Know Risk is a community education program designed by the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) to improve our understanding of insurance and how it relates to managing the many risks we all face in life.
Obligations and regulations that keep insurance safe and fair
The really important stuff you need to know.
Insurance, as an industry, is a highly regulated one that is governed by very specific laws that are designed to protect consumers as well as insurers.
The very fact that you are entering a legal contract when you purchase an insurance policy means that there are legal obligations for both parties, but while this may seem an obvious concept, it’s one that often gets lost. Knowing the obligations placed upon you and your insurer, as well as who is responsible for ensuring those obligations are adhered to is actually quite important knowledge.
To help break things up a bit, we’ve divided this information into two categories — stuff that is worth knowing but it’s okay if you forget, and stuff that you need to know and should try really hard to remember.
The important, but not necessary to remember, stuff (regulations)
The laws and the Code
In Australia, there are a whole heap of laws that apply to insurers in one way or another, but the ones that are most relevant are:
- the Insurance Contracts Act 1984 (Cwlth)
- the Corporations Act 2001 (Cwlth)
In New Zealand, some of the acts that are important to the industry are:
- the Insurance (Prudential Supervision) Act 2010 (IPSA)
- the Financial Advisers Act 2008 (FAA)
- the Financial Service Providers (Registration and Dispute Resolution act 2008 (FSPA)
- the Insurance Intermediaries Act 1994
Insurance companies are legally bound by these acts and their stipulations (which, like most acts of parliament, are quite detailed, so we’re going to leave them alone).
In both Australia and New Zealand, there are also codes of practice that general insurance companies – or fire and general insurance companies in New Zealand, (that is, insurance companies who sell insurance that isn’t health or life related) can or must sign up for.
In Australia, insurers who are members of the Insurance Council of Australia (ICA) agree to adhere to — the aptly named General Insurance Code of Practice. Insurers who are not members of the ICA can also sign up voluntarily. You can find a list of which insurance companies have signed up to the Code online.
In New Zealand, the Fair Insurance Code is the equivalent consumer protection code for general insurance provided by the Insurance Council of New Zealand (ICNZ). It covers all ICNZ member companies and is monitored by the ICNZ’s Code Compliance Committee.
The purpose of these codes is to protect consumers. They are straightforward in their terms and what they require of insurers and what consumers should expect from their dealings with insurers — honest communication, fair and equitable service and decision-making, and transparent operation that doesn’t attempt to conceal or obscure anything.
Both the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) and are responsible for regulating the Australian insurance industry to various respective degrees, but it’s unlikely you’re ever going to have some sort of dealing with either of these two bodies.
In case you’re super interested though, APRA looks after standards for general insurance companies. They make sure that companies have adequate reserves of money to pay claims to their consumers, amongst other requirements. Increased oversight in the wake of the HIH Insurance collapse in 2001 means that APRA is able to ensure that consumers are fully protected from financial mismanagement.
ASIC, on the other hand, oversees individuals involved in insurance, such as brokers and financial advisors, and do things such as provide and monitor the licensing and monitor conduct for those who provide insurance advice on particular products.
While you might not ever need to be involved with APRA or ASIC, you may at some point need to make use of the Financial Ombudsman Service. In Australia, FOS is responsible for making sure insurance companies adhere to the Code of Practice. If for example you and your insurer cannot come to a resolution in the event of a dispute, FOS would be the next place you would go to resolve the matter. FOS is a free and independent service.
In New Zealand, the Reserve Bank of New Zealand (RBNZ) acts as the industry’s prudential oversight, supervising compliance and licensing requirements. The Reserve Bank makes sure that insurance companies will remain solvent by imposing minimum capital requirements, and ensures that they comply with any other requirements deemed necessary.
Regulating individual financial advisors in insurance in New Zealand falls to the Financial Markets Authority (FMA). The FMA oversees those giving financial advice under the Financial Advisers Act, including their conduct, competency and disclosure obligations.
It is unlikely that you will need to deal with either the RBNZ or the FMA directly but you may at some point need to make use of the Insurance and Financial Services Ombudsman in New Zealand. If, for example you and your insurer cannot come to a resolution in the event of a dispute, the IFSO would be the next place you would go to resolve the matter. The IFSO is a free and independent service.
The important, and necessary to remember, stuff (obligations)
In all of your dealings with an insurer and their dealings with you, both parties are legally required to act in a certain manner. These obligations are generally confined to a few key areas.
The duty of utmost good faith and the duty of disclosure
These are the really important terms to understand when it comes to insurance. Luckily, both are quite simple to understand and are equally as easy to do.
The duty of utmost good faith requires that both parties (insurers and customers) act towards each other in a manner that is fair, honest and respectful at all times.
The duty of utmost good faith and the duty of disclosure are intertwined in that a key part of the former involves both parties disclosing information that they know to be relevant. This means you, the consumer, are legally required to share any information with the insurer that is relevant to them making a decision about whether or not to insure you, and the insurer must, in turn, make clear to you all the terms and conditions of the contract you’re entering into when you purchase a particular insurance policy. Insurers hold up their end of this bargain by providing consumers with a Product Disclosure Statement (PDS), which details everything you need to know about a prospective policy.
In terms of how you, the consumer, hold up your end of the bargain, you must do the following:
- Disclose absolutely everything that you know, or could be reasonably expected to know, is relevant to an insurer’s decision about whether or not to accept the risk you are asking them to insure
- Answer all questions as honestly and as thoroughly as possible
Quite simple, really, plus there is the added bonus that adhering to the duties of utmost good faith and disclosure enhances the likelihood that there will be no surprises for you or your insurer.
Privacy and transparency
This one is a little heavier on insurers when it comes to obligations. It is imperative that insurers act appropriately when dealing with your personal information. At all times, you can expect the following:
- Insurers will store all of your personal information securely.
- Insurers will not pass on your information without your consent.
- Insurers will only ever ask for personal information that is relevant to determine your suitability for insurance.
- Insurers will provide you with access to any information you provide them with and enable you to change that information if you find it to be incorrect.
- If your insurance application is unsuccessful, insurers are required to provide you with reasons as to why.
- Insurers will provide you with information about how to make a formal complaint if you are unhappy with any of the service they provide or if you would like to dispute a decision they have made.