Consumer Research on General

Insurance Product Disclosures

Request for Proposal Tender Document

April 2016

Table of Contents

1. Request for Proposal ................................................................................................... 3

2. Background .................................................................................................................. 3

3. The Problem ................................................................................................................. 5

4. Industry Objectives ...................................................................................................... 6

5. Research Objectives .................................................................................................... 6

6. Target Market .............................................................................................................. 10

7. Methodology & Sampling .......................................................................................... 10

8. Timing ......................................................................................................................... 11

9. Contact ........................................................................................................................ 11

ANNEX – Research literature review conducted by the Effective Disclosure Taskforce ....... 12

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1. Request for Proposal The Insurance Council of Australia (the Insurance Council), the peak industry body representing general insurers in Australia, is seeking tenders from researchers to design and conduct research to measure the impact of disclosure on consumer knowledge and decision-making. The research will:

i) Establish a disclosure performance benchmark to measure the degree to which current insurance disclosures are effective in informing and facilitating consumer decision-making; and

ii) Provide insights into consumer pre-purchase behaviours, including around the sources of information, if any, used to make purchasing decisions.

The research is intended to provide the foundation on which individual insurers can trial new forms of disclosure or specific disclosure techniques. The overall aim of the research is to better enable insurers to engage consumers to facilitate informed decision-making. The purpose of this Request for Proposal (RFP) document is to provide the background and outline the objectives of research being commissioned. It is not intended to narrow the scope of supplier proposals to be submitted; innovative proposals on how the research objectives can be met will be well regarded. Suppliers are invited to submit a proposal:

i) outlining suggested research methodologies and how the research objectives outlined in section 5 will be met;

ii) providing an estimate of the costs; and

iii) accompanied with the Curriculum Vitae of the lead researcher/s to be involved. Proposals are not required to cover the entire scope of the research being commissioned; researchers with expertise in specific aspects of the research are invited to submit proposals covering defined components of the research. Supplier proposals are required to be submitted to tenders@insurancecouncil.com.au by 4 May 2016.

2. Background The recent Financial System Inquiry renewed public attention to long standing concerns about the efficacy of disclosure to help consumers make informed decisions when purchasing general insurance. Disclosure documents are perceived by industry, government and consumer groups to be overly complex, lengthy and ineffective in enabling consumers to make informed choices at the point of sale.

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In 2015, the Insurance Council Board established an Effective Disclosure Taskforce (the Taskforce) to assess the effectiveness of disclosure. The Taskforce concluded its report1 in November 2015, with all of its recommendations endorsed by the Insurance Council Board. The Taskforce considered disclosure2 from a broad perspective as consisting of disclosure that is mandated and disclosure that is insurer initiated, including:

Mandated: Product Disclosure Statement (PDS)

Financial Services Guide (FSG)

Key Facts Sheet (KFS)

Certificates of insurance/policy schedules

Policy renewal communications

Insurer-initiated: Insurer website information/resources

Insurer call centres

Call centres/braches operated by agents of insurers (e.g. face-to-face sales made by financial institutions as agents)

Quotes

Advertisements In considering the effectiveness of the disclosure framework, the Taskforce found a notable absence of empirical research around how consumers actually use disclosure documents to inform their decision-making. Research conducted to date is significantly weakened by its reliance on consumers self-reporting, through surveys, knowledge and use of disclosures. In particular, none of the research measures the extent to which, if any, the mandated disclosure requirements have been of benefit to consumers. The final report of the Taskforce includes the findings of a literature review conducted into existing research into the use of disclosures in Australia and internationally3. The research reviewed is listed in Annex 1. To ensure that future reforms have positive impacts, the Taskforce concluded that a comprehensive research program is required to better understand how consumers actually use insurance disclosures and the impact of these disclosures on decision-making at the point of sale. The Taskforce recommended that the Insurance Council should:

establish a disclosure performance benchmark by commissioning and publishing research on current consumer knowledge and understanding of commonly purchased general insurance4;

1 Effective Disclosure Taskforce (November 2015), Too Long; Didn’t Read. Enhancing General Insurance Disclosure, Report to the Insurance Council Board,

http://www.insurancecouncil.com.au/assets/Effective%20Disclosure%20Report.pdf. 2 See pp 11 – 16 of the Taskforce report for a summary of the current disclosure regime applying to general insurance. 3 See pp 17 – 26 of the Taskforce report for a summary of the literature review conducted. 4 Effective Disclosure Taskforce (November 2015), Recommendation 1.

