Divergent views on defining hazard terms
Divergent views on defining hazard terms | Insurance Business Australia
Catastrophe & Flood
Divergent views on defining hazard terms
“I don’t believe there is a one-size-fits-all solution,” says CEO
Catastrophe & Flood
By
Daniel Wood
The federal government is currently exploring mandating standard definitions of hazard terms in insurance contracts. The terms being considered by Treasury for standardisation are fire, storm and stormwater or rainwater runoff.
Insurance Business is consulting with brokers and other industry stakeholders to find out what they think.
Alongside the definitions issue, Treasury is also looking at scrapping the existing standard cover regime that insurers often bypass by simply providing a PDS document to customers.
So far, the insurance brokers consulted by IB have expressed ambivalence about mandatory standard definitions. Some were concerned that standardisation could restrict or limit the coverages insurers offer.
Balancing clarity with flexibility
Scott Cole (pictured above) is no exception.
“I don’t believe there is a one-size-fits-all solution,” said Cole, who is CEO of Centrewest Insurance Brokers headquartered in Perth.
The broker said mandated definitions “can enhance clarity, fairness and consumer protection.” However, Cole said it is important to balance these benefits “against the need for flexibility, innovation and minimising regulatory burdens.”
The CEO said he would like consumers to better understand their covers, particularly in the retail sector, but thought mandated definitions could be too restrictive on insurers.
Strong support for mandatory standard definitions
However, other industry stakeholders, including some brokers, strongly support mandatory standard definitions – and not just of hazard terms.
Financial Rights, a community legal centre that specialises in insurance issues, made a submission on behalf of several other consumer advocate agencies.
They argued that, for decades, insureds have misunderstood insurance products “because of long, confusing, incomprehensible and inconsistent product disclosure.”
The legal rights advocacy group said this had led to insureds holding inadequate coverages resulting in “unwelcome surprises” at claims time and widespread underinsurance.
Financial Rights argued that the inconsistent definitions in policies “actively undermine” the risk mitigation partnership of consumers and insurers.
“Standardising insurance definitions and reforming standard cover are key to improving outcomes for insureds,” said the submission.
Financial Rights wants to define “all prescribed terms and exclusions” because, it said the industry has a history of circumventing defined terms.
One big step further: standardised insurance policy terms?
The Australian Consumers Insurance Lobby (ACIL), also took an extra step in its submission to Treasury and advocated, not just for standardised hazard terms, but also for standardised insurance policy terms.
ACIL, chaired by insurance broker Tyrone Shandiman (pictured below), argued that standardising insurance terms across the board would improve the transparency, fairness and accessibility of insurance.
ACIL’s seven benefits of standardising insurance policy terms
Consistent coverage
By ensuring that all insurers cover similar events uniformly, standardising complex clauses eliminates confusion.
Proven benefits
The previous success of standardising the definition of ‘flood’ in 2011, which led to more claims being paid. This suggests that further standardisation can significantly benefit consumers.
Less room for creative interpretation
Standardising key terms limits insurers’ ability to alter definitions to their advantage, leading to clearer and more equitable policies.
Simplicity for everyone
Simplified definitions make insurance more accessible, especially for those not well-versed in insurance jargon, promoting understanding and confidence.
Equitable treatment
Ensures properties in similar situations receive similar coverage, addressing discrepancies that can leave consumers unfairly unprotected.
Educational advantages
Standard definitions allow organisations like the Australian Financial Complaints Authority (AFCA) and the Insurance Council of Australia (ICA) to develop guidance materials, reducing misunderstandings and disputes.
Streamlined dispute resolution
Uniform terms mean that AFCA’s interpretations and resolutions can apply consistently across all insurers, enhancing fairness and efficiency in dispute resolution.
The ICA was also concerned about “the cost and administrative burden of updating or changing policies and policy documents to accommodate standard definitions.”
Submissions to Treasury’s consultation closed in April. The government hasn’t indicated when it could announce any changed hazard definitions.
Are you an insurance industry stakeholder? What do you think of mandating standard definitions of hazard terms in insurance policies? Please tell us below
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