Check against delivery

Good afternoon. My thanks to the Insurance Council of Australia for asking me to join you again 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 here today.

When we last gathered in November 2022, many Australian communities – and indeed insurers – were still reeling from a series of relentless floods. At that time, insurers were trying to stay ahead of the ‘relentless’ and found themselves playing catch-up. Grappling with legacy issues, like inadequate systems and controls, proving a costly drag.

Today’s gathering – ‘insuring tomorrow together’ – looks to match the persistent pressures insurers face with your aspirations: to do things better and differently. And as my colleague and APRA Executive Member Suzanne Smith rightly observed, ‘we all need to do our bit and work together’.

Community, consumer and government expectations of you are at their highest. And unsurprisingly so, as we acknowledge that today’s structural challenges abound and most remain unabated.

Structural pressures

First and perhaps foremost, the structural upward pressure on reinsurance costs.

Following this morning’s collective reflections on the ICA-led delegation to the UK and Europe, the message from global reinsurers is clear: prioritise mitigation to reduce underlying peril risk. And the clock is ticking loudly.

Serial extreme weather events in Australia have seen reinsurance costs reach a 20-year high. ICA data^[1] showing Australian reinsurance cost increases of up to 20 to 30 percent.

While global events (think of last year’s hurricane season) have reinsurance cost impacts in Australia, too.

Second, the affordability and accessibility imperative. Significant cost of living pressures persist for your customers. Whilst accessibility and affordability issues seem at times more a catchcry than an action plan.

Data from the Actuaries Institute released in August this year found a 28% increase in median home insurance premiums over the last 12 months.^[2] For the highest risk properties – the 5% of highest premium paying households - premiums increased by 50%.

The impacts are tangible. According to the Actuaries Institute, 1.24 million Australian households today face significant home insurance affordability stress: a 24% increase from a year ago.

Much of today’s discussion is focused on your collective aspirations to meet these structural challenges head-on. To move beyond a catchcry. As Suzanne rightly highlighted, this is a whole-of-economy issue that we need to get right.

These aspirations range. From insurers exploring artificial intelligence (AI) to lower costs and better services. To product innovation to redress affordability and accessibility. Through to well established but yet delivered government policy interventions to reduce peril risk (as comprehensively identified by CHOICE Weathering the Storm: Insurance in a changing climate). Including but not limited to disaster mitigation investment.

Internationally, some insurers are rethinking their products and looking at basics or partial cover offerings (not all perils, or not a full rebuild). Some start-ups are using AI to simplify and tailor policy offerings to match the needs and financial situation of the policyholder.

We are starting to look at how AI is being used by those we regulate. So, a brief reminder. Beyond being able to explain ‘the why’ for a decision, recommendation, or prediction by AI within your business, you will also need to ensure your AI use meets your obligations to provide financial services efficiently, honestly and fairly.

Since we gathered last year, ASIC has rather doggedly continued our focus on the things within your sphere of influence.

Why? Because aspirations only follow once you get the basics right. For absent the right basics, aspirations can easily go awry (think AI, think product innovation). Or can prove elusive (think government policy intervention and investment). So today our focus remains on getting the basics right. And we think it ought to be yours, as a priority, and collectively so.

Getting the basics right to afford aspiration reminds me of Hans Christian Andersen’s classic tale, The Princess and the Pea. A single pea can be felt underneath twenty mattresses, and twenty eider-down beds. It’s such a problem for the young princess that, despite the layers of comfort carefully and sequentially piled on top, she has a sleepless night because of said pea.

ASIC’s recent endeavour has identified no less than three peas in the bed of the insurance princess. This year ASIC lifted the bonnet to publicly report on those three ‘peas’ over as many consecutive months (June, July and August). Calling for whole of industry action across the trifecta, to get the basics right for:

• your pricing promises (June 2023)
• your design and distribution obligations (July 2023)
• your claims handling (August 2023)

I’ll take each in turn.

Pricing failures

Turning first to pricing failures. So, what happens when the price is not right?

In June 2023, ASIC released our report (Report 765 When the price is not right: Making good on insurance promises) revealing ongoing pricing failures would see insurers repay $815 million to more than 5.6 million consumers. This followed our intervention requiring 11 general insurers (representing 68% of the GI market) to undertake comprehensive reviews: to find, fix and repay customers for broken pricing promises. The ground collectively covered was vast.^[3]

Three consistent causal findings emerged:

• first, unnecessary complexity in pricing promises and pricing practices (accounting for the lion’s share of the remediation, some $380 million and a pricing transparency trust loss)
• second, persistent underinvestment in product governance, systems, controls and data, including controls over product distributors, and
• third, and the most disappointing, insurers’ inaction over years to act on earlier risk flags.

