Guidance to implement the add-on insurance deferred sales model

ASIC has released a new regulatory guide and final customer information requirements as part of its work to implement the new deferred sales model for add-on insurance (RG 275).

The deferred sales model introduces a mandatory 4-day pause between the sale of a principal product or service and the sale of add-on insurance. The deferred sales model was introduced by Parliament in December 2020, following a recommendation of the Financial Services Royal Commission. The Royal Commission found numerous issues in the add-on insurance market, including poor-value products, unfair sales practices and outcomes, and worse claims outcomes than in other insurance markets.

RG 275 provides guidance to industry as they prepare to comply with the deferred sales model from 5 October 2021. It follows consultation on the draft proposals with stakeholders (see CP 339 Implementing the Royal Commission recommendations: The deferred sales model for add-on insurance).

As required by the reforms, ASIC has made an instrument specifying the information that must be given to a customer to start the 4-day deferral period, and how that information must be given.

Deputy Chair Karen Chester said, “This is a key Government reform aimed squarely at improving consumer outcomes in the add-on insurance market. The pause in the sales process will give people time to consider the insurance they’ve been offered, and compare it with alternatives. It will reduce the risk of people buying insurance on the spot that is poor value or just not right for them.”

“‘The deferred sales model is part of a suite of Government reforms in the insurance sector that will improve how insurance products are designed and sold, and how claims are managed,” said Ms Chester.

Background

ASIC’s work in recent years found:

• • Add-on insurance is poor value – for every dollar paid in insurance premiums by consumers in car yards, they received just 9 cents back in claims (Report 492). For consumer credit insurance sold by lenders, only 19 cents was recovered in claims for every premium dollar which consumers paid (Report 622).
• • Add-on insurance sales are driven by commissions (rather than consumer demand). Insurers paid car dealers 4 times more in commissions than they paid consumers in claims. Commissions for car dealers were as high as 79% of the premium charged to consumers (Report 492).
• • Add-on insurance has been widely mis-sold. Insurers agreed to repay over $290 million to customers who were mis-sold add-on insurance in car yards or by lenders. This included people who could not claim on some of their insurance, for example, because they were sold unemployment cover at a time when they were not employed (see 20-115MR and 19-146MR).

The Royal Commission Final Report recommended an industry-wide deferred sales model for add-on insurance products, recognising concerns that these products represent poor value for consumers (recommendation 4.3). The Royal Commission reported that insurers pay more in commissions than in claims; consumer outcomes are considerably worse than in markets where there is meaningful competition; and consumers are at risk of unfair sales practices and adverse outcomes.

The Government implemented the deferred sales model with passage of the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 in December 2020.

In March and April 2021, ASIC consulted on the approach to regulatory guidance and the prescribed customer information requirements: see 21-043MR ASIC consults on implementing a deferred sales model for add-on insurance products. ASIC received 18 written submissions and held meetings with industry and consumer representatives.

A class of add-on insurance products may be exempted from the deferred sales model though regulations (under s 12DX of the ASIC Act). The Government has announced that a number of classes of add-on insurance products will be exempt from the deferred sales model: see Outcome of consultation on deferred sales model for add on insurance products (8 July 2021).

ASIC may exempt an add-on insurance product or class of add-on insurance products sold by a specified person from the deferred sales model (under s 12DY of the ASIC Act). ASIC has not exempted any products to date. It is expected that ASIC will only provide exemptions in exceptional circumstances and where it would be inappropriate to provide an industry-wide class exemption for the product or class in question by regulation.

The timeframe for a decision on an exemption application to ASIC cannot be guaranteed. Without prior relief, applicants must prepare to comply with the deferred sales model from 5 October 2021.