Insurtech and Insurance Law Reform – Impacts and Innovation Opportunities

Written By Russell Hutchinson

Below is a high-level overview of the impacts and innovation opportunities arising from the Insurance Contracts Act changes. We prepared this overview as part of our participation in an excellent Insurtech event, held last night at the Partners Life offices in Takapuna. The Insurtech community got to talk about how changes to insurance law will affect the insurance industry.

My fellow panellists were Charlotte Cockrell, Head of Legal, Remediation & Company Secretary, Fidelity Life; Jon Davies, CEO, InsuredHQ; Levonne Bell, GM of Underwriting and New Business, Partners Life. There was an excellent introductory presentation on the changes to the legal framework by Mark Banicevich, Industry Engagement Manager, Partners Life, too.

Grateful thanks to Paul O’Leary and Rob Ellis and the Insurtech team, as well as our hosts Partners Life for enabling the event.

Insurance Law Reform – Impacts and Opportunities for Innovation

Prepared by: Russell Hutchinson, Director, Quality Product Research Limited – 4 February 2024 – and staff.

Introduction

The Contracts of Insurance Act 2024 represents a significant overhaul of New Zealand’s insurance contract law. The impacts will be felt in systems processes and documents. At Quality Product Research Limited we review those things all the time for hundreds of on-sale and legacy policies with our team of five researchers. Below is a summary of the key changes introduced by the Act, with our comments. In commentary we aim to highlight areas where insurers may have more work to do, and what that may entail. There is an impact, and usually, an opportunity for innovation in most of these areas. InsurTechNZ members can probably think of more, but this, we feel is a good place to start. 

• Redefined Disclosure Duties:

