A lack of transparency in the general insurance industry with regard to
disclosure has resulted in significant barriers to consumers' ability to make efficient
use of product information. This issue is exacerbated by the inherent complexity of
general insurance products, says the Senate Standing Committee on Economics.
In a report released on 10 August, the Committee says that the risk-based nature of general insurance makes it a relatively complex financial product. From a consumer perspective, this complexity is obfuscated by a lack of transparency with regard to how general insurance is priced. Consumers' ability to understand and make appropriate choices is often hindered by the lack of sufficient understanding or information to compare different insurance products.
In the report, the Committee makes several recommendations to address the issues. It suggests that the government:
- require insurers to disclose the previous year's premium on insurance renewal notices and to explain premium increases when a request is received from a policyholder;
- initiate a review to provide component pricing of premiums to policyholders upon their taking out or renewing an insurance policy, as well as an assessment of the benefits and risks to making such a change;
- initiate an independent review of the current standard cover regime with particular regard to the efficacy of current disclosure requirements;
- work closely with industry and consumer groups to develop and implement standardised definitions of key terms for general insurance;
- undertake a review of the utility of Key Facts Sheets as a means of product disclosure, with particular regard to their effectiveness in improving consumer understanding of home building and contents policies; and merit of extending their use to other forms of general insurance;
- complete a detailed proposal for a comparison tool for home and car insurance;
- consider introducing legislation to mandate compliance with the ACCC's good practice guidance for comparison website operators and suppliers;
- introduce the legislative changes required to remove the exemption for general insurers to unfair contract terms laws;
- strongly consider introducing legislation to require all insurance intermediaries disclose component pricing, including commissions payable to strata managers, on strata insurance quotations.
The Committee also notes that the product disclosure statement (PDS), the principal means of disclosure to a consumer at the point of sale, has come to be perceived by government, consumer groups and the insurance industry alike as overly complex, lengthy and not conducive to consumer comprehension. Research into consumers' buying behaviours has consistently found that few consumers read the PDS when buying general insurance products.
In a response to the Senate committee report, Insurance Council of Australia (ICA) CEO Rob Whelan said: “Many of the recommendations are already being addressed by the ICA through initiatives including the Disclosure Taskforce and the review of the General Insurance Code of Practice, through measures being implemented by insurance companies and through existing government programmes.”
Referring to price comparison websites, he said: “Insurance is highly complex. You can’t compare insurance products as though you’re comparing cans of soft drink, and each insurer’s product is competitive on its features as well as its price.”
“The ICA notes the recommendation relating to a price comparison tool but believes enough evidence has already been provided to demonstrate a government-run aggregator would not stand up to a cost-benefit analysis.”