Overhauling the Insurance industry

Professor Alan Fels is cleaning up the insurance industry over how they price their policies

Introduction

Ross Greenwood:

Let’s start this hour then we’ll talk about insurance. Given what’s taken place in Queensland and Northern New South Wales, a lot of people are very much concentrating right now on insurance and the industry. As I said earlier, it’s about its very best and its very worst during these times of crisis. The very best you see, the assessors out there, very quickly trying to get people money in their pockets, to try and get assessments done so that they can get on with their lives. Of course it’s also the time when people find out the very nitty-gritty, the intricacies of their policies which in some cases can leave them with significantly less than what they might have expected.

One person who has been studying this and watching it very, very closely is Professor Allan Fels, the former chairman of the Australian Competition and Consumer Commission and also now the New South Wales Insurance monitor. There has been an inquiry, a Senate inquiry into it and indeed today the Consumer Action Law Centre, the boss of that indicated that he believes that insurance contracts are unfair, complex and in fact that customers suffer the consequences. Let’s get the reaction of Allan Fels. Many thanks for your time Allan, as always.

Interview with Professor Alan Fels, former Chairman ACCC

Allan Fels: Thanks.

Ross Greenwood: Okay, tell me this, you have performed this role you’ve got with New South Wales, you’ve done it for Victoria but it doesn’t matter where you go around Australia, it’s going to be fairly similar in terms of the terms and the conditions of these insurance contracts. Do you believe in your professional opinion and observance that these contracts have been fair to the consumer?

Allan: I think I need to look at, I don’t think that there, we have an unfair contract law which– but unfortunately, it doesn’t really apply that much to insurance. It’s just clear when you get these insurance contracts, you really don’t have a lot of bargaining. What’s really important is two things, to get more competition in there and to get better informed consumers. Those two things got to redress the balance somewhat.

Ross Greenwood: Okay, one other aspect of this also is that you’ve got a situation where a lot of people may not be aware of it but when they sign up and pay insurance, they also pay a levy and the levy basically goes to the state government that does fund emergency services. It happens all around the states, and it’s true in New South Wales, as it is in Queensland or Victoria but in recent times, say for example, the giant insurer AAG was forced to repay $6.8 million after it overcharged 27,000 home insurance policyholders the state government levy. Just explain how that works and why it could be that a big insurer could do this.

Allan: Well, in New South Wales now, up till July 1, there’s a levy on your insurance. Most people that I know don’t notice that you get your premium and you can look at it carefully. There’s a basic premium and then there’s an add-on of about 20% which the insurers say correctly is their way of collecting a tax that they have to pay. Now, the big thing is that from live one in New South Wales, that tax will be taken off and by the way, it will be put more or less on your rates but just concentrating on the insurance, insurance 20% once that tax is removed.

We did that exercise– Victoria did it a couple of years ago and I had a similar role where to use that, was to make sure I pass it on and there were some exceptions I couldn’t pass it on and we put the foot down and got some penalties and repayments.

Insurance companies lifting premiums

Ross Greenwood: The interesting thing is I know that you have asked five of Australia’s largest insurers to explain why there have been such big price increases. In following increasing consumer concern, the companies have been lifting premiums to offset the removal of that levy. Is that something you’re worried about at the moment?

Allan: I’m concerned about it, yes. Of course, the insurance companies are aware that the New South Wales Parliament passed the law with extremely strong sanctions. If they pocket any of the benefits of that tax reform. The tax of 20% or so that’s on consumers and households, maybe 30% on a lot of commercial property, that’s going to be taken off and it has to be passed on in full to consumers. The fact that maybe an insurer feels, “It cost is a bit low, here’s an opportunity to restore costs.” That’s not a legitimate reaction and we are going to require that lower cost only and we’re also going to apply it.

If there is any deceptive conduct, for example, if an insurer tells its customers, “We’re taking a tax coming out of our prices,” but they’re actually putting a bit back in through premiums and in each instance that can be filed up to $10 million per offense for overcharging or for misleading consumers.

