December 2014

Transparency highlighted in Rome

by Mark Radford

Transparency is a significant issue in Australia and worldwide.

The AIDA general report on the topic indicated that, while different approaches are taken worldwide, 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 clearly understand the cover, compare it with other products, and make a decision about its purchase and administration mid term, for example, notifying changes to the risk or making a claim. (I 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, seeking to achieve transparency.

However, the Financial Services Inquiry’s interim report, issued on July 15, 2014, has already indicated concerns with the current Corporations Act disclosure regime:

  • It is too lengthy and complex;
  • It does not enhance consumer’s understanding; and
  • It imposes significant costs on industry.

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 with the advantage of being able to rely on the wording to deny claims outside the cover.

The sad reality is we may never get there as policies must, by their nature, contain all relevant contractual provisions (no matter how clearly or concisely drafted) and attempts to summarise or layer information will always run the risk of misleading consumers, because what is important to one consumer will not be to another. The key facts sheet regime will be unlikely to succeed for that very reason.

For consumers, if insurers do the above properly, they reduce the chances of having a claim paid (opportunities for argument are reduced) and the reality is that:

  • Even if drafted clearly, consumers will not usually read them.
  • Even if they read them, will they understand them, even when they’re clearly drafted? Ie, there are consumer literacy issues.

It then becomes a struggle between the “commercial contract” and the “social contract” concepts.

The commercial contract concept, at its highest, allows insurers to choose what to cover or not and apply the terms as intended and agreed with the consumer. The consumer is responsible for reading the documents and making a sensible decision.

The social contract concept, at its highest, is where the consumer buys a policy and gets the cover they need. The answer is somewhere in between, as neither will realistically work, other than in unusual circumstances.

If insurers don’t provide the cover consumers need, they risk government intervention.

If consumers seek too much, there will be no insurers willing to cover the risks or, where they do, the price becomes prohibitive.

The solution relies on a collaborative team approach to identify where the balance should reasonably be, taking into account the realities identified above.