Introduction to Claims Handling and Settling as a Financial Service
Claims handling and settling services are classified as a financial service under the Corporations Act 2001 (Cth). This classification, established in 2021, changed the previous regulatory landscape where these services were excluded from the definition of ‘financial service’. Consequently, entities that provide claims handling and settling services are required to hold an Australian Financial Services (AFS) licence.
This guide aims to provide clarity on when an AFSL with a claims handling authorisation is necessary. It will help identify who must hold an AFSL to provide claims handling and settling services, ensuring that providers in the financial services industry understand their legal obligations and comply with the regulations implemented in recent years as a response to the Hayne Royal Commission.
What Constitutes “Claims Handling and Settling Services”?
Key Activities Defined as Claims Handling and Settling
Under Chapter 7 of the Corporations Act 2001, certain activities related to insurance products are defined as insurance claims handling and settling services, which are categorized as a financial service. To conduct these activities, an AFSL is required for those operating in this space. The key activities classified as claims handling and settling services include:
Making recommendations or stating opinions on claims: This refers to providing advice in response to inquiries about a claim or potential claim. It also includes sharing opinions that may influence decisions about initiating, maintaining, or continuing a claim.
Assisting with claim preparation and pursuit: This entails representing a claimant during the claims process and assisting them with the preparation and submission of their claim.
Assessing insurer liability: This involves evaluating whether an insurer holds liability under a particular insurance product.
Decision-making on claims: This includes determining whether to accept or reject all or part of an insurance claim.
Quantifying and settling claims: This encompasses tasks such as calculating the insurer’s liability, making settlement offers, and fulfilling the insurer’s obligations under a claim.
Services Provided to Insured Persons and Third-Party Beneficiaries
The scope of claims handling and settling services extends beyond the insured person listed in the policy to include third-party beneficiaries. This ensures that the legal and ethical obligations to provide financial services efficiently, honestly, and fairly also apply to these third parties. Examples of such third-party beneficiaries include:
Individuals insured under group policies: These individuals may be covered by offerings such as complimentary travel insurance provided through a credit card or life insurance obtained via a superannuation fund.
Persons entitled to claim under life insurance contracts: This includes individuals who are eligible to make claims under a life insurance contract, even if they are not the life insured under the policy.
Why is an AFSL Required for Claims Handling and Settling?
Removal of the “Financial Service” Exclusion
Previously, insurance claims handling and settling services were excluded from being classified as a financial service under the Corporations Act 2001. This exemption meant that entities providing these services were not obligated to possess an AFSL. However, the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry resulted in the removal of this exclusion.
Commissioner Hayne argued that there was no valid justification for continuing to exclude claims handling and settling from the definition of a financial service. He highlighted that the ability to make a successful insurance claim is integral to the value of an insurance product for consumers. Based on this logic, it was deemed necessary to regulate claims handling and settling as a financial service.
The AFSL Licensing Regime and Claims Handling Authorisation
Following these regulatory changes, the Australian Financial Services (AFS) licensing regime was extended to include claims handling and settling services. Effective from 1 January 2022, entities providing claims handling and settling as part of their business must comply with the new requirements.
To operate in this space, businesses within specific prescribed categories must:
- Hold an AFSL with a dedicated ‘claims handling authorisation,’ or
- Be authorised to provide claims handling and settling services by an entity that already holds the required AFSL authorisation.
This shift ensures that businesses involved in claims handling and settling are now held to the rigorous standards of the AFS licensing regime, enhancing transparency and accountability in the provision of financial services.
Who Specifically Needs an AFSL for Claims Handling and Settling?
