Treasury's draft Bill1 and Regulation2, which were released on 28 November 2019, follow on from the Royal Commission's recommendation in February 2019 that the handling and settlement of insurance claims should no longer be excluded from the definition of a "financial service" and Treasury's Consultation Paper in March 2019 which considered how that should be done. In short, the new rules will require a broad group of entities involved in insurance claims handling to obtain an Australian Financial Services Licence (AFSL), or authorisation by such a licensee, and to meet tailored financial services obligations in relation to that service.
The draft legislation's commencement date is set for 1 July 2020, following completion of the consultation period on 10 January 2020, any final changes and then its passage through Parliament. A short transition period has been provided for the necessary preparations to be made and for relevant entities to obtain a licence or authorisation. That runs through until 31 December 2020, though that can be extended into 2021 (though no later than 30 June 2021) where a licence application has been lodged by 31 December 2020 but not yet granted.
The key elements of the new regulation of insurance claims handling are as follows:
Claims handling will become a new "financial service"
As proposed by Treasury in March, the draft legislation will establish a new category of "financial service"
, to be known as a "claims handling and settling service"
. Subject to the legal services exclusion below, a person will be taken to have handled or settled an insurance claim if they do any of the following:
- make a recommendation or state an opinion that could influence a decision whether to make an insurance claim;
- assist another person to make an insurance claim;
- assess whether an insurer is liable under an insurance product;
- make a decision to accept or reject all or part of an insurance claim;
- quantify an insurer's liability under an insurance product;
- offer to settle all or part of an insurance claim; or
- satisfy a liability of an insurer under an insurance claim.
There is plainly a broad group of people who might carry on such activities, including representatives of the insurer itself, investigators, assessors, adjusters and advisers; however not all of those will need an AFSL or authorisation (see below).
Legal services are excluded
Before moving to licensing, however, the legislation removes most legal services from the definition of a "claims handling and settling service"
altogether, those being:
- advice on matters of law provided in a professional capacity as a lawyer;
- other advice provided in the ordinary course of activities as a lawyer where that is a reasonably necessary part of those activities;
- action taken by a lawyer to determine whether an insurer is liable to another person under an insurance product or to quantify the extent of the insurer's liability;
- negotiation by a lawyer of the settlement of a claim; and
- conduct by a lawyer, acting on instructions and in their professional capacity, that can be regarded as a necessary part of acting on those instructions, provided they do not receive any benefit in relation to that conduct other than professional fees and expenses.
The Corporations Act
defines a "lawyer"
as a duly qualified legal practitioner so would include both external lawyers and those employed in-house by insurers and their representatives. Where they carry out these activities, they will not be regulated as a financial service.
Licencing and Authorised Representative Requirements
Not all of those involved in providing a "claims handling and settling service" will need an AFSL or authorisation, though the list is fairly broad. Those caught by the requirement will be:
- the insurer;
- loss assessors acting for the insurer;
- "insurance fulfilment providers" with an authority to reject all or part of a claim;
- insurance claims managers;
- insurance brokers who handle insurance claims on behalf of an insurer;
- persons who provide financial advice to an insured and who handle and settle an insurance claim on behalf of the insurer.
The "loss assessor"
category will include both those who investigate the validity of claims and those that assess the insurer's liability for them (ie. a loss adjuster). Each of these will need an AFSL or authorisation by such a licence holder.
This category should not pick up independent medical practitioners who are only providing their medical opinion in relation to an insured's injuries or to investigators who are following an insurer's instructions on surveillance, though the draft Bill or Explanatory Memorandum might be improved with some clarity on that point.
Insurance Fulfilment Providers
The term "insurance fulfilment provider"
is defined to mean persons who carry on a business of providing goods or services to insureds in satisfaction of the insurer's liability. On its face, this is a broad category which could include smash repairers, builders and the like – however those will only need an AFSL or authorisation where they are given an authority to reject all or part of a claim. Where such a provider is only following the insurer's instructions, without such an authority, they will not be caught. It will become important, therefore, to be clear where an authority to reject aspects of a claim is being given to this category of provider and where it is not.
Insurance Claims Manager
Those carrying on a business of handling and settling claims for one or more insurers will need an AFSL or authorisation. This group will pick up specialist claims management businesses, including third party claims administrators acting for overseas insurers. Underwriting agencies and other distributors will also be caught where they have been given a claim settlement authority. Care will need to be taken with this group to make sure that others who may become aware of insurance claims and, for instance are required to notify the insurer in that case, do not cross the line into this category.
Insurance brokers will be similarly caught where they are authorised to handle or settle claims for the insurer. However, in the absence of such an authority, the broker's assistance to their insured client on a claim will not be caught.
Licensing and Authorisation requirements
Those caught by these requirements will generally need to obtain an AFSL covering the provision of claims handling and settlement services or to be authorised under such a licence (though an intermediary authorisation may be relied upon in the same way as for other financial services where appropriate, for instance where an overseas insurer wishes to rely on the AFSL obtained by a local third party claims administrator).
