Speech by ASIC Deputy Chair Karen Chester at the Insurance Council of Australia Annual Conference, 2 November 2022.

Check against delivery

Good morning everyone.

Thank you to the Insurance Council of Australia for the opportunity to speak today.

I would like to begin by acknowledging the Traditional Owners’ ongoing connection to, and custodianship of, the lands on which we meet – the Gadigal people of the Eora Nation, and to pay my respects to their Elders past, present and future. I extend that respect to Aboriginal and Torres Strait Islander people present today.

My collective thanks to the ICA and insurers for your leadership in what has been a character-building year. For all of you, your staff and the many Australian communities impacted by the relentless series of floods. 

Alongside an unheralded constellation of global change. Economic, geopolitical, health and weather. And with that constellation, costly disruption to so many things we took for granted. Further compounding the costs of the floods. 

It makes it all the more difficult to see and then to say, that when we look at the insurance sector right now, we do see an industry in ‘catch up’. Responding to rapid change in your operating environment, shifts in the expectations on you, and new and more robust regulatory obligations. But legacy issues are at play here as well. And in a costly way. 

Two legacy issues, both in your direct field of influence being: inadequate control and information systems; and complexity in products, promises and business models.

The third and enduring issue being climate change. Bringing with it serial severe weather events what we all hope is not the new normal, but perhaps is. Making it all the more difficult to play ‘catch up’. 

Today I will talk to you about three areas that matter to us all:

• Pricing failures
• Severe weather events, and
• Data needs

Pricing failures

As you all know, this time last year, ASIC initiated an industry-wide pricing promises review. This followed a significant uptick in general insurers reporting breaches related to pricing issues, and related enforcement action. 

With the lagged cost of historical under-investment in systems and controls around pricing manifest in a failure to pass on promised discounts to consumers. Pricing failures across at least five years, and a number of firms.

In initiating the pricing review, we afforded each insurer the driver’s seat to: ‘find, fix and repay’.   

By way of a quick overview, the ‘find’ involved insurers: looking back to check whether their customers fully received all pricing promises. And when issues were identified, putting in place the structures to stop the failure.

Collectively, the ‘fix and repay’ phases will see insurers investigate the root causes, implement longer term fixes to systems and controls and importantly, remediate customers in a timely way. It is going to be an expensive fix. Remediations so far total more than $760 million in refunds, covering an estimated five million insurance policies. And this doesn’t include the running costs of the remediations. Nor the cost of the fix. 

The bottom line is that insurers’ systems and controls have not been robust enough to know and ensure pricing promises followed through to delivery. Charging your customer the promised price is a must-have.

Two factors contributed to system and control failures here  ̶  unnecessary product (and promise) complexity, and systems out of step with industry consolidation. 

The complexity issue has stemmed from choices in product design. With many failures throughout the product distribution cycle attributed to unnecessary complexity.

For example, on the customer-facing side, it could be a breakdown in processes used by insurers to determine customer eligibility for a discount. Especially when the onus is unnecessarily on the consumer to demonstrate eligibility. On the promise side, a pricing engine breakdown where complex and layered promises need integrated data sets for a complete customer view.  

For many, product simplification will help. The simpler the products and pricing, the less complex the control environment needs to be – and promises delivered.

Some of these risk management issues are also a by-product of industry consolidation. We have seen new brands, products and businesses being bolted on.  This then coupled with a delay to invest in the systems to unite, simplify and modernise.   

There are lessons. The pricing failures reviews provide valuable insights into the systems, processes and governance of insurers and also a roadmap to make improvements now and going forward. We will be reporting publicly on this work in the first half of 2023.

Severe weather events

Increasingly severe weather events are becoming less cyclical and more serial in occurrence. And as their devastating footprint broadens, there seems a new and unwelcome ‘normal’ establishing.

Before this year, insurers were already contending with two years of persistent flooding and storms, and severe bushfires before that. Indeed, the ICA has declared 18 natural disasters in the last three years, affecting most states and territories.

The past three years have seen Australians live through consecutive bushfires, floods, cyclones and the ongoing COVID-19 pandemic reflected in collective claims of more than 197,000 by the end of 2021.