What happens– how far do you go as compared with say, a financial

Ross Greenwood: Wow, so it’s a decent sanction on them if the wrong thing is done. Tell me how far does your remit go? Say for example, people who feel that insurance companies have done the wrong thing by them, say for example in floods or storms water situations in Northern New South Wales, I presume there will be similar arrangements in Queensland, you’ve done work in Victoria in the past. Just explain what happens– how far do you go as compared with say, a financial services Ombudsman.

Allan: I take care of one thing that is quite a big thing, it’s to make sure that that very big tax reduction is passed on to consumers. That’s what I’m on about. It’s not really the other questions are not the insurance regulator in general and for two or three years I’ve just got to make sure that happens and there’s a big pool in insurance prices. Of course, there’s a couple of things that have got linked with that.

Receiving previous premium costs on renewal notice

Going back to something you said about consumers, kind of not knowing everything. One of the key reasons is that insurance don’t tell you when you get your premium notice, what you paid a year ago, where we believe that they should and we’re thinking of insisting and requiring that on your renewal notice it should say what you paid last year–

Ross Greenwood: At least that way you know how much it’s jumped and you can make a quick calculation as to whether that’s 8%, 10%, 5% or indeed whether it’s cheaper which it never is, it doesn’t seem, but therefore, at least you have the opportunity if you’ve got the information spelt out to you as to what that policy is made up of, to go ahead, and shop it out, and try and get a better quote.

Allan: That’s exactly the point. I am totally confident that consumers with that information will use it sensibly. There are some in the insurance industry say, “Oh, that’s not a good idea. They will not be able to judge anything about the crisis and maybe there are some other– that doesn’t work.” I say, “No, that is information that will start consumers thinking more about prices, getting interested in shopping around.”

Ross Greenwood: It’s going to be interesting because that’s what it’s going to be about and ultimately, what you don’t want to find out is shall I say traps or tricks in your contract after you’ve made a claim as distinct from when you’re signing up to their contract at the outset.

Compare Insurance Premiums

Allan: That’s right and one of the other thing that’s quite interesting is that we did a survey of what an identical insurance contract for about 10 or 11 suburbs or towns in New South Wales and we specified in some detail a insurance contract. We went through this and we found very big differences in the premium. For example, in Melbourne, we found that the lowest quote was about 1,000, the highest quote was about 2,200, so there’s a huge spread. In typical, the average quote for identical properties is less 1500 but some quoted down others  2,200.

Now that kind of system if consumers are not informed of the process in the matter. It’s an instance where it’s worth shopping around. We found similar, big differences in the 10 or 12 places we looked at. Very big cross the country and continue– it’d be a lot more competitive if consumers new that.

Ross Greenwood: Gee, I’ll tell you what Allan, that’s an amazing thing. Consider this, an identical policy, in an identical place, one quote comes in to the thousand, another one comes in at $2,200. It’s identical and that’s the thing that the consumer, the person out there, whether you’re in business, whether you’re an individual that you’ve got to understand and you’ve really got to work hard to get some of these bills down, otherwise somebody else is going to profit off the back of that. Well, I’ll tell you what–

Allan: giving really serious consideration to introduce an independent website that gives you a comparative cost because I think that would be a good idea that you can go through– not controlled with someone with a vested interest. A person truly independent. Maybe the government commission someone to do that. The fact that– you were talking a little about the price of the contract varying, I fully agree with you on that.

Now the insurance was saying, “Oh, if you put up that website with prices, people will ignore the other terms and conditions.” I think the opposite, is not a person who go to the trouble of looking at prices on the website, is exactly the sort of person who also go on and have a look at any special case inside the contract.

Who can shine a light on all that stuff

Ross Greenwood: I think it’s absolutely true, there’s no doubt but what you need is a transparency to begin with. One man who can shine a light on all that stuff, professor Allan Fels, the New South Wales Insurance monitor and former chair of the Australian Competition and Consumer Commission. As always Allan, great to have a chat.

Alan: Thanks so much Ross.

Westpac CEO Brian Hartzer Half Year Results 2017

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