Entities with an existing AFSL will be able to vary their licence to include the new service. Those without an existing AFSL may decide to obtain one, for instance because of a need to provide their own authorisations to others. For both these groups, the Government's recently introduced changes to financial services licensing requirements will be relevant (assuming they are passed)3. These will require, for both new and varied AFSLs, that applicants carry out and provide evidence to ASIC on the fitness and propriety of all their officers (not just their Responsible Officers) and also all officers of their "controllers" (for instance, their majority shareholders and ultimate owners). For some entities, this is likely to be an extensive exercise.
All other persons caught by the new requirements will need to be authorised by an AFSL holder. This will involve replacing supplier agreements currently in place with ones which include the required authorisation, along with provisions setting out the obligations needed to meet the new regulatory requirements, organising necessary sub-authorisations (for instance, for individual representatives), addressing cross-endorsement requirements and notifying ASIC of the appointment.
Looking beyond the licensing requirements, what will the new regulation require?
Efficient, Honest and Fair
Perhaps the most important of the new requirements will be the obligation on licensees to do all things necessary to ensure that claims handling services are provided "efficiently, honestly and fairly"
. The Explanatory Memorandum explains that this would require, at a minimum, handling and settling claims:
- in a timely way, without undue delay;
- in the least onerous and intrusive way possible, including requesting information, medical examinations, surveillance and other assessments only if they are strictly relevant to the claim;
- fairly and transparently; and
- in a manner that ensures adequate support is provided to insureds, particularly vulnerable consumers.
ASIC's recent review of the investigation of car insurance claims4
is also a useful source of guidance. In that, ASIC set out its expectations for claims investigations, including for instance that insurers should inform customers in writing of the purpose, scope and timeframe of an investigation before it starts, limit requests for information and interviews and "actively"
identify and penalise poor behaviour by investigators. While ASIC stated in its report that it expected those recommendations to be implemented immediately (and that it would pursue utmost good faith claims where that was not done), the application of the "efficient, honest and fair"
obligation to claims handling will give it a much more effective power to enforce its position.
There have been significant concerns raised about the regulation of advice in relation to claims handling. The new legislation deals with that issue by expressly removing recommendations and opinions that "could reasonably be regarded as a necessary part of"
providing a claims handling service from the financial product advice regime. This means that, provided claims handlers operate within this scope, distinctions between personal and general advice, and the obligations that flow from each, will not apply. There may, however, be some areas of discussion which would need to be treated carefully. For instance, if a customer were to ask about the impact of their claim on future premiums, it may not be certain that the answer would be excluded as a necessary part of providing a claims handling service.
Financial Services Guides (FSG)
Similarly, the draft legislation states that entities which are only providing a claims handling and settlement service, such as a claims management firm or a loss adjuster, will not need an FSG. Note, though, that entities which provide other financial services alongside a claims handling service will need to amend their existing FSG (where one is required) to include details relevant to the claims handling service.
The draft legislation includes a new obligation specific to the claims handling service. Where a cash settlement is offered to a retail client in relation to a general insurance claim, the person making the offer will be required to provide the insured with a "Statement of Claim Settlement Options"
. This is a relatively simple document which will outline the options for settling the claim, so that the insured has a clear statement of their rights at the time the cash offer is made.
While this requirement seems to have been included to address property insurance products which offer the repair, replacement or cash settlement of claims (normally at the option of the insurer), there is currently nothing to prevent it applying to products where cash payment is the only settlement option. It is not clear how such a Statement would be of any value to an insured in that situation.
AFSL holders will also need to review how other AFSL obligations are to be applied to claims handling. For instance, training and competence requirements, resourcing, processes to manage conflicts of interest and breach reporting processes will all need to be extended into the realm of claims handling. Complaints handling, internal and external dispute resolution may also need adjustment, for instance to extend to the full scope of entities caught by the new requirements.
Oversight and monitoring
Finally, AFSL holders will need to make sure that the measures they currently have in place to oversee those involved in claims handling will meet the new regulation. This will include that those to be appointed as authorised representatives comply with their new obligations and also that their other service providers, such as lawyers, medical providers and preferred smash repairers provide their services in a way which allows the AFSL holder to meet its obligations.
A link to Treasury's consultation can be found here - https://treasury.gov.au/consultation/c2019-36687
For more information on how removal of the claims handling exemption may apply to insurance products, please contact insurance advisory principal, Mathew Kaley.
1 Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2020 Measures)) Bill 2020: claims handling
2 Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers)(Claims Handling and Settlement Services) Regulations 2020: claims handling
3 Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2019 Measures)) Bill 2019 – introduced into Parliament on 28 November 2019
4 ASIC Report 621, Roadblocks and roundabouts: A review of car insurance claim investigations, 4 July 2019