The game is up for junk insurance policies and predatory sales tactics
Commissioner Kenneth Hayne's verdict on Australia's insurance industry is in and the game is up.
From grossly inappropriate cold-calling and pressure-selling of life insurance to junk insurance sold to people who could never claim on it, the banking royal commission has revealed the human impact of a sales culture that puts profits before people.
Strong reforms that can fix this mess
The good news is that Hayne's strong recommendations can clean up the general and life insurance industries and improve the lives of Australians.
Insurance companies have taken advantage of legal loopholes that Hayne has recommended now be closed. If implemented, Australians will be able to rest easy knowing that they won't be subject to cold-calling of life and funeral insurance. Insurance claims would need to be handled "efficiently, honestly and fairly" - and the regulator would have oversight.
Unfair contract terms
Importantly, Hayne recommended applying the prohibition on "unfair contract terms" laws to insurance - laws that already apply in virtually every other industry.
Naturally, Hayne saw through the industry's push for a watered-down and ineffective model with massive carve-outs. The devil is in the detail, which Hayne acknowledged by recommending a robust model for the new laws.
Under Hayne's recommendation, most terms in a policy would need to pass a fairness test. Blanket mental health exclusions and unfair "cash settlement" terms won't pass muster.
Finally, after a decade-long scandal, time is up for car yards and insurers that have been flogging junk "add-on" policies bundled with credit cards and loans.
Insurers have been paying more in commissions to car dealers that sell these worthless policies than they pay out in claims to their customers. Commissions can be as high as 79% of the premiums paid, incentivising sales regardless of whether the policies are suitable for the customer.
If Hayne's recommendations are implemented, these exorbitant commissions would be no more, with ASIC to set a cap on commissions to car dealers. The commission also supported a deferred sales model for junk add-ons, which would give people time to decide if they want to opt-in to buying any add-on insurance after the purchase of a car or loan.
Banks and insurers have refunded millions to customers who were sold junk policies, but this is just scraping the surface. We estimate that the junk insurance scandal is likely to have cost Australians more than $1 billion over the past decade.
Anyone who has bought a car or taken out a loan should check their paperwork for add-on insurance. If you didn't know about it or were pushed into buying, you might be owed a refund. Even if you did choose to buy it, it might be worthless to you - and you should demand your money back.
The Consumer Action Law Centre's DemandARefund.com can help you claim your money back.
Our message to the insurance industry is this: get on board with these reforms.
Insurers must proactively compensate every affected person and stop selling worthless products.
Industry lobbying for loopholes and carve-outs from laws is part of the reason we ended up in this mess. If the industry wants to restore the lost trust, it must support the spirit and letter of these essential reforms.