Royal Commission, ACCC, Insurance inquiries and more
What does it mean for strata insurance and the strata industry?
There has been a lot of scrutiny on the insurance industry in recent months on a number of fronts, with undoubtedly more to come.
You are probably aware of the Royal Commission final report in February this year into misconduct in the banking, superannuation and financial services industry, due to the extensive media coverage. In November last year, the ACCC released the Northern Australia Insurance Inquiry Interim Report. Meanwhile, Treasury is asking for submissions on a discussion paper regarding the Disclosure in General Insurance: Improving Consumer Understanding.
So what are the potential implications of these in the world of strata - for insurance, brokers and strata managers?
The Royal Commission proposed a three-year review to consider commissions payable for the distribution of general insurance products - preferably completed by 30 June 2022 but no later than 31 December 2022. One of the main outcomes is the review of general insurance exemption from conflicted remuneration provisions and the ban of commissions on general insurance products as a result - and this includes strata insurance.
Currently, general insurance is exempt from the conflicted remuneration provisions under s963B of the Corporations Act 2001. There will be a review of this exemption, which may result in:
- general insurance commissions (including strata insurance commissions) being banned or capped;
- fee instead being payable by body corporates and not insurers or intermediaries; or
- disclosed in greater detail.
If the general insurance exemption to conflicted remuneration is subsequently removed, intermediaries i.e. brokers and authorised representatives (including strata managers) will not be able to receive commission.
Some are predicting that early adopters will make changes now and lead the market by promoting the ‘rebate of commission’ and the ‘fairer’ model of a fee for service. If commissions are banned, there will likely be a transition period.
Capping has occurred in the life insurance space, which is quite different to general insurance in the way commissions are structured i.e. upfront and trail.
In respect of commission disclosure in greater detail, this is already required under the NSW Strata Schemes Management Act 2015. Strata managers are required to provide 3 insurance quotes and disclose the dollar amount of commission received each year.
Also under scrutiny are:
- additional payments for achieving a certain level of business e.g. volume bonuses; and
- soft dollar and non-monetary benefits like free tickets to conferences, invitations to sporting events and corporate boxes
The ACCC is proposing:
- standard cover, standard definitions of key terms extend to all general insurance products;
- unfair contract terms should apply to insurance (which the Royal Commission recommended);
- disclosure of last year’s premium;
- extending the ban on conflicted remuneration to all general insurance products (strata included); and
- a review of commission and other remuneration disclosure in general (there is a perception that there is a lack of independence if commission received).
Treasury is seeking submissions on:
- disclosure of last year’s premium and the percentage change to the new premium;
- reasons for any increase in premium;
- a breakdown of premium into components (not easy to do);
- standard cover and standard definitions of key terms, and
- extend the use of a Key Facts Statement.
On a positive note, we have three years to prepare for the potential alteration to payment of commissions and implement a new business model in strata. A transition to a fee for service is an obvious one.
The proposal to ban commissions is not set in stone – yet. But the times, they are undoubtedly changing and the insurance and strata industries need to be ready for when they do.
For more information of if you have any questions please contact your local CHU Office.