The types of entities needing an AFSL with a claims handling authorisation are as follows:
Insurers:
Insurers, as issuers of insurance products, must obtain an AFSL with claims handling authorisation. Since claims handling is fundamental to their policies, authorisation ensures they meet regulatory standards for handling claims.Insurance Fulfilment Providers:
These providers deliver goods or services to meet an insurer’s liability to the insured person. They must hold an AFSL in situations where the fulfilment provider is authorised by the insurer to reject all or part of a claim. However, if they lack the authority to reject claims, they generally fall under an exemption and do not require an AFSL.Insurance Claims Managers:
Claims managers, who act on behalf of one or more insurers to handle claims as a business, must hold an AFSL. These entities often operate as third-party administrators and are responsible for processing and settling claims for insurers.Claimant Intermediaries:
Claimant intermediaries, which represent insured persons in pursuing claims under general insurance products for a benefit—whether monetary or non-monetary—must obtain an AFSL. Their role includes assisting insured individuals in navigating the complexities of the claims process with insurers.Insurance Brokers:
Insurance brokers who arrange insurance contracts for customers and also provide claims handling and settling services on behalf of insurers are required to hold an AFSL. Their dual role of brokering contracts and managing claims makes licensing necessary.Financial Advisers:
Financial advisers must hold an AFSL if they provide financial product advice to insured persons (including third-party beneficiaries) and also handle claims settling on behalf of insurers. This requirement applies because their role extends beyond advisory capacities to include acting as agents for insurers in processing claims.
This framework ensures that each entity involved in claims handling operates in compliance with strict regulatory standards, promoting accountability and fairness across the process.
Exemptions from the AFSL Requirement for Claims Handling
General Exemptions – Roles Not Typically Requiring an AFSL
Certain roles involved in the insurance claims process are generally exempt from the requirement to hold an Australian Financial Services Licence (AFSL) with a claims handling authorisation. These general exemptions cover roles whose activities do not constitute providing a financial service under claims handling regulations. Examples include:
Loss assessors or loss adjusters:
These professionals assess the extent of loss and damage to help insurers determine liability. However, since they lack the authority to decide whether to accept or reject a claim, they are typically exempt from needing an AFSL.Specialists providing expert opinions:
Engineers, geologists, and forensic accountants who provide technical advice to aid insurers in assessing claims are generally exempt. Their role is limited to offering expert evaluations, not making or influencing claim decisions.Investigators:
These individuals or firms gather facts and evidence regarding a claim’s circumstances. Since they only provide information to the insurer and do not make claim outcome decisions, they typically do not require an AFSL.Fulfilment providers (without claim rejection authority):
Vendors such as builders or smash repairers engaged to deliver goods or services to fulfill an insurer’s obligations are generally exempt. However, if a fulfilment provider is authorised to reject all or part of a claim, they would likely need an AFSL.Independent medical examiners:
Medical professionals conducting evaluations and providing medical assessments to insurers during the claims process are exempt. Their role is confined to medical judgments, not claim determination.Debt collection agents:
Agents recovering debts related to insurance policies are exempt if they do not participate in claims handling or settling activities.Superannuation trustees:
Trustees of registrable superannuation entities (RSEs) are generally exempt from requiring an AFSL with claims handling authorisation. Their claims handling activities are covered under their existing superannuation trustee service authorisation.
Specific Exemptions – Services Explicitly Excluded from AFSL Requirements
In addition to general exemptions, certain services are explicitly excluded from the AFSL requirement for claims handling and settling. These specific exemptions are detailed in regulations to avoid duplicating regulatory oversight or to accommodate professional service models. They include:
Professional legal services:
Legal practitioners providing insurance-related claims handling and settling services as part of their professional legal practice are exempt. This avoids overlap with the existing legal profession regulatory framework.Services to wholesale clients:
Claims handling and settling services provided to wholesale clients under arrangements between the AFSL holder and the insurer are exempt. This reflects the different regulatory standards often applicable to wholesale arrangements.Services under specific arrangements with certain insurers prescribed by regulation:
Claims handling services furnished under prescribed arrangements, such as those involving Lloyd’s underwriters or unauthorised foreign insurers, are explicitly exempt. These exemptions are limited to arrangements that meet specific regulatory requirements outlined in legislation.Exclusions for certain claimant intermediaries as per section 911A(2) of the Corporations Act 2001:
Certain claimant intermediaries are excluded from requiring an AFSL, even if they meet the general definition of providing claims handling services. For example:- Financial advisers are not classified as claimant intermediaries if they hold an AFSL that authorises them to provide financial product advice.
- Insurance brokers are similarly exempt when appropriately licensed to arrange contracts of insurance.
This ensures that professionals already regulated under existing AFSL authorisations are not subjected to duplicative regulation for overlapping activities.
These tailored exemptions, whether general or specific, ensure that individuals and businesses operating in distinct, limited roles within the broader claims process are not unnecessarily burdened by licensing requirements that do not align with the nature of their work.
Speak with an AFSL Lawyer Today
Request a Consultation to Get Started.
