A welcome move for life insurers 4 min read
In a welcome move for life insurers reissuing or reinstating certain life policies, ASIC has registered the ASIC Corporations (Design and Distribution Obligations—Reissued Life Policies Class Exemption) Instrument 2023/183 (Instrument).
The Instrument provides conditional relief for life insurers from the design and distribution obligations when reissuing life insurance policies in certain, limited circumstances. In this Insight, we provide a brief overview of the purpose of the Instrument and the relief granted by ASIC.
Purpose of the Instrument
Design and distribution obligations (DDO) were introduced into the Corporations Act 2001 (Cth) with effect from 5 October 2021. The DDO regime imposes a number of obligations on financial product issuers in respect of the financial products they issue, including that the issuer must:
- make a 'target market determination' for each product the regime covers;
- take reasonable steps that will, or are reasonably likely to, result in 'retail product distribution conduct' (other than certain excluded conduct) being consistent with the determination;
- notify ASIC of 'significant dealings' in a product in relation to a retail client that are inconsistent with the determination; and
- review the determination regularly and keep records.
Life policies issued by insurers are within scope of the DDO regime. However, as ASIC notes in the explanatory memorandum to the Instrument, life policies are intended to be held over an extended period and many existing policies were first issued before the commencement of the DDO regime in October 2021. Some of those policies contain terms which give the policyholder the option to request administrative transactions that make changes to their policy. There are also situations where the insurer or the policyholder would wish to have the policy reissued, eg where the policy has lapsed due to non-payment of premiums, or where a new policy is issued to correct an administrative error in the previous iteration.
Depending on the terms of the policy or the insurer's administrative systems, these transactions sometimes require the issue of a new financial product (rather than just a variation to the existing policy). The issue of a 'new' financial product would trigger the requirement for the insurer to comply with DDO obligations in respect of the reissued policy, even where the policy was originally issued before the commencement of DDO.
Effect of the Instrument
ASIC has provided conditional relief in order to ease the regulatory burden associated with reissuing policies in these circumstances. Relief is available for policies issued both before and after the introduction of the DDO regime.
Policies issued before DDO
The Instrument exempts insurers from complying with Part 7.8A of the Corporations Act (ie the DDO regime) where all of the following apply in relation to the reissued policy:
- the reissued policy replaces a policy that was first issued before 5 October 2021;
- the reissued policy is reissued to, and at the request of, the original policyholder;
- the only difference between the terms and effect of the reissued policy and the previous policy is the differences required to give effect to the replacement, and to:
- correct an administrative error in a previous policy;
- reinstate a previous policy after the previous policy lapses due to non-payment of premium;
- exercise an option to buy back cover following payment of a sum insured;
- remove or reduce a cover option other than the sum insured;
- change an income protection policy from agreed value to indemnity based cover; or
- combine two or more previous policies into a single policy covering all the previous policies.
Policies issued after DDO
ASIC has also provided an exemption to insurers from DDO for the reissue of life policies originally issued on or after 5 October 2021. This applies only where the reissue is to correct an administrative error in the previous policy or to reinstate the previous policy after the previous policy lapses due to non-payment of premium.
Comments
Insurers should note that the conditional relief is available immediately.
This will be a welcome change in terms of the regulatory burden associated with reissuing policies post-DDO. The Instrument will be particularly beneficial to both insurers and policyholders where policies have lapsed for non-payment of premiums. Until now, insurers in those circumstances were either required to incur the costs associated with meeting the DDO requirements, or, where those costs were prohibitive, may have refused the request for reinstatement, ultimately leading to poor outcomes for policyholders.
The Instrument is currently slated to expire in five years, on 15 March 2028.
If you would like to discuss this, or require assistance with the DDO, please get in touch with any of the people below.