Claims handling as the sixth ‘financial service’

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.

Commencement date and application

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).

The crux of the changes

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:

• Obtain an AFSL covering claims handling or become an AR of an appropriately licensed AFSL holder.
• Meet the AFSL requirements including handling and settling claims efficiently, honestly and fairly (even if representatives handle the claims on their behalf) as well as other general licensing and disclosure obligations. Claims will need to be handled using principles such as the following:

• Ensure representatives are adequately trained and competent to provide claims handling services.
• Have an internal dispute resolution (IDR) process in place and be a member of Australian Financial Complaints Authority (AFCA).
• Provide relevant disclosure to retail clients. When offering to settle a general insurance claim using cash payments, consumers must be given a Cash Settlement Fact Sheet. This may slow down claims payments, particularly in natural disasters.

What activities will be caught as a claims handling service?

The activities that will be captured include:

• Making a recommendation or stating an opinion that could influence a decision whether to make an insurance claim;
• Assisting another person to make an insurance claim;
• Assessing whether an insurer is liable under an insurance product;
• Making a decision to accept or reject all or part of an insurance claim;
• Quantifying an insurer’s liability under an insurance product;
• Offering to settle all or part of an insurance claim; and
• Satisfying a liability of an insurer under an insurance claim.

Who is caught?

Aside from insurers who issue the insurance products, others who may be captured by the claims handling services requirements include:

• Certain insurance fulfillment providers that engage in a business of providing goods or services to satisfy an insurer’s liability to its insured and have authority from an insurer to make a decision on the outcome of a claim. They may include tradespeople such as smash repairers and builders if they are authorised to reject all or part of the claim;
• Insurance claims managers if they provide a claims handling and settling service on behalf of one or more insurers and do this as a business;
• Insurance brokers that conduct a business of arranging contracts of insurance for prospective insureds and provide a claims handling and settling service on behalf of the insurer;
• Claimant intermediaries that represent insured people in pursuing a claim and do so in return for any benefit (monetary or otherwise); and
• Financial advisers who act on behalf of insurers and provide financial product advice to an insured person, including a third-party beneficiary.

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.

What does this mean for organisations?

1. These reforms are wide-ranging across numerous products and potentially large and varied claims fulfilment chains. Organisations need to ascertain the impact of the claims handling reform on their organisation by reviewing their claims processes for each captured insurance product, and conducting an inventory of each element of the claims value chain for the different products captured.
2. Those who currently do not have an AFSL, but handle claims, will be required to either obtain an AFSL or become an authorised representative of an AFSL holder. Existing AFSL holders will need to apply to ASIC to vary the services provided under their licence to include claims handling. Insurers should to start to engage with the third parties in their claims value chain to consider if they need an AFSL, and consider issues around potential AR cross-authorisation where a person may seek to be the AR of more than one licensee.
3. A detailed review of the claims value chain should be conducted to identify who may be captured, for what activities, and how they will identify, communicate with and ultimately train and supervise those who are their representatives. This will mean that additional compliance requirements may apply to small businesses such as smash repairers and builders, who will be largely unprepared for higher levels of oversight.
4. Identify how the reform will impact each element of the captured value chain and identify the uplift in activities, processes, training, communication, and supervision that will be needed. This is likely to be extensive, even with currently well-run claims processes, due to the need to consider the new application of general obligations, and supervision and training that will be required.

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.