THE EVOLVING STRUCTURE OF INSURANCE CONTRACTS, DISTRIBUTION & THE NEW ANTI-HAWKING REGIME

Following the publication of our principles on the new anti-hawking regime for financial products, we have been advising many life insurers and general insurers on their readiness for the new regime, due to come into effect on 5 October 2021. This is without a doubt one of the biggest reforms to impact the insurance industry in a long time.

It may not be immediately obvious to everyone, but it will be obvious to some that one of the important by-products of the new anti-hawking regime will inevitably be a change to the way in which insurance contracts are structured. The core reason for this is simple: the anti-hawking regime will prohibit the cross-selling of financial products through unsolicited interactions. In other words, insurers will be restricted from (among other things) inviting applications for or offering financial products to a customer other than products which the customer has enquired about or otherwise consented to discuss.

A major corollary of this is that speaking to a customer about an existing financial product already held by them will not constitute a breach of the anti-hawking regime. This is because there will be no unsolicited offer or invitation to purchase or apply for a new financial product.

This requires us to consider the core concept of a “financial product” and what this means in the insurance context. The starting position under the Corporations Act is that the relevant financial product is the contract of insurance (see section 764A of the Corporations Act). What constitutes the contract of insurance is typically a matter of contractual construction. However, there is a statutory overlay here and importantly, the Corporations Act adopts a differentiated approach between life insurance and general insurance.

In the life insurance context, a customer could contact their insurer about, say, their disability insurance cover and where the overarching contract of life insurance also provides options for obtaining death or trauma cover, these options could be raised with the customer without contravening the anti-hawking prohibition. However, if the death or trauma covers were offered under separate contracts, these would constitute separate financial products which could not be offered without customer consent.

This leads to Proposition #1 that there is a legitimate rationale and incentive for a contract of life insurance contract to be structured such that a single contract offers a series of optional benefits that can be purchased at the election of the customer. Where multiple covers are provided under a single contract and therefore, a single financial product, the making of offers or invitations for different covers under the same life policy would not, on the better view, constitute a breach of anti-hawking. There seems to be no reason why this structure could not be fruitfully employed in the life insurance context to optimise sales flexibility or what we refer to as “cross-positioning” of life insurance covers. We are aware of many instances across the industry when such “bundled” life policies are used.

The position in respect of general insurance is a bit more complicated. This is because of the “X-factor” represented by subsections 764(1A) and 764(1B) of the Corporations Act. These sections effectively deem different kinds of insurance cover and insurance cover for different kinds of assets to be separate financial products, thereby modifying for regulatory purposes the usual rules of construction of contracts. This means that a customer with one type of general insurance cover, such as say home insurance, could not be sold landlords insurance in an unsolicited interaction, as these different types of cover would constitute different financial products. Further, the parameters of this deeming can be ambiguous. For example, is home and contents insurance one or two kinds of cover?

This leads to Proposition #2, namely that general insurance will be less pliable when it comes to restructuring for the purposes of cross-positioning and the new anti-hawking regime. However, some restructuring is still possible and in fact, the above analysis lends itself to other cross-positioning opportunities. For example, an existing motor vehicle insurance policy can be altered such that it can cover multiple vehicles, not just one.

So while major changes were always expected to the way in which insurance is distributed, associated changes to product design are also, in our view, inevitable.

Shifting briefly from the above discussion on product design, there are also opportunities to restructure distribution (as many insurers will be aware) by bundling or categorising different types of cover from a sales perspective, where such covers are sufficiently connected. For example, some common categories could be:

• car insurance (which could capture comprehensive car insurance, CTP, and fire and theft);
• home insurance (which could capture home building, home and contents, contents only, and landlord insurance);
• business insurance (which could capture public liability, product liability or professional indemnity covers); or
• personal items (which could capture personal and valuable items cover, or home contents only cover).

Such categorisation from a sales perspective would seek to leverage the legislative mechanism that enables a product offer/invitation to be made where such an offer/invitation is “reasonably within the scope of the consumer’s consent” (see section 992A(5)(a)(ii) of the Corporations Act). This approach would be premised on a customer providing consent on broad terms, such as identifying a broad risk or need for which they would like insurance cover for (as opposed to a specific type of insurance cover), e.g. “I would like insurance for my business” as opposed to “I would like public liability insurance”. The Explanatory Memorandum for the new anti-hawking legislation at [5.66] expressly acknowledges that:

“A reasonable person should consider a financial product to be within the scope of the consumer’s consent if it:

• • covers the risks that the consumer consented to being contacted about;
  • has the same purpose or function as the product that the consumer consented to being contacted about; or
  • is so closely related to the product that the consumer consented to being contacted about that the consumer would reasonably expect to be offered that product.”

This leads us to Proposition #3, namely that in addition to opportunities for insurers to restructure a single financial product to provide different or broader protections, insurers can also consider whether the protections provided by different products have an adequate connection to enable a conversation with a customer about those different products.

If you have any questions about the new anti-hawking regime or about the distribution of financial products, get in touch with one of our experts below.