Key Ongoing Obligations for AFSL Holders Providing Claims Handling Services
Providing Services Efficiently, Honestly, and Fairly
AFS licensees with claims handling authorisation are required to handle and settle insurance claims in a manner that is both effective and ethical. To fulfill this obligation, licensees must emphasise the following key areas:
Timeliness:
Act without undue delay. This includes:- Promptly acknowledging claims.
- Regularly following up on outstanding information.
- Minimising delays to reduce negative impacts on claimants.
Industry codes of practice often prescribe timeframe obligations that can serve as useful benchmarks.
Minimum Intrusion and Burden:
Assess claims as unobtrusively and efficiently as possible. Specifically:- Requests for information should be strictly relevant to the claim.
- Surveillance and other intrusive assessments should be reserved for exceptional circumstances, such as when there is reasonable suspicion of fraud.
Transparency and Fairness:
Ensure claimants are well-informed throughout the process by:- Clearly explaining what to expect during the claims process.
- Outlining what information is required from claimants.
- Providing regular updates on the status of the claim.
Licensees should also give claimants the opportunity to respond to any adverse findings, inform them of their right to lodge complaints, and provide access to dispute resolution mechanisms.
Support for Vulnerable Claimants:
Tailor services for consumers experiencing vulnerability or financial hardship. This may include:- Providing extra assistance and flexibility with information requests and deadlines.
- Training representatives to identify and respond to vulnerable situations with empathy and understanding.
Adhering to these principles ensures compliance while fostering trust and confidence in the financial services industry.
Maintaining Adequate Dispute Resolution and Compensation Arrangements
To protect consumers and provide avenues for redress, AFS licensees must implement robust dispute resolution and compensation mechanisms. These obligations are upheld through several critical measures:
Internal Dispute Resolution (IDR) Procedures:
Licensees must:- Establish IDR procedures that meet prescribed standards.
- Ensure these procedures operate independently and impartially, separate from claims handling and other operational functions.
Additionally, these procedures must comply with ASIC requirements and provide a transparent path for retail clients to escalate complaints.
Membership of AFCA:
Licensees are required to maintain membership with the Australian Financial Complaints Authority (AFCA), which offers external dispute resolution. AFCA provides a recourse for consumers dissatisfied with the outcomes of a licensee’s IDR process.Compensation Arrangements:
Adequate compensation arrangements must be in place for retail clients who suffer loss due to breaches of license obligations by the licensee or its representatives. Generally, Professional Indemnity (PI) insurance is used to meet this requirement, ensuring access to funds when compensation is necessary.
By implementing these arrangements, licensees reinforce the fairness and effectiveness of the claims handling process, ensuring consumer trust in the financial services framework.
Managing Conflicts of Interest and Maintaining Organisational Competence
AFS licensees must actively manage conflicts of interest and ensure they maintain organisational competence to uphold the integrity of claims handling services. These requirements include the following key components:
Managing Conflicts of Interest:
Licensees must:- Identify and mitigate conflicts of interest, such as those arising from remuneration structures or commercial arrangements.
- Implement policies that ensure these conflicts do not compromise fairness in the claims assessment process. For example, staff incentives should be designed to prioritise equitable claim assessments over other motives.
Maintaining Organisational Competence:
Competence should be ensured by:- Employing responsible managers with the required knowledge, experience, and qualifications.
- Establishing systems that monitor and maintain the ongoing professional competence of the organisation.
Training of Representatives:
Representatives must be adequately trained to perform claims handling and settling duties properly. Effective training programs should cover:- Legal obligations.
- Relevant industry codes.
- Internal claims processes of the licensee.
Regular competency reviews and ongoing training help maintain high service standards and ensure compliance.
By addressing conflicts of interest and prioritising continual professional development, licensees can enhance the quality and integrity of claims handling services.
Conclusion: Ensuring Compliance and Seeking Guidance
Adhering to AFSL requirements for claims handling and settling services has been mandatory since 1 January 2022, unless exemptions under the Corporations Act 2001 apply. These services, now recognised as financial services, must be delivered efficiently, honestly, and fairly to meet industry standards.
Given the complexities of these obligations, expert guidance is invaluable. Contact AFSL House today to book a consultation and benefit from their expertise in AFSL applications and compliance, ensuring your business operates lawfully and upholds the highest standards in claims handling.