Where we identified potential misconduct, we investigated and took targeted enforcement action.

To date three civil penalty proceedings. The first now resolved with civil penalties of $40 million ordered by the Federal Court of Australia (against IAL) for failing to honour discount promises made to customers. The largest ever penalty imposed by the Court against an insurer for breaches of the financial services consumer protection laws. And further insurance pricing investigations are underway.

Insurers are taking positive steps to get these basics right. Beyond fixing the identified pricing failures, most are now creating centralised repositories for pricing promises and dedicated roles assigned for reviewing those promises.

But unfinished business remains. Many insurers still have multiple and legacy systems outpaced by the complexity of their products and distribution channels. Underinvestment here will continue to get in the way of delivering on pricing promises.

Looking ahead, we have broadened our focus to pricing transparency. Premium transparency is paramount for customers to clearly understand your promises. And to restore customer trust in its delivery.

Ultimately, there are four questions boards should be critically asking on pricing transparency – and regularly so – of management:

• Are we delivering our pricing promises and discounts?
• Is our pricing clear and transparent, and is the pricing system auditable? Can we follow the promise?
• Can our consumers see the promise delivery?
• Can they see the impact of any mitigation steps on their premium?

Pricing and premium transparency is now more than ever a ‘must have’. Arguably needed to secure your challenge matching aspirations.

Government policy intervention, mitigation investment and consumer mitigation action. All will want to see their dividend. And clearly so.

Product design and distribution

Turning to our second 'pea’. Looking at how well design and distribution obligations (DDO) are being met by insurers. Our initial focus – on product design and target market determinations (TMDs).

In July 2023, we released our insurance DDO findings.

For ASIC, DDO is and should be your compass to get the basics right – right product to right consumers.

And your consumer-first mindset visible and preserved through time. As you test the assumptions and outcomes in your product design and distribution. Not a ‘set and forget’ game.

Now in its second full year of operation, we had hoped DDO would be better-embedded. But our review of more than 100 insurance TMDs (the TMD blitz) found compliance with the obligations to be nascent at best.

Many got the basics wrong. Target market descriptions were vague or overly broad. Most did not properly consider or explain how the product issuer considered a consumers’ financial situation, objectives and needs.

A broad target market can bring a greater onus to substantiate (to understand and know) how your product is likely to be suitable for such a broad consumer cohort. Getting this right should prevent low value products being sold to your consumers. And value metrics like claims and loss ratios and withdrawal and renewal rates your spirit level when preparing and reviewing your TMDs.

From our shared findings, a range of corrections ensued. Some insurers have issued revised disclosure documents. A few are reviewing existing products and discounts to simplify them. And others are undertaking risk transformation plans to better manage their non-financial risk – an area of interest we share with APRA.

Ultimately, there are three questions your boards should be critically asking management when examining how you are meeting your product design and distribution obligations:

• For each product, is our target market clear? Is it a real target or too broad?
• Are we confident the product will meet the financial situation, needs and objectives of people in the target market, and how do we test this regularly?
• How does the product account for the financial needs of distinct consumer cohorts residing within the target market, for example – flood or bushfire prone consumers, or low-income consumers?

These may sound relatively simple. But arguably are easier to ask than to confidently answer. And both fundamental to getting your DDO basics right.

DDO as your guard rails should also afford confidence for product innovation. Looking ahead, we hear much talk, but need to see attention and action, from insurers on innovation in product design.

It’s fair to say that DDO has become a ‘go to’ regulatory tool and a compliance compass across ASIC.

Over the last 12 months, we have issued more than 80 stop orders across investment, credit, insurance and OTC derivatives. Notably in the corrective responses, 11 products have been withdrawn from the market.

For insurance to date, 39 interim stop orders have been made.

For each, the orders were lifted upon insurers corrective actions to address ASIC’s concerns, most by amending their TMD. Notably most were significant amendments.

We have commenced four civil penalty proceedings for alleged DDO breaches.^[4] We have other investigations underway. Our next phase of DDO compliance extends to the distribution (the reasonable steps) phase and will also focus on low value insurance products.