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commission and publish research to determine pre-purchase consumer behaviours and how disclosure can be used to nudge appropriate decision-making5; and

research consumer behaviours in relation to decision-making about the sum insured for home building insurance6.

3. The Problem While there are limitations to existing research into the effectiveness of disclosure, some broad observations from this research can be summarised as follows:

While the existing research provides inconsistent findings around the percentage of consumers that refer to the PDS as an information source, it is likely that many consumers do not read the PDS before they purchase a policy. Consumers appear to be using a range of information, including information not provided by insurers, in making key decisions.

Where the PDS is used as an information resource, consumers are more likely to skim the document rather than read the terms and conditions in detail. There is a perception that PDSs are generally too long and difficult to comprehend.

Consumers may have limited motivation to seek information from insurers proactively because of assumptions that all policies are the same and a disproportionate focus on product price over features.

The PDS appears to be valued as a post-purchase information resource, for when a consumer needs to make a claim.

Disclosure preferences appear to vary significantly from consumer to consumer. It is unlikely that there is a simple information solution that will meet every consumer’s needs.

The Taskforce considered that a major shortcoming in the disclosure regime to date has been its sole focus on information provision without the necessary regard for the consumer’s ability to make use of that information. A challenge for insurers is to ensure that there is a strong element of consumer engagement; disclosure is unlikely to be effective regardless of how useful the information/tools are if consumers are unlikely to use that information. Other challenges to effective disclosure identified by the Taskforce include:

A trust deficit – consumer distrust of the industry exacerbates disengagement;

Length and complexity of disclosure – insurance PDSs are also used as the contract of insurance with the insured, and must set out the full terms and conditions of the policy;

Difficulty in making product comparisons – disclosures differ in the terminology, definitions and presentation used from insurer to insurer;

5 Effective Disclosure Taskforce (November 2015), Recommendation 2. 6 Effective Disclosure Taskforce (November 2015), Recommendation 6.

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Information gaps – gaps have been identified around the ability of consumers to make informed decisions around insurance coverage (including selecting a sum insured and knowledge about individual natural hazard risks)

Impact of behavioural biases – the growing field of behavioural sciences suggests that decision-making may be influenced by biases and short cuts, rather than information disclosed; and

Low levels of financial literacy – low levels of financial literacy will present a barrier to comprehension of information disclosed.

While there are significant challenges to effective disclosure, digital innovation presents opportunities for more targeted disclosure of certain information/prompts at specific stages of the product life-cycle.

4. Industry Objectives The Insurance Council is commissioning foundational research to facilitate better consumer understanding and decision-making in relation to general insurance. The Insurance Council’s objectives are to:

influence and improve industry practices in relation to disclosure;

facilitate an evidence-based approach to the policy debate and reform around mandated disclosure;

enable the development of effective disclosure principles as guidance to the industry; and

provide insights that would facilitate individual insurer testing of new disclosure concepts.

It is intended that the research will be used as a shared industry resource and will inform individual insurer trialling of new and innovative disclosure tools and techniques.

5. Research Objectives There are two key components to the research:

i) Establish a disclosure performance benchmark through an assessment of current consumer knowledge and understanding of commonly purchased general insurance.

ii) Determine pre-purchase consumer behaviours (including the setting of the sum insured for home insurance) and how disclosure can be used to nudge appropriate decision-making.

