Insurance contract law review

If you have not yet read the draft Bill, or one of the summaries of it, we suggest you skip to the end of this article to find the useful links and work your way through at least the summary.

Tuesday, October 18th 2022, 8:19AM

by Russell Hutchinson

The draft law is also a relatively quick read at only 83 pages. Possibly the most interesting thing about this document is the case for government intervention over self-regulation. The Regulatory Impact Assessment is a bit dismissive of industry attempts to self-regulate:

“Given the multitude of players in the industry, it is not reasonable to expect all players to comply with certain voluntary standards without government intervention The characteristics of insurance products and services mean that some underlying issues such as information asymmetry, conflicts of interest and an imbalance of power exist. While voluntary initiatives are welcome, we do not think that they are an adequate substitute for clear laws on the contract between the insurer and policyholder”

In the same document the summary of existing legislation that governs insurance contract law highlights just how long it has been since work was done in this area. New Zealand’s existing insurance contract-related statutes are:

the Marine Insurance Act 1908
the Life Insurance Act 1908
the Law Reform Act 1936
the Insurance Law Reform Act 1977
the Insurance Law reform Act 1985
the Insurance Intermediaries Act 1994

On average law dealing with this aspect of our sector is 70 years old. Overall, this update is largely welcome and useful, but the impacts are not cost-free. More opportunities open up for innovation if you have the time and capital to invest in developing new services. Marginal services may be best replaced rather than continue to receive investment.

Advisers having spent much of the last two years working to achieve full licensing might be forgiven for a smile at the thought that this law change impacts insurers primarily. But as with all such things, some of the changes will affect you too. In particular, a review of how insurance is treated with respect to contract terms could make the process of taking the client through the application form a bit more painstaking – because the consequences for getting it wrong could fall harder on insurers.

However, if you use only fully underwritten products, the whole process in sum, should be essentially the same as it is right now – perhaps with more emphasis on the consequences of non-disclosure and with some revisions to questions. Long compound catch-all questions common in short-form applications are unlikely to pass muster. The pressure then falls on insurers and reinsurers to find better ways to reduce the burden of underwriting while not falling foul of the requirements. That may take years of experimentation and feedback to work out. We are a bit worried that to be safe insurers will be less likely to experiment with non-standard ways of underwriting. Although to be fair, most of them don’t really experiment with that right now. I believe it is worth it, but it is not cost-free. So, my assessment differs with the claim in the regulatory impact statement that the implementation of the law would impose only modest, short-term, costs.

Insurance Contracts Bill useful links:

Dentons review: provides a good overview of the draft change, at about a five minute read this is about as succinct and reliable an introduction to the new law as you can get. https://www.dentons.co.nz/en/insights/articles/2022/march/15/insurance-contracts-law-reform

The draft law, which is not yet up on legislation.govt.nz Link: https://www.mbie.govt.nz/dmsdocument/18807-insurance-contracts-bill-draft-for-consultation

The regulatory impact statement, link: https://www.mbie.govt.nz/dmsdocument/7480-impact-statement-insurance-contract-law-reforms-proactiverelease-pdf

Tags: Russell Hutchinson