Authorities the world over are grappling with the proper balance of transparency in insurance. While different approaches are being taken worldwide, the reality is that the core problems are essentially the same no matter what the approach.
The ultimate goal of transparency is to have insurers clearly, concisely and effectively provide product information to consumers in a form that allows them to understand the cover, compare it with other products and make a decision in relation to its purchase and administration mid-term, such as notifying changes to risk or making a claim. Let’s call this transparency nirvana. Different regimes try different methods of seeking to achieve transparency nirvana.
In Australia, we have things like the Product Disclosure Statement requirements under the Corporations Act for retail clients (which work with the Insurance Contracts Act and General Insurance Code of Practice) that seek to achieve transparency.
However, the Financial Services Inquiry interim report, issued in July, has already indicated concerns with the current Corporations Actdisclosure regime, opining that it:
- Is too lengthy and complex,
- Does not enhance consumer’s understanding, and
- Imposes significant costs on industry.
Difficult peak to climb
As with all jurisdictions, the aim is to make changes that lead towards transparency nirvana. However, what is the result when we get there?
For insurers, achieving it can come at significant cost but with the advantage of being able to rely on the wording to deny any claims outside the cover.
The sad reality is that we may never get there, as policies must, by their nature, contain all relevant contractual provisions and attempts to summarise or layer information (no matter how clearly or concisely drafted) will always run the risk of misleading consumers, as what is important to one consumer will not be to another.
Our Key Facts Sheet regime will not be likely to succeed for this very reason.
If the insurer does the above properly, they reduce the chances of having a claim paid (opportunities for argument are reduced). The reality is that:
- Even if drafted clearly, consumers will not usually read the information, and
- Even if they read them, will they understand them?
The importance of obtaining advice from insurance brokers cannot be ignored as part of the solution in such circumstances.
At this point it really becomes a struggle between the “commercial contract” and the “social contract” concepts. The “commercial contract” concept allows insurers to choose what to cover or not, and apply the terms as intended and agreed with the consumer. The consumer has responsibility to read the documents and make a sensible decision as to whether it is appropriate for their needs or not.
The “social contract” concept is where a consumer buys a policy and get the cover they need. The most practical answer is somewhere in between, as neither will realistically work, other than in unusual circumstances.
What’s at stake
If insurers don’t provide the cover consumers realistically need, they risk government intervention (for example, suitability for purpose requirements or government-run insurance arrangements). If consumers seek
too much, there will be no insurers willing to cover the risks, or where they do the price becomes prohibitive.
No matter where you live in the world, the solution relies on a collaborative team-up by industry, consumers and the government. All need to work together to identify where the balance should reasonably be, after taking into account the realities of the relevant circumstances.
Mark Radford is NIBA’s Legal Counsel and the Principal of Radford Lawyers. He was also a member of the International Insurance Law Association recent panel on transparency.