Disclosure performance benchmark The purpose of establishing a disclosure benchmark is to measure the performance of the current disclosure framework. Such an assessment requires agreement on the objectives of disclosure. The objective of mandated disclosure (under section 1013C of the Corporations Act 2001 (Cth)), as stated in the Explanatory Memorandum, is “to balance the need for the purchaser

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to have sufficient information to make an informed decision and compare products against the concern that they may be provided with more information than they can comprehend”. In its regulatory guidance, ASIC states that the PDS should help consumers compare and make informed choices about financial products7. The Taskforce considered that the primary objective of disclosure should be to help consumers purchase a general insurance policy appropriate to their needs. The Taskforce considered that a major shortcoming in the disclosure regime has been its sole focus on the provision of information, without necessary regard for the consumer’s ability to make use of that information. Hence, the research should not only focus on consumer knowledge, but whether (and the extent to which) consumers can apply that knowledge. This may include exploring the extent to which insurers are effective in prompting consumers to act on information at particular points of the purchase process. The research should explore the various layers of knowledge, including:

general knowledge – about the purpose of insurance, the impact of under/non-insurance and how key product concepts are defined (e.g. sum insured, excess);

product knowledge – about key policy inclusions and exclusions of the specific type of insurance the consumer is considering (pre-purchase) or have purchased (post-purchase);

applied knowledge – about applying general and product knowledge to a consumer’s specific circumstances.

As well as seeking to test consumer comprehension, the research should also study the effect of disclosure on decision-making. A comprehensive performance benchmark cannot be assessed on knowledge alone, given the objective of disclosure is to enable consumers to make appropriate decisions about their insurance arrangements. The research should determine how disclosure is currently being used by consumers, and the impact of its use on decision-making at the point of sale. Key decisions at the point of sale include:

determining coverage (e.g. sum insured);

determining type of cover provided by the policy (e.g. accidental damage/listed events)

determining policy inclusions (specified claim events) and exclusions are appropriate (such as whether the exclusion is relevant to the consumer);

determining excess amount; and

determining the premium price is appropriate. While the role of disclosure at the point of sale is critical, disclosure should also provide sufficient information after a policy has been purchased to enable a consumer to make a claim should an insured event occur.

7 ASIC (September 2010), “Disclosure: Product Disclosure Statements (and other disclosure obligations)”, Regulatory Guide 168.

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Possible areas for key performance indicators (KPIs) to be identified in assessing whether disclosure meets these objectives are set out in Table 1. Table 1

Disclosure objectives Areas for KPIs to be identified

Point of sale

1. Inform about the product - Disclosure is used as an information resource

- Disclosure is accessible (and the likelihood of consumers actually accessing the disclosure)

- Consumers understand key policy exclusions and limits

- Consumers understand key policy inclusions and have general knowledge about the broad scenarios in which a claim can be made

- Consumers understand differences in policies, e.g. comprehensive vs third party/accidental damage vs listed events

2. Assist consumers make appropriate decisions about their insurance needs

- Consumers can use the information to determine whether to purchase an insurance policy

- Consumers can use the information to compare competing products

- Given accessibility and availability of coverage:

o consumers’ decisions results in adequate coverage of key assets and risks

o consumers’ purchase decisions results in coverage for potential large losses

Duration of policy

3. Provide clarity on how claims can be made

- Consumers are aware of where to look for more information when they need to make a claim

- Consumers can form a relatively accurate view on whether a common event would be covered or not

- Consumers are aware that complaints can be made

The selected researchers will be required to develop, in discussion with industry and other stakeholders nominated by the Insurance Council, an agreed set of KPIs as part of the performance assessment framework. This performance assessment framework should also include agreement on how performance will be evaluated (i.e. what success looks like). In this regard, it may be necessary to seek consumer feedback on their expectations of good disclosure; i.e. how do consumers define success?

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It should also be kept in mind that the Insurance Council expects to be able to use the performance assessment framework for further periodic testing over the medium to longer term. Consumer pre-purchase behaviour In establishing a disclosure performance benchmark, it is expected that insights will be gleaned about how consumers go about determining the need for insurance, accessing information (if at all), and making final decisions (including to not purchase insurance). While a performance benchmark will need to explore the totality of the product life-cycle, we are particularly interested in consumer behaviour at the pre-purchase stage. This could include new as well as renewing customers, although the process of obtaining information is likely to be different. Greater depth in understanding about the type of information that is accessed at different points of the decision-making process would enable insurers to consider strategies to better engage with consumers on key issues. Key questions to explore include:

What prompts consumers to consider the need for insurance? Are there sufficient prompts for key risks that could cause significant financial loss if not insured?

