coverage of the voluntary codes and 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 ICA and consumer groups.
The effectiveness of the Code of Practice and the Claims Review Panel will be kept under continual review through the contact already developed between the ISC and those bodies, and continuing consultation between the ISC and consumer groups.
By agreement with the ICA, the General Insurance Code of Practice is due to be reviewed in 1998.