The issue with insurance fine print

How do you choose the right insurance policy for your needs?

If you take the time to read the product disclosure statement, you might think you are protecting yourself from making a bad decision, but a new study suggests you may be wasting your time.

Monash University examined the effectiveness of home contents product disclosure statements (PDS) and key fact sheets (KFS) in assisting consumers to select the policy that best suits their needs.

The (In)effective Disclosure study involved 406 participants across Australia who were provided a PDS and/or a KFS and were invited to identify a home contents insurance policy as ‘good’, ‘okay’ and/or ‘bad’.

The study found that:

  • up to 42 per cent of participants chose the worst offer, despite being given the time and opportunity to review the disclosure information
  • when able to choose from three policies, 35 per cent chose the worse policy and only 46 per cent found and selected the best policy
  • there was no simple and consistent effect of disclosure – while participants were more likely to forego purchasing an insurance policy when they only had access to the PDS, the results did not find a clear pattern of understanding when people were provided with more or less disclosure information
  • purchasing decisions were not affected by the way in which the consumer viewed the disclosure (i.e. computer or smart phone)

“In these circumstances the question needs to be asked whether disclosure is an effective tool at all to aid consumers in choosing an insurance policy,” said study author Professor Harmen Oppewal.

“Mandated disclosure may serve other purposes, including informing the purchase choices of highly literate and motivated consumers, guiding consumers through the claims process or ensuring they have a clear guide as to the limits of their policy when there is a dispute, but the findings indicate that even in ideal circumstances, disclosure does not ensure that consumers make better decisions nor does it help their chances of obtaining suitable insurance cover.”

Co-author Professor Justin Malbon said there was considerable room for improvement in the disclosure documents.

“When you look at the fact that sectors like the shipping industry have simplified their own insurances down to a choice between three standard term policies for cargo insurance – and these people live and breathe insurance risks – it is hard to understand why we expect everyday consumers to figure it all out,” Professor Malbon said.

“It may be time for a serious rethink on disclosure practices.

“We should consider requiring insurers to offer a standard set of gold, silver and bronze cover across the industry. That way the market can compete on price, and not confound consumers about what is covered and not covered when they make claims under their policy.

“The government has standardised the terminology for flood cover, it should go further and standardise all terms such as for robbery, fire, earthquakes and so on.”

Karen Cox from the Financial Rights Legal Centre said the research showed that disclosure statements were too confusing for consumers.

“Our experience with speaking to consumers on our Insurance Law Service phone line is that people are regularly unaware of what insurance they have purchased, confused about what is covered, and unable to understand their documents when they do in fact read them,” Ms Cox said.

“The Government and the insurance sector need to take a close look at the results of this study.

“If the policy goal is for people to be purchasing insurance that best suits their needs, this research confirms that further efforts to improve disclosure are misplaced.

“Instead, policy makers should look to minimum standards for policies, or star rating systems that people actually understand.”

Do you find choosing insurance cover confusing? Do you think insurance terminology should be standardised to make it easier to understand?

Written by Ben

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