The new Commerce and Consumer Affairs Minister is committing to reviewing legislation that has for decades been criticised for putting consumers on the back foot when dealing with insurers.
Kris Faafoi acknowledges the law that enables an insurer to decline a claim if the claimant innocently or mistakenly failed to disclose material information about themselves, is in need of a revamp.
Under the Insurance Law Reform Act, an insurer can decline a claim related to someone having a heart attack for example, if it finds out that on taking out the insurance policy, the claimant didn’t mention the fact they had previously taken ongoing medication for a back injury that had since healed.
While disclosure is undeniably key to ensuring insurers can accurately price risk and operate a business, the criticism is that the law puts a disproportionately high onus on consumers to disclose often complex or seemingly irrelevant information.
As insurance lawyer Andrew Hooker discussed in this column, the same obligation doesn’t fall on insurers.
He points out that while a consumer could lose huge sums of money by having their entire claim declined and policy cancelled due to non-disclosure, a High Court judge recently only fined Tower $5000 for breaching its duty of good faith by withholding an expert report from a customer affected by the Canterbury earthquakes.
“Why is it that the duty of good faith, which clearly applies to both insurers and their customers, has such a draconian outcome for the insured and such a slap on the wrist with a wet bus ticket for the insurer?” he questions.
Insurance law reform to stretch beyond disclosure and consider tech developments
Speaking to interest.co.nz in a Double Shot Interview, Faafoi says a review of the law governing insurance contracts is a “piece of work that we have to pick up”.
“Because you’re right, I think the law around that is archaic and I think some of the behaviour you’ve described has been going on for far too long, and we’ve got to make sure we get that balance right.”
However Faafoi says the scope of a review will stretch beyond disclosure. It might therefore take the government's whole three-year term to look at issues across the industry, and get an update on the table.
While Faafoi’s predecessor, Jacqui Dean, in May told interest.co.nz she wanted to start work on a “significant package” of insurance contract law reform in 2018, the last concrete piece of work done on this was a Cabinet Paper written when Labour was in government in 2007.
Faafoi hasn’t had a look at the paper yet. While he believes it will be relevant to some extent, he says a number of new issues, particularly around technology, have arisen since 2007.
He would therefore prefer to take a “present day” look at the matter.
Consultation on interest rate caps to begin in early to mid-2018
At the top of the Minster’s list of priorities is working to prevent vulnerable people spiralling into debt when they take out expensive loans with third-tier lenders.
As detailed in this story, there are lenders in the market raking in up to $432 in interest and fees from borrowers who take out a $500 loan they repay within 30 days.
“For some time now there has been little protection for those people who are the most vulnerable in the community,” Faafoi says.
He is therefore following through on his commitment to introduce interest rate caps for third-tier lenders as part of a review of the Credit Contracts and Consumer Finance Act (CCCFA).
He says it’s “no secret” that when the National-led Government made changes to the Act, which were enforced in 2014, Labour believed it “didn’t go far enough”.
“So I’ve asked them [his officials] to prioritise some of the work around the interaction between consumers and lenders, and whether or not the lenders are being monitored enough.
“And of course capping interest rates is something I’d want to look at.”
While interest rates are capped in a number of countries including Canada, the US, Australia, South Africa, Japan and a number of European countries, Faafoi recognises they have their critics.
Asked how he would get around the problem of lenders seeing caps as targets, and simply setting rates just below them, he says: “That’s something I’m trying to get advice on.”
Faafoi is tight-lipped on the level at which he think a cap should be set, but makes a passing comment that a limit of 30% “sounds pretty high”.
Australia’s cap sits at 20% up front and 4% monthly for the life of a loan.
Faafoi wants to get started on a review “really quickly”, so expects a consultation paper will be released early to mid-next year.
Supermarket code of conduct a ‘medium priority’
A “medium priority” for Faafoi is introducing a code of conduct for supermarkets, aimed at ensuring there’s a healthy level of competition within the sector, dominated by Foodstuffs and Progressive Enterprises.
“It’s no surprise that during our term in opposition we had some suppliers who brought concerns to us about their interaction with the supermarkets…
“At times they felt like there was an uneven balance of power during their transactions with them [supermarkets]. I don’t want to get into too much detail.”
Faafoi says he’s looking to Australian and UK examples of codes of conduct.
While the former is voluntary and the latter mandatory, the Minister isn’t yet in a position to say what a New Zealand code would look like.
He’s only met with one supermarket chain so far, which he says is happy to work with the Government.