What do consumers look for when they have decided that a risk/s should be insured? How are judgements formed about the level of risk that needs to be covered?

What information sources do consumers access? What is the relative weighting given to each source, such as between mandated disclosure and other insurer-initiated disclosure (e.g. information on websites)?

What are consumers’ preferred sources of information, and is this available or accessible?

How do consumers approach product comparison? What factors are relevant in deciding to go for a particular insurer?

How is this information used to make decisions? Are there sufficient prompts from insurers to ensure that key issues are considered at each decision-making point?

At the end of this research, we expect to be able to:

i) Identify the level of consumer knowledge, and particularly gaps in knowledge, about key product concepts and features.

ii) Identify how consumers seek information about insurance in real life situations.

iii) Identify aspects of disclosure that contributes to/hinders consumer understanding of key product concepts and features.

iv) Identify aspects of disclosure that contributes to/hinders consumer decision-making about their insurance arrangements.

v) Identify potential improvements to disclosure to assist decision-making at the point of sale.

vi) Assess the performance of the disclosure regime.

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6. Target Market

The target market for this research is consumers of commonly purchased general insurance products. The products to be subject to the research, and ordered in priority if the scope of research needs to be narrowed, are:

i) Home building insurance

ii) Motor vehicle insurance8 (excluding Compulsory Third Party insurance)

iii) Travel insurance

iv) Home contents insurance

v) Personal sickness and accident insurance

vi) Pet insurance9 The research should incorporate a broad coverage of consumers nationally, in metropolitan and non-metropolitan locations. There should also be a broad coverage of consumers from varying age groups, income distributions and education backgrounds. Consumers from a non-English speaking background should also be selected.

7. Methodology & Sampling The Insurance Council is keen to explore innovative research methods. Given the complexity of the research proposed, it is anticipated that several research methods will need to be conducted to produce complementary findings, such as:

Larger scale surveys to test consumer knowledge and sources of information accessed;

Ethnographic study to observe actual behaviour in the consumer’s normal environment;

Experimental research in a laboratory setting to study specific questions or concepts. Proposals submitted by researchers are not required to address all of these research methods; however, should nominate the research methods that should be used and justify why a particular methodology will provide more insightful findings. The Effective Disclosure Taskforce recommended that research should be based on actual behaviour rather than consumer self-reporting. Self-reporting through surveys is inherently flawed, as respondents are prone to over-confidence, and may generate findings that do not correlate to how consumers actually use disclosure documents. Insurers’ day-to-day interaction with consumers shows a growing shift towards the use of insurer websites, social media, web chat and videos in seeking information. The data

8 Sample should include consumers that would like to nominate younger drivers in their policies. Anecdotal feedback suggests a knowledge gap in relation to how policies apply (including applicable excesses) to young drivers using their parent’s insured vehicle. 9 Pet insurance is not a commonly purchased general insurance product, however, is an extensively growing product.

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generated by these activities should be explored. The Insurance Council will coordinate industry work on identifying metrics that can be utilised for the research. While there is growing use of digital media by consumers, current industry experience is that many consumers are still reliant on verbal information by accessing call centres, particularly to clarify other disclosure information. Many consumers use hard copy disclosure documents for record-keeping purposes, with previous research suggesting that consumers typically keep and file their PDS in case they need to make a claim10. It would also be useful to test the effectiveness of the recently mandated KFS for home and contents insurance policies. In designing the research, consideration needs to be given to the various channels of product distribution. Direct sales channels include online, telephone and branches. Indirect sales channels include insurance brokers, other intermediaries (e.g. financial advisers) and representatives (e.g. travel agents). The research sample should include a range of distribution channels. It would be useful to gain insights into whether the channel of distribution has an impact on consumer understanding and decision-making, and in relation to intermediaries, whether consumers are aware of the different roles and duties of the various parties. The impact of information sources not provided by insurers should also be considered for their impact on consumer behaviour, such as the use of comparison websites.

