Ensuring Competition for Consumers; a Burden for Insurers?

The Productivity Commission released its draft “Competition in the Australian Financial System” report on 7 February 2018, with the driving message being that financial service providers, including general insurers, ought to be engaging in more competitive behaviour. With recommendations geared towards increasing competition in the general insurance market already being proposed, even at this early stage it appears likely the final report, to be forwarded to the Australian Government by 1 July 2018, will change the way insurers sell their products. 

In order to understand why certain recommendations have been made by the Commission so far, and perhaps even predict what recommendations the Commission will eventually submit to the Government, it is worthwhile briefly canvassing the findings presented in the Commission’s draft report.
The Commission considers that several factors stifle competition in the general insurance market, including the following:
  • the illusion of competition that is created by various general insurers operating under a range of different brand names – in every general insurance market considered, the four firms with the greatest market share (which are not always the same four) accounted for more than 70% of the relevant market;  
  • comparison websites providing a simplistic and often inaccurate overview of insurance policies that reduces what should be a complex insurance purchasing decision to one based solely on price, thereby skimming over important differences such as the extent of policy cover – some comparison sites even earn commission from insurers, whilst others are actually owned by the insurance companies they supposedly compare;
  • the information that is readily available (such as product disclosure statements) is complex and lengthy, and therefore often neglected by consumers.
To combat dwindling competition in the general insurance market, recommendations such as the following have been proposed:
  1. Comparative Pricing Information on Insurance Renewal Notices

Although consumers are reminded annually of their option to renew general insurance policies, consumers will more often than not simply renew their existing insurance instead of opting for another product and/or provider. 
It is on this basis that the Commission makes the following draft recommendation: renewal notices for general insurance products should transparently include the previous year’s premium and the percentage change.
Interestingly, despite the Commission’s concerns with price being the primary factor taken into account by consumers when choosing between different insurance policies, this draft recommendation focuses on just that: price. Nevertheless, including such information on a renewal notice may cause consumers to consider whether their renewal is competitive, and if not, prompt them to switch.
The Commission notes that the information about the previous year’s premium ought to be included near the information about the current premium, and in font no smaller than that for the current premium. The Commission also suggests that the percentage change in price since the previous year’s premium should be included on renewal notices, for the purpose of increasing transparency for consumers.
The consumer organisation Choice noted that similar changes are being made in the retail energy market, where retailers have agreed to write to customers who have reached the end of a plan to communicate to them in plain English alternative offers that are available.
  1. Transparency on Insurance Underwriting
According to the report, the two largest insurers underwrite more than 25 different brands between them, and two relatively recent entrants underwrite 50 brands.
Therefore, in light of this competition ‘illusion’, the Commission proposes that on the same part of an insurer’s website that contains information about which insurer underwrites their product, the insurer should include a list of any other brands that are underwritten by the same insurer for that particular type of insurance.
Insurers should then provide an up-to-date list of the brands they underwrite to the Australian Securities and Investments Commission, which in turn should publish this information as a transparent list on its website.
Whether these recommendations will be implemented by the Government remains to be seen. With the sole focus being on increasing competition though, regardless of the specific recommendation itself it appears that insurers will be forced to be more innovative in order to attract and retain customers. We will report further upon the finalisation of the Commission’s report.

Post by Justin Ho and Freida Stylianou 

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