Following the release in March this year of the terms of reference for the review of insurance contract law, the first step of the process for the review has been met by the release of an issues paper by the Ministry of Business, Innovation and Employment (MBIE) for public consultation.
The terms of reference for the review stated that the aim of the review is to assess and develop recommendations on changes to existing legislation and to consolidate and modernise New Zealand’s insurance contract law. These aims have been articulated in the issues paper as two key objectives – that insurers and insureds are able to transact with confidence at all points of the lifecycle of an insurance policy, and that interactions between insurers and insureds are fair, efficient and transparent at all points in the lifecycle of an insurance policy.
Who needs to read it? Why?
All insurers and insurance intermediaries should read this issues paper. It provides the first detailed look at the issues the Government is focussed on in undertaking the review of insurance contract law. Submissions are sought from all stakeholders, and the Government is particularly interested in hearing from consumers about their experiences dealing with insurers and insurance products. Responses received will help to inform the development of policy options to address any shortcomings in our current law, including the law relating to insurance business conduct. We therefore expect that all insurers and insurance intermediaries will wish to carefully consider the issues raised and the questions posed in the issues paper, and to take the opportunity if warranted, to provide full and considered responses to questions relevant to them in order to have input into the future of New Zealand’s insurance law.
What does it cover?
As foreshadowed by the terms of reference for the review of insurance contract law, the issues paper covers the following topics:
Obligations and remedies for non-disclosure
The paper examines the origin of the duty of disclosure (arising from the reciprocal duty of utmost good faith) and the history of New Zealand’s insurance legislation providing statutory remedies for incorrect or misleading disclosure. Of particular concern to MBIE is the duty, under current law, for policyholders to make full disclosure of all “material” facts within their knowledge when applying for insurance.
MBIE’s initial position is that consumers generally are not aware of what needs to be disclosed, or even that there is a duty of disclosure. Therefore, the duty can be unduly onerous, and the consequences for breaching the duty to disclosure can be disproportionate to that failure. MBIE is seeking submissions from stakeholders on whether consumers do understand the potential consequences of breaching the duty to disclose, and whether unintentional breach should be treated differently from intentional breach, amongst other questions.
Conduct and supervision
Consistent with the Financial Markets Authority’s (FMA) recent concerns about conduct in the insurance sector, the paper also focuses on this issue, and whether the insurance sector should be subject to greater supervision, noting that the conduct of insurers and intermediaries involved in selling insurance can significantly influence the outcomes for policyholders during the contract lifecycle.
To date, the insurance sector has been largely self-regulated. MBIE refers to a raft of consumer issues including claims handling complaints, issues with sales and advice, the role of incentives and advice (or conflicted remuneration), pressure sales tactics and product suitability. These are examples of issues that might indicate gaps in regulatory oversight. MBIE notes that although each of the Commerce Commission, Reserve Bank of New Zealand and FMA have some regulatory or supervisory powers over the insurance industry, no one regulator has oversight over insurers’ and intermediaries’ conduct during the full lifecycle of a policy.
The paper refers to the identification of this regulatory gap in the International Monetary Fund’s 2017 Financial Sector Assessment Program report, and to Core Principle 19 of the International Association of Insurance Supervisors’ framework for the supervision of the insurance sector. Core Principle 19 relates to insurance business conduct and compliance with it is expected to be overseen and enforceable by an industry regulator. Submitters are asked to comment on whether the gap between the current regulation of conduct in New Zealand and Core Principle 19 is a concern.
Unfair contract terms exceptions in the Fair Trading Act (FTA)
MBIE notes that consumer stakeholders have expressed concerns about the exceptions in the unfair contract terms provisions of the FTA for insurance. However, insurers consider that without the express exceptions in the FTA, insurers may face uncertainty about the extent of risk under the policy, and if the risk cannot be quantified it cannot be priced. Therefore, MBIE asks consumers whether they are experiencing problems with terms in insurance contracts that are exempted from the unfair contract terms provisions.
Comparing and changing policies and providers
This topic is driven by a desire to drive effective competition and to avoid adverse consequences for consumers where there is difficulty finding, understanding and comparing information on insurance, particularly in relation to switching policies. MBIE is interested to understand whether it is difficult for consumers to find and understand information about polices, to compare information about policies and premiums, and what, if anything, the Government should do to address any shortcomings.
MBIE wraps up the issues paper with a smorgasbord of technical issues that could be addressed in future law reform, including:
- third party access to liability insurance moneys under the Law Reform Act 1936;
- failure to notify claims within time limits;
- exclusions that have no causal link to loss;
- registration of assignments of life insurance policies; and
- responsibility for intermediaries’ actions.
We agree that some of our insurance legislation is outdated and in need of consolidation and modernising. Further, if the stated objectives of the insurance contract law review are met it will be a positive outcome for both insurers and consumers. Consumers will be able to access the information they need to make informed decisions and have greater certainty with regard to the response of their policy in the event of loss, although it will be challenging to achieve this without impacting on insurers’ ability to effectively measure and price risk.
We acknowledge that insurers may not agree with all of the issues identified in MBIE’s paper. It is, therefore, critical that the industry engages with this law review constructively to ensure that the policy decisions leading to legislative change are fair and commercially effective, whilst aligning regulation of the insurance sector with the regulation of other financial services businesses.
Following MBIE’s consultation on the issues paper (which closes on 13 July 2018), MBIE’s next step is to develop an options paper for public consultation in late 2018. Any policy decision and legislative process is proposed to occur in mid-2019.
If you have any questions in relation to the upcoming review or about insurance regulation in New Zealand, please contact one of our experts.
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