Compounded by the number of claims this year, with:

• 234,000 claims for the floods in Queensland and NSW in February, the secondly costliest severe weather event at $5.4 billion; and
• 21,000 claims for the severe storms in NSW in July.

And now you are dealing with the latest catastrophe – flooding in parts of NSW, Victoria and Northern Tasmania during October, resulting in more than 14,480 claims, so far.

Right now, the number of open CAT claims on your books is more than 118,000. Not including BAU claims, industry is clearly facing a bedrock task.

The industry has stepped up as it always does in disaster events, and performed relatively well under stress. But it has revealed pressure points that need addressing.

Claims are taking longer. There are still outstanding claims remaining from 2021. Thirteen percent (14,000) of the claims from the October 2021 storms remain outstanding 12 months later; 6% (2,000) of the claims from the June 2021 Victoria storms are outstanding 16 months later; and 11% of claims from Cyclone Seroja in Western Australia are outstanding 19 months later. And many CAT claims are now slipping beyond 12 months. 

Internal and external dispute resolution is under pressure. We continue to see increases in complaints received in the general insurance space. AFCA has also identified significant increases in requests for extensions, overdue responses, and non-response rates.

Last financial year, general insurance accounted for more than 18,000 complaints received by AFCA. Almost 5,000 of these were for delays in claims handling, compared to just over 3,000 the previous year.

Notably and importantly, this is not only for severe weather event claims, but for BAU claims as well, suggesting backlogs are beginning to play out at broader consumer expense. 

With a far higher than usual number of insurance complaints at AFCA currently, we understand insurers are not keeping up with both IDR and EDR timelines.

It’s not surprising that claims resolution is taking longer than normal.

We acknowledge the challenges you are facing. The sheer volume of claims, supply chain issues, and labour resourcing pressures. But resourcing for better consumer outcomes here needs to move beyond an ongoing state of catch-up.   

Perhaps it’s time to pause and rethink the resourcing of claims handling and dispute resolution. Is there a need for a structural lift in that resourcing, rather than event or season-driven surge capacity?

We will shortly write to insurance boards to share our expectations for claims handling as we head into the Australian summer.

Against this backdrop, 2022 heralded law reform with claims handling being subject to financial services obligations. ASIC is currently conducting a review of claims handling practices by insurers to set a baseline of insurer conduct against your obligations. Those obligations are set out in our information sheet 253, working alongside your own GI Code with important decision-making timeframe requirements.   

We are focusing directly on the consumer experience, including identifying frictions in claims handling. We expect to communicate our findings by mid-2023.

Improvements in product design and communication are also required. Insurers will need to look at definitions for terms like ‘flood’, ‘storm’ and ‘runoff’, and consider how to communicate policy features to customers.

Consider whether you can better design products to assist people in high-risk communities. The complex challenge of improving product design for the here and now pressure (for example, around term standardisation) and longer term (which I know Helen will explore further) will take a collective effort from the industry. And that’s a challenge we know the ICA is keen to engage on.

Data needs

Let me briefly touch on data. Helen will talk further about our joint endeavour on data.

We know the ICA and its members have been doing important work collecting data on disaster claims, and more recently on policies in force. We will use these industry data collections to support our joint work with APRA, and also as an interim measure to support our regulatory work through analytical insights. 

Ultimately and over time, the integration of our granular insurance policy and claims data with Reportable Situations, and internal and external dispute resolution data, will enable a 360-degree view of firms’ performance in customer outcomes. Increased data granularity is important for everyone– regulators, the government, industry, and consumers– as it allows all of us to develop effective strategies and targeted actions to ensure insurance products are meeting consumer needs. Ultimately driving better consumer outcomes.

Conclusion

A final observation before we hear from Helen.

We acknowledge there is much that impacts the accessibility and affordability of insurance that is beyond your direct field of influence. Which is why expectations are high for your performance in areas that are in your field of direct influence. 

We see the industry is in catch-up. We know this is not the ideal time to be so. But we all know the way forward – with data, with a focus on consumer outcomes, with embedding DDO, with resourcing up to deal with claims and with working together through the ICA and with us – the regulators.

Thank you.