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Since the passing of Chapter 7 of the Corporations Act in 2002, the handling or settling of claims or potential claims was excluded from being a financial service. Thus, providers of claims handling services did not need an Australian Financial Services Licence (AFSL) to provide them, thereby excluding these services from the general licensing and other AFSL or disclosure requirements.
Given the critical importance of claims handling in meeting the promises under insurance contracts, it was no surprise this regulatory gap came into sharp focus when claims issues began to emerge in life and general insurance. Following the push for this to change by ASIC and the Parliamentary Joint Committee on Corporations and Financial Services, Commissioner Hayne promptly picked it up at the Royal Commission, and made recommendation 4.8 to bring claims handling directly into the fold once and for all.
The Financial Sector Reform (Hayne Royal Commission Response) Act 2020, containing a raft of Hayne reforms including claims handling, passed through Parliament on 10 December 2020.
The effect of this reform is that a wide variety of dealings relating to insurance claims, by a wide range of people in the claims value chain, will be considered a financial service, and new or varied AFSLs will be needed. This will mean those caught will need to meet extensive obligations relating to conduct, training and complaints.
The law will commence on the later of 1 January 2021, or the day after Royal Assent. However, the transition periods will apply differently to different people. Once Schedule 7 applies in full to a person handling and settling insurance claims, the reforms will only apply to claims started the day after the legislation commences.
Anyone providing the services after 30 June 2021 will need to have applied for a new or varied AFSL covering claims handling, or operate as an Authorised Representative (AR) under another AFSL. ASIC has already released an information sheet for insurance claims handling (Draft INFO 000 Claims handling and settling) explaining how the claims reform will operate and how organisations can apply for new or varied AFSLs.
The scope of the claims handling changes extends to insurance products under the Corporations Act. These include general insurance products, life risk insurance products and investment life insurance products. The changes do not apply to health insurance, Commonwealth, and State and Territory insurance, reinsurance, quasi insurance products, and to claims to Super trustees (who will be subject to a separate equivalent reform).
Currently claims handling is excluded under the financial services definition. Claims handlers are therefore not required to hold an AFSL for these services, nor is there a requirement to act efficiently, honestly and fairly when handling claims.
What do the new reforms entail?
The new reforms will require a new regulatory rigour over the way that claims are handled, and along the claims value chain. Insurers and other people who provide claims handling services will be required to:
What activities will be caught as a claims handling service?
The activities that will be captured include:
Who is caught?
Aside from insurers who issue the insurance products, others who may be captured by the claims handling services requirements include:
Lawyers will generally be exempt from these requirements provided their services fit within specific carve-outs.
Whilst loss assessors are excluded under the revised draft legislation, some of their activities could still be captured under other elements of the definition of claims handling.
In short, organisations involved in insurance claims handling need to start work without delay – this reform could require significant analysis and implementation commitment, with numerous external stakeholders to manage.
Bhrajna is a Director in Deloitte’s Governance, Regulation and Conduct practice. She has a focus on insurance and has extensive experience in supporting insurers on engagements relating to regulatory change and conduct. This includes design of frameworks, reviews and implementation relating to product design and governance, sales practices, claims handling and complaints.
Georgia is a Manager in the Governance, Regulation and Conduct practice based in Brisbane. She specialises in supporting clients across the financial services sector in designing, implementing and reviewing frameworks, policies and procedures focused on preventative conduct and promoting good customer outcomes.