MBIE expects advisers to bear costs of regime change

Insurers and financial advisers can expect a “low to medium” increase in their costs as a result of changes to insurance law, the Ministry of Business, Innovation and Employment says.

Monday, December 9th 2019, 8:01PM

In an impact statement prepared ahead of the announcement of proposed new changes, MBIE said the costs should not be ongoing but would come from changes being made to contracts and systems. They would apply to insurers and all intermediaries, including advisers, the ministry said.

The changes cover clients’ disclosure requirements, treatment of non-disclosure, unfair contract terms, improving consumer understanding of insurance policies and insurers’ duty of utmost good faith, among other issues.

General and life insurers have already tried to self-regulate on disclosure, with voluntary codes developed by the Financial Services Council and Insurance Council making clear how they should deal with cases where information has not been provided by a customer.

But MBIE said it was not sufficient.

“Given the multitude of players in the industry, it is not reasonable to expect all players to comply with certain voluntary standards without government intervention."

"The characteristics of insurance products and services mean that some underlying issues such as information asymmetry, conflicts of interest and an imbalance of power exist. While voluntary initiatives are welcome, we do not think that they are an adequate substitute for clear laws on the contract between the insurer and policyholder.”

It pointed to cases where customers felt they had been penalised for irrelevant non-disclosure: In one case, a life insurance policy was voided when a wife tried to claim after her husband was killed by a drunk driver, because her husband had not disclosed a former bankruptcy. An income protection claim was declined when the policyholder had to leave work for cancer treatment because she had not disclosed psychological problems experienced as a teenager.

The Government plans to abolish the duty of disclosure for consumers and replace it with a duty to take reasonable care not to make a misrepresentation. Insurers would have to identify the information they need to underwrite the risk through questions.

Consumers must answer truthfully and as accurately as reasonable. Whether or not a consumer had taken reasonable care would take into account factors such as how clear and specific the insurer’s questions were and whether the consumer had an adviser.

MBIE had asked whether insurers should be required to access medical records as part of underwriting but said it would create costs.

Insurers would still be allowed to avoid contracts where non-disclosure had been deliberate or reckless or where there was material misrepresentation.

Proportionate remedies would apply where non-disclosure or misrepresentation was not deliberate or reckless, but was both careless and led the insurer to enter the contract on those terms. Insurers could re-underwrite an insurance contract upon learning of such a non-disclosure or misrepresentation, by doing what they would have done had they known of the information at the time.

“While some insurers were concerned that this option would require insurers to prove intentional conduct in order to access the avoidance remedy, on balance we think the benefits outweigh the costs of this option," MBIE wrote.

"Further, a higher evidence threshold may be appropriate where insurers resort to the most extreme remedy of avoidance without returning premiums. As insurers themselves pointed out, they rarely use the remedy of avoidance even though they have no evidentiary burden currently, therefore this should not impose significant costs.”

Tags: insurance Insurance Advisers MoBIE