“My natural inclination is that people do things off their own volition, because I think that works better.”
Wait and see approach taken to crypto-currencies
Asked about crypto-currencies, Faafoi says: “I don’t know a lot about this to be honest. It’s not something that I’ve thought about investing in.”
He credits the Financial Markets Authority for the commentary it released in October, suggesting investors use New Zealand exchanges that are linked to dispute resolution schemes.
“We will have to watch… as this develops, how much of an issue the risk around crypto-currency is. It’s something that’s only kind of new to me. I know it’s been floating around for a while.
“But if the officials start saying there are increasing numbers of New Zealanders who have been done over with crypto-currency, then I think it’s obviously going to be a bit more of a concern.”
‘I’m pretty pushy’
Asked how seriously Labour takes the Commerce and Consumer Affairs role, given Faafoi, like his two immediate National predecessors (Jacqui Dean and Paul Goldsmith), haven’t been Cabinet Ministers, Faafoi says: “People have asked that question before. And my response will stay the same. I’m pretty pushy.
“And to make sure we get some of the reforms through and make sure that we have some of the consumer protections through that we campaigned on, I’ll be working pretty hard to make sure they get through Cabinet in a timely fashion.”
Faafoi is of the view that he’ll push for collaboration before regulation, giving industry an opportunity to make any changes on their own accord, before getting a push from the Government.
11 Comments
We don't need a code of conduct for the supermarkets. We need them broken apart from their cozy duopoly. The 2 main supermarket chains dominate far too much of the market. Its absurd that they have been allowed to reach such positions.
The HHI index https://en.wikipedia.org/wiki/Herfindahl_index will be almost 0.5 (2 players with near 50% each) which is defined as extreme concentration.
A minimum of about twelve supermarket groups would work much better for the New Zealand economy. Remember it's not just consumers the duopoly are screwing, it's the producers. Currently the duopoly only allow a limited numbers of suppliers and that just blocks innovation and stops dead the enterprising startups.
"Australia’s cap sits at 20% up front and 4% monthly for the life of a loan."
Using this handy converter: http://www.stoozing.com/calculator/apr-rate-converter.php
4% monthly is equivalent to 60.1% annually (if compounded) or 48.11% annually if not compounded. So the Aussie cap is between 80% and 68% per annum.
You can only agree with the opinion of the new minister. The Insurers have had far too much their own way for far too long and this has not been checked. Predict the first riposte from the Insurers,to any measures that might discipline them, “THIS WILL PUT PREMIUMS THROUGH THE ROOF.”
Won't be 'through the roof' but logic dictates there will be increases if insurers are forced to pay claims they otherwise wouldn't.
The challenge is determining the monetary value of the extra claims and thus the increase in premiums needed. Insurers will have a rough idea of the present figures but they won't know the knock on effect i.e. how many proposers who would previously have been deterred by knowing the consequences of lying will now fib in the knowledge that as long as the untruth is not related to the claim cause, it is likely their insurance will remain valid.
In respect of innocent mis representations, the changes wouldn't greatly worsen the risk profile of the insurers book but for those who deliberately engage in deception, the 'moral hazard' component of the insurers risk profile will increase because of the higher number of dodgy people they would then have on their books.
I've seen people unfairly penalised by policy avoidance due to inadvertent non disclosure and support change but Faafoi will need to proceed carefully to avoid opening up an avenue for fraudsters.
Other consequences will be far more detailed proposal processes, as in other countries that have made these changes and the additional resources insurers will need to put into investigating claims so the cost of doing business will rise, which policy holders will pay for.
Tks Middleman & fair comment. Ihave a question for you. Back in the sixties when I started work there were many many Insurance companies, eg Hereford St CHCH you could probably count off more than twenty. I started work for a bank and was told that all banks in NZ had to operate under a government charter as too did the Insurance companies. The charter was binding and provided not only financial requirements but also operational guidelines, ethics sort of, if you like. Am I right? & if so does that mechanism still apply today.
Operational guidelines ethics etc were governed by the insurance council. Premiums were also set by this council (seems incredible now, eh!) using a 'tariff' system. If you misbehaved or breached this tariff by undercharging you would be hauled in front of bunch of stuffed shirts for a please explain and your company copped a financial penalty.
Reserve bank today sets and monitors insurer solvency compliance. Operational ethics etc are self governed under insurance council oversight. There is also considerable legislative regulation that insurers are subject to , notably the insurance law reform act.
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