The death of poor life insurance practices

The life insurance industry has become the centre of a number of investigations which are painful for participants but will lead to changes which will modernise it.

Commission

The first investigation was ASIC’s Review of Retail Life Insurance in late 2014. This was highly critical of the quality of financial advice provided to retail clients and the misalignment of interests caused by the remuneration structure of upfront commissions. The FSI report later that year also suggested introducing a level commission structure.

This led to the FSC commissioning the Trowbridge Review of Retail Life Insurance Advice. The government modified the recommendations from this report slightly and is now introducing limits on upfront and renewal commissions. The changes will reduce churning of policies and (despite the protests of a few recalcitrant advisers) they will provide better value for consumers. Many expect that commissions will be banned in future but it was politically impossible to do this in one step.

Claims handling

Following a dramatic ABC TV program, there has been poor media publicity centred on Comminsure’s claims practices. A few case studies based on one of its ex-employee’s complaints have escalated to concerns about claims handling practices across the industry. Consequently, ASIC was instructed by government to review these and has now released its report.

The ASIC inquiry did not find evidence of industry-wide misconduct though it found several areas of concern, particularly around claims-handling for disability claims. The main issue appears to be one of inconsistency – ASIC uncovered difference in areas of ‘fairness’ with some claims being declined on technical terms whereas other insurers paid out more ‘ex-gratia’ claims.

As expected, the rate of declined claims was higher for retail products sold direct (and not through a financial adviser). This is in part due to these products having pre-existing condition exclusions, effectively underwritten at claim time. We expect that products sold Direct will be scrutinised further with ASIC promising a major review of this segment.

The overall level of declined claims for TPD and trauma was 16% and 14% respectively, which is too high. ASIC are now considering a new public reporting requirement for insurer rates of decline, perhaps similar to that in the UK.

Interestingly, despite the media focus on Retail out-of-date medical definitions, this was the cause of a small proportion of disputes. Insurers can be trapped here as the products cannot be legally upgraded if it forces additional cost on any policyholder. So, we have a large number of legacy products with varying definitions.

It takes far too long to process superannuation claims, partly due to the emergence of plaintiff lawyers who often add cost and delays. There is little evidence to show that the involvement of these lawyers leads to a higher level of accepted claims. Anyway, members should use the SCT if they have a dispute with a fund – it costs nothing and they will get a fair hearing. We note that ASIC did not specifically review the role of these legal groups.

Worsening profitability

The last decade has seen radical change in the group insurance market with superannuation funds introducing benefits replicating the retail segment. However, the enhanced benefits were introduced in a price war and led to losses for the group insurers and their reinsurance colleagues. While death rates continue to decline, disability and trauma claims have risen in the retail segment and disability claims have jumped in group superannuation.

APRA has been concerned for some time at the sustainability of group insurance rates and there have been substantial premium increases across many funds. This has been easier to manage as group policies are not guaranteed renewable like retail life policies. The marketplace is now more stable and the latest profit margins released by APRA show that the Group Insurance segment is in recovery.

More reviews

The FSC has issued a Code of Conduct which is binding on its life insurance members. It does not include group superannuation but ASFA, AIST, ASFA and the FSC will jointly develop a further code for insurance claims within superannuation. The code is voluntary and won’t be enforceable by ASIC but it is a start.

Meanwhile, the reviews are not finished. ASIC will follow up on several issues it identified, including high rates of declined claims and lengthy claims-processing times. Further, the Senate is now holding an inquiry into the Life Insurance Industry.

What next?

The outcome of this activity will be more industry changes. Claims handling will be improved, driven by better use of modern technology.

In time, this should lead to a profitable industry providing better value for consumers, an environment which should please APRA and ASIC alike.