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On Friday 11 December, ASIC released the final guidance (RG 274) on the Design and Distribution Obligations (DDO). Since the release of the consultation paper and draft regulatory guide late last year, the industry has been eagerly awaiting the finalised guidance to support its ongoing DDO implementation in readiness for 5 October 2021.
RG 274 sets out ASIC’s expectations on how the regime will operate, its expectation for compliance and its approach to administering DDO.
The RG takes into consideration the consultation and feedback received from the industry. Largely, the guidance on DDO has not significantly changed.
Below we have set out the key considerations for insurers.
Meeting appropriateness requirements when making a target market determination
The inclusion of additional guidance on the ‘appropriateness requirements’ in the RG will require product issuers to conduct an objective assessment on:
Additionally, insurers should critically assess their products when making a target market determination (TMD), and strengthen parameters outlined within their TMDs by including key attributes such as eligibility criteria. For a number of insurers the framework and methodology for developing a TMD is likely to remain unchanged, however additional re-work to the TMD drafts will be required.
The RG outlines the importance for issuers, particularly issuers of insurance products, to consider the likely performance of products in practice. This should include the product’s key attributes and the likely outcomes for the identified target market. For example, an insurance product that offers lower upfront affordable premiums but requires a high excess payment at claim time could result in consumers not being able to pay the excess. This may act as a barrier to make a claim or result in an unsuccessful claim, and is likely to be inconsistent with the objectives, financial situation and needs of the intended target market.
Insurers should therefore consider the identifiable target market’s circumstances in entirety, through the full insurance value chain. Furthermore, insurers should consider assessing the actual value insurance products offer the intended target market as part ongoing product monitoring processes. This can be through a tailored product value framework that measures ‘value for money’ products provide consumers, using metrics such as claims ratios, loss ratios and claims handling indicators.
For bundled products, ASIC requires issuers to determine whether it will need to meet the TMD content and appropriateness requirements as a bundle in one TMD or separately. ASIC expects a target market for a bundled product should be defined in a narrower way compared to the target market for products sold individually.
A product like home and contents insurance that is generally sold as a bundle, will require assessment of the target market at the home insurance level and content insurance level separately. This is because different assets are protected by the two insurance covers, which may result in two classes of customers that are likely to have different needs and objectives. However, there can be an overlap of target markets between bundled products, whereby the overall class of customers’ objectives, financial situation and needs align to both insurance covers. Insurers should assess the degree of overlap across the target markets for bundled products to determine the level at which a TMD needs to be developed.
The RG expands on insurance policy renewals and how it triggers the reasonable steps obligation. This requirement mainly impacts general insurers given the annual reissuance of general insurance policies. ASIC highlights the need to rely on consumer data and information to ascertain whether consumers continue to remain in the target market and consider risk of potential harm to consumers.
As part of the renewals process, insurers will need to take a risk-based approach and analyse consumer information to assess whether a consumer, or group of consumers, continues to remain in the target market. This may include analysis of:
If a consumer is found to be outside the target market, an insurer does not need to decline renewal of an insurance policy. However, further reasonable steps will need to be taken by the insurer. This could be informing the consumers that they are no longer in the target market, offering them alternative insurance cover based on the target market they are likely to be in or obtaining further information from them.
Referrers and comparison websites
Insurers use a wide variety of distribution networks, including referrers and comparison websites. If referrers engage in financial services relating to certain insurance products, such as general insurance products and bundled consumer credit insurance products, they would be subject to the reasonable steps obligation. In relation to comparison websites, the website would be engaging in retail product distribution conduct if their conduct relates to ‘arranging’ for a person to apply for or acquire an insurance product.
Insurers should review their current DDO scope to ensure referrers and comparison websites are captured, and engagement should commence with distributors to implement the reasonable steps requirements.
Review triggers and data
The RG provides specific examples of insurance review triggers. They include data points such as claim ratios, the number, nature and magnitude of paid, denied and withdrawn claims, volume of sales, including penetration rates, policy lapses or cancellation rates, average claim duration and the nature and number of complaints and related trends.
Whilst many insurers would already be exploring their data landscape and looking to implement these review triggers, ASIC encourages segmenting the data by distribution channel and underwritten risk type to get a full picture of the data being reviewed and related product insights.
Insurance in Super
The RG confirms that investment options and insurance components of Choice Superannuation products are key attributes that could affect the class of customers for whom the product is appropriate.
Trustees will also need to consider whether the inclusion of insurance changes the target market for the product. In particular, ASIC expects trustees to consider members for whom insurance is unlikely to be appropriate. The attributes and eligibility criteria of the insurance component should also flow through to the distribution conditions articulated within the TMD.
What does this mean for insurers?
Insurers should review their approach to DDO in light of the finalised guidance and apply the insurance specific examples ASIC has provided for the various DDO requirements as part of ongoing implementation and uplift to product governance arrangements.
Whilst ASIC’s guidance has not materially changed, insurers will still need to take deliberate actions in achieving good customer outcomes and implementing the extensive DDO requirements, for both issuers and distributors. All in all, a substantial amount of work still needs to be undertaken in readiness for October 2021.
Rosalyn is a partner in Deloitte's Melbourne office in the Governance, Regulation and Conduct practice. She specialises in supporting firms to design and assess frameworks to treat customers fairly, including the development of conduct, product governance, sales practices and complaints handling frameworks.
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.
The consultation process and public hearings on Design and Distribution Obligations (DDO) and Product Intervention Powers (PIP) are now complete. After an 18 month consultation process, it has been recommended the legislation be passed.