As part of ASIC’s broader work on product design and governance, we’re also focused on unfair contract terms (UCT). This is one of our explicit 2023 enforcement priorities. In just four weeks, UCT will be subject to our civil penalties regime under the ASIC Act. We’re also monitoring potential unfair terms relating to maintenance and ‘wear and tear’ in home insurance. And this has been informed by our third ‘pea’.

Putting people first: Claims handling

So, turning to where the rubber hits the road. When consumers find themselves in the unfortunate reality of needing to claim on their insurance policy.

The third in ASIC’s trifecta of insurance reviews – our claims handling and dispute resolution findings (Report 768 Navigating the storm: ASIC's review of home insurance claims). In short, our review revealed a ‘tale of two cities’ – of good and poor practices across all six insurers (representing 63% of the home insurance market).

Our consistent observation – claims handling is under strain.^[5]

We reviewed the claims handling practices of six home insurers since 1 January 2022, when claims handling and settling became a regulated financial service.

We collected data to assess the claims handling of 218,256 home insurance claims (lodged between 1 January and 31 March 2022), through the claim handling life cycle (for a further six months).

An insurance claim doesn’t have to be handled perfectly, but it must be handled well.

Our review identified five areas for improvement:

• better communications to customers about decisions, delays, and complications
• better project management and oversight of third parties
• better recognition and handling of complaints and expressions of dissatisfaction
• better identification and treatment of vulnerable consumers, and
• better resourcing of claims handling and dispute resolution functions.

While some pressure points are outside your direct control, these five ‘fixes’ are firmly within your sphere of influence. And your boards should be critically challenging you on the progress and outcomes of these fixes.

Reflecting on the fifth area for improvement: claims handling resourcing. We also called on insurers to further analyse the resourcing of claims handling and immediately address the identified under-resourcing of their complaints handling (dispute resolution) functions. These obligations are ‘all weather’ obligations.

ASIC is actively monitoring claims handling practices. We have commenced several investigations.

We are also undertaking supervisory work to identify and address inadequate internal and external dispute resolution arrangements this financial year.

As you know, claims handling will also be subject to parliamentary scrutiny by the House of Representatives Standing Committee on Economics inquiry into insurers’ responses to 2022 major floods claims. The inquiry, due to report by 30 September 2024, will look at timeframes for resolving claims and insurer communication with policyholders. The inquiry will also consider ASIC's review of home insurance claims (Report 768) and your own ICA-commissioned external review of insurers’ responses to the 2022 floods.

Conclusion

Taken collectively, getting back to basics matters. For the pricing promises you make. For the products you design, over time innovate and distribute. For the handling of claims and complaints when things go wrong, as they will. All an imperative for every insurer, not just a few.

We want to see you afforded the latitude to pursue your aspirations. But getting the basics right is pretty much an essential precursor. To be able to step up to abate the structural challenges that today abound. At great cost and harm to millions of Australians.

We are reminded by reinsurers and know from past public inquiries that government action is needed, including mitigation investment. We know from the OECD^[6] that internationally AI and product innovation can wrestle some of your structural challenges.

But in our here and now, it’s up to your boards to take ‘whole of business’ accountability for getting the basics right. And with that the trust of consumers, communities and government preserved. So, your aspirations – to do things better and differently – ought to be supported, secured and safe.

And then like the princess, we can all get a good night’s sleep.

I look forward to joining Suzanne for your questions. Thank you.

^[1] ICA Insurance Catastrophe Resilience Report 2022-23

^[2] In dollar terms, an increase in the median ($1,484 to $1,894) and mean ($1,534 to $2,234) from 2022 to 2023.

^[3] This included more than 500 general insurance products, more than 2,000 pricing promises, 30,000 call centre calls and 300,000 documents.

^[4] ASIC commenced four civil penalty proceedings for alleged DDO breaches against distributors of an investment product (FirstMac) the issuer of a credit product (AMEX); investment platform (EToro) issuer of CFDs; and a few weeks ago, the provider of (the Kraken) crypto exchange (Bit Trade).

^[5] Australian Financial Complaints Authority reported a 50% increase in general insurance complaints last financial year, with the top issue being delays in insurance claims handling. This increased by 76% from the previous year.

^[6] The Impact of Big Data and Artificial Intelligence (AI) in the Insurance Sector (oecd.org)