8. Timing

Item Timing

Proposal published 6 April

Q & A 6 April – 4 May

Proposals submitted 4 May

Research commissioned 18 May

Research design finalised 13 July

Complete fieldwork 9 September

Complete analysis and draft report

30 September

Consultation on draft report 3 October – 28 October

Final report 4 November

9. Contact Denise Hang Senior Policy Advisor (02) 9253 5163 dhang@insurancecouncil.com.au

10 Inside Story (October 2010), Consumer Insurance Product Information Needs, Phase 2 Quantitative Report for

the Insurance Council of Australia.

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ANNEX – Research literature review conducted by the Effective Disclosure

Taskforce

1. Research commissioned by the Insurance Council

UMR Research (November 2008), Insurance Council of Australia Community and

Stakeholder Study, commissioned by the Insurance Council of Australia.

The Allen Consulting Group (June 2009), A better Product Disclosure Statement regime. A

roadmap for improvement, commissioned by the Insurance Council of Australia.

Inside Story (October 2010), Consumer insurance product information needs, commissioned

by the Insurance Council of Australia.

Quantum (June 2014), Understand Insurance Motor Research Report, commissioned by the

Insurance Council of Australia.

Quantum (August, 2014), Understand Home Insurance Research Report, commissioned by

the Insurance Council of Australia.

2. Australian research

Wallis Consulting Group (March 2008), Report of findings of qualitative research into

effective disclosure (stage II), commissioned by the Investment & Financial Services

Association.

O’Shea, P. (March 2010), Simplification of Disclosure Regulation for the Consumer Credit

Code: Empirical Research and Redesign, prepared for the Standing Committee of Officials of

Consumer Affairs.

Susan Bell Research (October 2014), Insuring your home: Consumers’ experiences buying

home insurance, commissioned by the Australian Securities and Investments Commission.

Godwin, A. & Ramsay, I. (October 2014), Financial Products and Short-form Disclosure

Documents – Challenges and Trends, Centre for International Finance and Regulation.

Sweeney Research (December 2014), Australian Financial Attitudes and Behaviour Tracker.

Wave 1: March – August 2014, commissioned by the Australian Securities and Investments

Commission.

3. International research

Weil, D. et al (2006), The Effectiveness of Regulatory Disclosure Policies, Journal of Policy

Analysis and Management, 25(1), pp. 155 – 181.

Financial Services Authority (May 2008), Transparency as a Regulatory Tool, Discussion

Paper 08/3.

Beshears, J. et al (April 2009), How does simplified disclosure affect individuals’ mutual fund

choices?, National Bureau of Economic Research, Working Paper 14859.

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de Meza, D. et al (July 2010), Disclosure, Trust and Persuasion in Insurance Markets, The

Institute for the Study of Labor, Discussion Paper No. 5060.

Hogarth, J. M. & Merry, E. A. (August 2011), Designing Disclosures to Inform Consumer

Financial Decisionmaking: Lessons Learned from Consumer Testing, Federal Reserve

Bulletin, 97(3).

Oxera (September 2012), Review of literature on regulatory transparency. Update on recent

developments, prepared for the Financial Services Authority.

Financial Conduct Authority (April 2013), Applying behavioural economics at the Financial

Conduct Authority, Occasional Paper No. 1.

Financial Conduct Authority (April 2013), Encouraging consumers to claim redress: evidence

from a field trial, Occasional Paper No. 2.

Executive Office of the President National Science and Technology Council (May 2013),

Smart Disclosure and consumer decision making, Report of the Taskforce on Smart

Disclosure.

Oxera (October 2014), Review of literature on product disclosure, prepared for the Financial

Conduct Authority.

Ernst & Young (2014), Reimaging customer relationships, EY Global Insurance Survey 2014.

Financial Conduct Authority (January 2015), Stimulating interest: Reminding savers to act

when rates decrease, Occasional Paper No. 7.

Gillis, T. B. (August 2015), Putting Disclosure to the Test: Toward Better Evidence-based

Policy, Social Science Research Network.