Life Insurance Code of Practice 2.0 is here! - Financial Services blog | Deloitte Australia has been saved
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The revised Life Insurance Code of Practice (LICOP) 2.0 is a key pillar of the regulatory architecture across the life insurance industry as it sets solid foundations to achieving fair customer outcomes. LICOP 2.0 supports improved service standards and requires life insurers to have customers at the heart of the insurance value chain.
In this blog, we explore the key changes and implications that life insurers may face prior to the 1 July 2023 commencement date, as well as some preparatory next steps for firms.
LICOP was first published by the Financial Services Council (FSC) in 2016. It underwent a review in 2018 following a number of concerns about the conduct of the Life Insurance industry that were raised by ASIC, the Parliamentary Joint Committee Inquiry into Life Insurance, and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The Royal Commission also highlighted enhancements required to the LICOP so that it evolves and adapts to the changing regulatory and operational environment.
The LICOP underwent further review and consultation from 2018 to 2021 in consideration of the industry concerns, and the regulatory reforms that were effective across 2021 and early 2022. In June 2022, the FSC released the updated code.
LICOP 2.0 introduces over 50 new customer protections covering commitments and obligations around providing products and services to customers in an open, fair and honest way. This ties in with principle of utmost good faith under a contract of insurance.
Whilst LICOP 2.0 is mandatory for all FSC member life insurers it is not yet enforceable under ASIC’s enforceable codes regime.
The Royal Commission recommended that some important code provisions should become enforceable by law (i.e. provisions that govern the terms of the insurance contract). Similar to the enforceability of certain provisions in the Banking Code of Practice, it is expected that LICOP will be registered under ASIC’s enforceable codes regime, allowing ASIC and Code Governance Committees to enforce additional powers.
LICOP 2.0 will impact the end-to-end life insurance value chain. The following are the key new requirements of the revised code:
1. Reinforcing product governance arrangements
LICOP 2.0 requires life insurers to design products that meet the genuine needs of customer in the target market. Furthermore, life insurers are required to:
Whilst many of these code requirements relating to product design and monitoring are not new, they need to be aligned and embedded with the DDO requirements and the life insurer’s product governance arrangements. Product design and distribution also aligns to ASIC’s external strategic priorities for 2022 to 2026.
Life insurers will need to factor annual inflationary increases to claims benefits when designing and monitoring products. In addressing the code provisions, it is important to note the life insurance product sustainability concerns raised by APRA.
2. Shifting the dial on advertising and sales practices
The revised code places emphasis on clear and transparent advertising, good sales and retention practices.
This includes appropriate training of staff to be able to identify and consider the needs of customers when recommending products, and also extending to rules and processes governing sales practices internally and that of authorised representatives.
There are also additional requirements for life insurers that conduct direct sales to customers, and new requirements for funeral insurers and consumer credit insurance (CCI) providers, around providing required information so that customers can make informed decisions about purchasing these products.
The above highlights the need for life insurers to further embed the reasonable steps they take to comply with DDO. To meet the revised LICOP 2.0 requirements, insurers may need to revisit their reasonable steps, including reviewing their existing advertising, sales strategies, training practices, and monitoring, to ensure they are adequate.
3. Consistency and clarity around customer communication
Life insurers are required to engage and service customers with care, clarity and transparency at each stage of the insurance value chain. Most importantly, the communication needs to be tailored to the policy type, the owner and the information being communicated. LICOP 2.0 requires communication and reminders in relation to:
The revised code also has requirements regarding gaining customer consent, with the aim to empower customers with the knowledge of their rights regarding personal information.
Life insurers will need to review their marketing and/or document disclosure frameworks, including materials, to enable the appropriate changes to be made, and to ensure that the relevant collateral around communicating to customers is produced and embedded into processes.
4. Claims handling timelines and keeping claimants informed remain important
Some of the timeframes and data capture requirements for handling claims have changed under the revised code. The altered timeframes relate to:
Claims systems and claims monitoring processes, including data components, will need to be reviewed and re-aligned to these revised LICOP requirements as well as the claims handling requirements that were effective earlier this year.
Life insurers need to support a customer’s recovery during their income protection claim. This will require proactive identification of rehabilitation and treatment options as part of the claims process.
5. Focus on customers experiencing vulnerability and financial hardship
LICOP 2.0 has provisions that require life insurers to be equipped to recognise the nuances of vulnerability and provide the appropriate support to customers who may be experiencing vulnerability. Additionally, life insurers will need to provide options to those experiencing financial hardship through the life of their policy, as well as when making a claim.
This will require life insurers to develop policies, processes and guidance around identifying and supporting customers experiencing vulnerability specific to life insurance, ensuring that there is flexibility to tailor communications, approaches and outcomes to particular circumstances. Life insurers will also need to design and provide options to customers experiencing financial hardship.
Life insurers should take a holistic approach in preparing for LICOP 2.0 implementation, starting with culture and planning for implementation, understanding the changes and implementing the changes across the organisation, and then embedding the changes to meet ongoing code compliance. Implementation should also consider overlapping regulations and new provisions across the revised code to achieve efficiencies and meet compliance.
1. Setting the tone – It is critical for firms to set out the importance of LICOP and meeting code compliance across the organisation, having a positive culture around the code, and having executives accountable for implementation and BAU compliance.
2. Understanding the changes and plan for implementation – Firms should understand the changes and implications to their operations, setting timeframes, and having adequate capability and capability to implement the revised requirements.
3. Identifying gaps following an end-to-end review of the insurance value chain – Firms should conduct gap analysis across the full insurance value chain, from product design to claims to LICOP governance, to understand the state of current processes, the gaps that need to be addressed and the new processes that need to be designed.
4. Aligning the revised LICOP to connected regulations and operations and implementing the new requirements – This will require mapping of code requirements and related obligations against organisational risks and controls so that the code requirements are embedded for ongoing compliance.
5. Performing post-implementation reviews – Firms should review the effectiveness of any implemented LICOP 2.0 changes for ongoing BAU compliance.
If you have any questions or wish to discuss further, please feel free to contact us.
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. Rosalyn co-leads our Accountability practice and leads Deloitte’s Design and Distribution and product governance offering.
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.
Kavir is a Senior Manager in Deloitte’s Governance, Regulation and Conduct Practice. He specialises in supporting banking, insurance, superannuation and wealth management clients navigate through regulatory change, with a focus on designing and implementing conduct frameworks.
Holly is a Manager in the Governance, Regulation and Conduct practice based in Sydney. She specialises in supporting clients across the insurance sector with dispute resolution and focusses on preventative conduct and promoting good customer outcomes.