EXECUTIVE SUMMARY
Competition is considered central to the Government’s plans to support innovation and economic growth and deliver better outcomes for consumers and small businesses.
On 1 July 2017 the Productivity Commission (Commission) commenced an inquiry into competition in Australia’s financial system.
It released a draft report on 7 February 2018 with submissions requested by 20 March 2018. The draft report notes concerns regarding market concentration, barriers to entry for new participants, a lack of innovation compared with overseas markets, add on insurance and general advice confusion.
As a result, the draft report makes a number of important recommendations, in particular:
- insurers publish a list of all brands on their website and that the same is done by ASIC to improve consumer choice and competition;
- the inclusion of comparison premium information be provided on renewal notices to prompt consumers to consider switching of products (or insurers) at renewal to further enhance competition;
- the implementation of a deferred sales model in add on insurance car dealerships space along with improving consumer outcomes that deliver better value to consumers for these products; and
- that the financial product advice model and labelling of “general advice” be reconsidered.
In addition, consistent with the Commission’s 2014 Natural Disaster Funding Inquiry , they recommend state and territory taxes and levies on general insurance should be phased out from mid-2018.
The final report is due to the Government by 1 July 2018.
WHAT DOES THE INQUIRY COVER?
Under the Terms of Reference the Commission is to:
- consider the level of contestability and concentration in key segments of the financial system (including the degree of vertical and horizontal integration, and the related business models of major firms), and its implications for competition and consumer outcomes;
- examine the degree and nature of competition in the provision of personal deposit accounts and mortgages for households and of credit and financial services for small and medium sized enterprises and general insurance providers and products;
- compare the competitiveness and productivity of Australia’s financial system, and consequent consumer outcomes, with that of comparable countries;
- examine barriers to and enablers of innovation and competition in the system, including policy and regulation; and
- prioritise any potential policy changes with reference to existing pro-competition policies to which the Government is already committed or considering in light of other inquiries.
The Commission is to have regard to the Government’s existing wide-ranging financial system reform agenda and its aims to:
- strengthen the resilience of the financial system;
- improve the efficiency of the superannuation system;
- stimulate innovation in the financial system;
- support consumers of financial products being treated fairly; and
- strengthen regulator capabilities and accountability.
Life insurance is not being considered in this inquiry, given that more than 70% of life insurance is provided through superannuation, and the Commission is undertaking a separate review of the competitiveness and efficiency of Australia’s superannuation system.
RELEASE OF DRAFT REPORT
On 7 February 2018 the Commission released its draft report to which submissions can be made by 20 March 2018. The final report is due to the Government by 1 July 2018. The following covers the key matters relevant to general insurance.
The Commission notes in the draft report that:
“Australian general insurance markets have consolidated over the past 10 years. Despite some new entrants (including from overseas), mergers and restructures and exits have reduced the overall number of providers. Some of the new entrants have since been acquired by other insurers that are pursuing strategies of growth through acquisition. Of those remaining, many have links with banks and other large retailers, and some are niche providers that specialise in particular insurance lines.”
The Commission also notes that there is a high degree of market concentration in the home insurance, domestic motor insurance, travel insurance, lenders mortgage insurance and reinsurance markets and points out that:
- the largest four firms (which are not always the same four) account for more than 70% of the relevant market and have more than 30 brands in total between them;
- the two largest firms account for more than half the domestic home insurance market;
- there are significant barriers to entry for new participants, particularly regulatory barriers;
- there is a lack of innovation compared with overseas markets; and
- the use of multiple brands by insurers creates the illusion of more competition than actually exists in the general insurance market.
This concentration issue and branding concern has led to recommendations that:
- insurers publish a list of all brands on their website and that the same is done by ASIC to improve consumer choice and competition.
- comparison premium information be provided on renewal notices to prompt consumers to consider switching of products (or insurers) at renewal to further enhance competition;
The Commission considered the add on insurance market with a primary focus on prior work undertaken by ASIC in this area and recommends the implementation of a deferred sales model in this space along with improving consumer outcomes that deliver better value to consumers for these products.
The Commission also identified:
- constraints in the current financial advice regime and that there remains a poor understanding by consumers of the policy they are obtaining and the nature of their risks; and
- that consumers often do not fully understand the nature of the information provided when general advice is given, and the term “general advice” creates confusion whereby consumers may unduly rely on this information when making a purchasing decision without understanding this information may not be relevant to their needs.
As a result, the Commission has recommended that the financial product advice model and labelling of “general advice” be reconsidered to ensure that consumer reliance on such information is minimised.
Consistent with the Commission’s 2014 Natural Disaster Funding Inquiry, the Commission recommends state and territory taxes and levies on general insurance should be phased out from mid-2018.
To seek to access our detailed review of each recommendation contact us.
NEXT STEPS
Those who wish to make a submission to the Commission on the draft report should do so by Tuesday 20th March. The final report and recommendations of the Commission are then expected to be released to the Government by 1 July 2018.
IMPORTANT NOTICE
This document is designed to provide helpful general guidance on some key issues relevant to this topic. It should not be relied on as legal advice. It does not cover everything that may be relevant to you and does not take into account your particular circumstances. It is only current as at the date of release. You must ensure that you seek appropriate professional advice in relation to this topic as well as to the currency, accuracy and relevance of this material for you.
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