• Consumer Insurance Contracts: Policyholders are now required to “take reasonable care not to make a misrepresentation” when entering into or varying a contract. This shifts the onus onto insurers to ask clear and specific questions. What constitutes ‘clear and specific’ is not yet defined. Experience from the UK following similar law and regulation suggest that long compound questions, catch-all questions, and questions unlimited by time are unlikely to meet requirements. ensuring that consumers understand their disclosure obligations.
• Non-Consumer Insurance Contracts: Policyholders must make a “fair presentation of the risk,” disclosing all material circumstances they know or ought to know. This ensures that insurers receive sufficient information to assess the risk accurately.
• Impacts – all insurers will need to review application questions, including initial applications, supplementary questions, and probably some aspects of offers of terms. The changes are probably more significant for those insurers who offered short-form underwriting. These questionnaires often had complex compound questions and a catch-all question which may not meet the requirements of the new law. This means the impacts are probably greater for direct and bank insurance offers than for fully-underwritten offers normally distributed through advisers.
• Innovation: there is substantial opportunity for innovation in this step in the advice process and insurer’s underwriting processes. The aim should be to not just match legal and regulatory requirements with updated systems questions but push further into new methods for underwriting that bring process reengineering benefits not just mere compliance.
• Proportionate Remedies for Non-Disclosure:
  • The Act introduces proportionate remedies based on the nature of the policyholder’s non-disclosure or misrepresentation:
    • Deliberate or Reckless Misrepresentation: Insurers can avoid the contract but must return the premium.
    • Unintentional Misrepresentation: Remedies are based on what the insurer would have done if aware of the true facts, such as adjusting the terms or premium.
  • Impacts: it depends on the current claims processes of the insurer. Most of the insurers I deal with regularly, and that goes for advisers too, will not have to make radical changes to claims processes. Again, this is more likely to affect insurers who underwrite less upfront.
• Implied Term for Timely Claim Payments:
  • Insurers are now obligated to pay any sums due in respect of a claim within a “reasonable time.” What constitutes a reasonable time will depend on factors like the complexity of the claim and any external factors beyond the insurer’s control.
  • Impact: most insurers do not aim to stretch out claim payment processes. Some claims, however, do take time to process. That can be because of a lack of required information. Clearly, expediting that is now more of a priority.
  • Innovation: death claims are ripe for automation. We have good public registers of deaths and these could be searched and analysed to enable claim payments with little human intervention. Some trauma and IP claims could be automated as well if better access to health and ACC databases were available. Currently access to these is limited and does not enable automation. However, if government is serious about enabling innovation, adding doctors, pharmacies, specialists, the Ministry of Health, and ACC to its planned targets for a consumer data right would be a great step!
• Plain Language Requirements:
  • Insurance contracts must be written and presented in a clear, concise, and effective manner. This aims to enhance consumer understanding and allows for better comparison between insurance products.
  • Impact: special hat tip to Mark Banicevich who pointed out that these terms are in the associated law the Contracts of Insurance (Repeals and Amendments) Act 2024. There will be endless debate about what represents ‘clear, concise, and effective.’ Not all of those terms work in concert – clarity sometimes requires more words than would be desirably concise. We feel that a few documents that currently have some degree of recognition for their ‘readability’ are in fact poor. On average, documents in the sector are difficult for consumers to navigate. They are typically multi-part documents, which makes finding all the relevant terms hard. Some documents are gigantic because they contain wording for every possible benefit irrespective of what the insured purchased. Almost all require the learning of specific terms.
  • Innovation: we think it likely that the requirement to be concise means giant omnibus documents are a thing of the past. One test for readability measures whether something is comprehensible when text is removed. Obviously huge sections of text can be removed from omnibus documents. Another clear opportunity, already used by one insurer is personalisation – something modern systems can easily handle – examples being, instead of ‘insured’ use the person’s name, instead of sum insured insert the dollar amount of the sum insured, and so on. These days the document can continue to be updated as these change.
• Direct Rights for Third Parties:
  • The Act allows third parties who are owed an insured liability by a policyholder to bring a claim directly against the insurer, subject to court approval. This modernises the previous statutory charge mechanism, providing greater clarity and efficiency.
  • Impact: being able to lodge a claim for some of the proceeds of claim probably helps create some clarity. However, claims processes may have to be addressed to ensure a check is made.
  • Innovation: this aspect may lean against claim automation in some cases.
• Consolidation of Insurance Legislation:
  • The Act repeals and amends multiple existing statutes, including the Insurance Law Reform Acts of 1977 and 1985, consolidating them into a single, more accessible piece of legislation.
  • Impact: modernisation.
• Unfair Contract Terms Provisions:
  • Scope and Application: – these provisions apply to all consumer insurance contracts—those taken out for personal, domestic, or household purposes. Terms in insurance contracts are assessed for fairness, particularly those not individually negotiated.
  • Criteria for Unfairness: – A term is considered unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer. Factors considered include the transparency of the term and whether it is necessary to protect the insurer’s legitimate interests, which means there are some excluded terms, which are, broadly: terms that define the main subject matter of the contract (like the insured risk) and those setting the price, provided they’re presented in plain language, are not subject to this unfairness assessment. The Court can declare a term unfair and, consequently, void. However, the rest of the contract continues to operate as long as it’s capable of doing so without the unfair term.
  • Examples of Unfair Terms (from the Act’s Guidance): – terms that allow the insurer to unilaterally vary the contract without a valid reason; terms that disproportionately limit the insurer’s liability or the consumer’s rights to claim; terms that bind the consumer to terms they had no opportunity to read before the contract was made (hidden terms).
  • Consumer Empowerment: – policyholders are encouraged to challenge terms they perceive as unfair, knowing there’s a legal framework supporting their concerns. This empowerment aims to foster a more competitive market where insurers are incentivized to maintain fair and transparent practices.
  • Impact: At Quality Product Research we are very interested in fairness concepts and have been researching and comparing contract terms (usually in definitions) for over 20 years. Insurers will need to review wordings, especially in standard-form contracts, to ensure they meet the fairness criteria. There’s a push towards greater transparency and simplification in policy documents, with a focus on eliminating “legalese” that could obscure unfair terms. The impact of this change creates risk. While pricing is defined as a core term the question of how premium reviews is done, for example, may not be so protected. That risk needs to be examined in some more detail. It is not the only area where a particular type of fairness – procedural fairness – needs to be examined. We are working with Nick Kirwan to develop more tools to review procedural fairness, as well as developing our ratings based on some key aspects of policy wording disclosure.
• Product design: there are wider design implications:

o   Taken individually there may be impacts and necessary actions to comply and innovation opportunities. Taken collectively the new laws may push product development in some specific directions, especially when considered alongside the need to develop products which are much more efficient.

o   Terms clarity, underwriting clarity, and claims clarity, plus requirements for speedy settlement suggest claim automation. Claim automation tends to favour explicitly stated sums insured triggered by verifiable events – what is sometimes referred to as parametric insurance in contrast to a historical bias towards the principle of indemnity. Indemnification often requires more involved verification procedures, which are slow and subject to more judgment calls. There is an efficiency tradeoff in the claim between these different types of cover, but it may be worth it for the gains from automation.

We welcome discussions about the impact and opportunities of these laws and look forward to hearing from you with your thoughts. Do contact either me or any of the team by visiting www.quotemonster.co.nz

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For further information, you may refer to the following resources:

• Hesketh Henry’s overview: heskethhenry.co.nz
• Anderson Lloyd’s summary: al.nz
• Dentons Kensington Swan’s insights: dentons.co.nz