A report on the sale of add-on general insurance products by the independent committee monitoring the Insurance Brokers Code of Practice (the Code) outlines the extent to which and how Code subscribing insurance brokers provide add-on insurance products to their clients.
The Insurance Brokers Code Compliance Committee (the Committee) conducted an own motion inquiry into add-on general insurance products this year, drawn from data it collected in its 2019 Annual Compliance Statement (ASC) and in follow-up phone discussions. Its findings and recommendations are set out in a report released this week, Sale of Add-on General Insurance Products. It can be accessed here.
The Committee is pleased to find that most brokers don’t sell these products (although seven large broker firms do).
Whilst a very small number of Code subscribers sell add-on products, sales practices don’t always prioritise the client’s needs.
The Committee has a concern that the prospect of earning commissions on these products has the potential to jeopardise brokers’ independence.
This is a very important issue for insurance brokers because the practice of selling and the products themselves have been the subject of serious criticism for some time. The professional reputation of the entire industry could be put at risk if the few brokers selling these add-on products do not take great care to ensure staff are trained in ethical sales practices and understand the risk of harm these products might bring for the wrong customers.
Of course, the brokers primary duty is to its insured client. In determining how clients’ insurance needs are best satisfied, policy answers which include add-on must be handled with great care.
The inquiry sought to determine whether and how Code subscribers sell add-on general insurance products and how they ensure they are useful, reliable and of value to their clients. Although only 2.6% of the brokers who subscribe to the Code offered these products in 2018-19, the inquiry identified several areas for improvement.
These related to sales practices, remuneration arrangements, training programs and procedures for monitoring staff and authorised representatives who sell add-on products.
The Code does not specifically address add-on products, but they are covered by obligations set out in several of its service standards concerning scope of services, buying insurance and training.
It is appropriate to highlight that brokers who provide services on behalf of general insurers that subscribe to the new 2020 General Insurance Code of Practice (2020 GI Code), must also comply with various standards under the GI Code in certain circumstances. A broker who is a ‘Distributor’ or ‘Service Supplier’ of a general insurer, has an overall obligation to be honest, efficient, fair, transparent and timely in their dealings with consumers and small businesses.
Part 4 and Part 6 of the GI Code sets out particular standards concerning education and training and buying insurance, including specific obligations addressing the issue of pressure selling and the deferred sales period.
The Australian Securities and Investment Commission (ASIC) defines add-on insurance products as those generally sold to consumers alongside a primary product, such as a credit card, loan, motor vehicle, airline and entertainment tickets, or when buying a primary service, such as an apartment lease or car rental.
Sales practices for these products have been under intense scrutiny by consumers, regulators and government. The Royal Commission into financial services uncovered customers being sold policies of little or no value to them and on which they were ineligible to make a claim. It also identified widespread use of unethical sales tactics driven by high-value commissions to third-party sellers.
Several pieces of federal legislation are now in train and ASIC has been given increased powers to order remediation to consumers treated unfairly. Both ASIC and the Australian Financial Complaints Authority (AFCA) have flagged issues with the sale of add-on general insurance products.
In its report, the Committee urged subscribers who offer add-on products to embrace its recommendations and ensure they are enacted before they are legally required to.
Problematic areas identified
Some of the behaviour the Committee uncovered in its inquiry include:
- An over-reliance on scripted conversations and documentation during sales. Brokers and authorised representatives may not adequately consider the suitability and reliability of the product or its value to the client. Clients are not always made aware add-ons are optional.
- Almost all subscribers who sell add-on general insurance products earn a commission on each sale, generally around 20% of gross written premium. A small number receive a fixed fee. Commission-based sales models by nature prioritise the sale over the needs of the consumer and can lead to unscrupulous or unfair behaviour.
- Training of staff and authorised representatives seems largely focused on increasing product knowledge and sales skills rather than on ethical sales practices and Code obligations.
- Monitoring procedures tend to occur post-sale and focus on the volume of sales rather than on whether the sale followed ethical practices.
The Committee made a series of recommendations that would improve fairness and compliance with the Code when add-on products are offered. These include:
- ensuring add-ons are useful, reliable and of value to the client
- not selling them to clients unlikely to be eligible to make a claim
- ensuring the client understands they are optional
- introducing a deferred sales model before legally required to
- commissioning an independent audit of sale practices and of remuneration arrangements with insurers to ensure they don’t encourage employees or authorised representatives to engage in pressure selling and other unethical sales practices
- to mandate education about ethics and the Code’s service standard on buying insurance, and
- to ensure monitoring procedures include a mix of proactive and reactive approaches.
The generally good results for most insurance brokers should not obscure the fact that there is room for improvement. While only a small number of Code subscribers offer these products, the report urges them to demonstrate a commitment to fairness and implement change before they’re required to. The Committee also encourages all Code subscribers to read the report and consider how the recommendations could be applied to similar areas in their business.