By Rodney Lester
The latest ASIC report into claims handling practices in the life insurance industry has found no evidence of “systemic misconduct” in handling claims, but identified several areas of “significant shortcomings”. The review also found that claims were rejected at a higher rate when the insurance was sold directly to consumers without financial advice*.
It’s been a big week in the world of life insurance with the release of an Australian Securities and Investments Commission (ASIC) report on claims handling practices in the life insurance industry and the Financial Services Council (FSC) releasing a code outlining how their members – including registered life insurers, behave in their direct dealings with consumers.
These developments, which follow hot on the heels of last week’s appearance in front of the parliamentary committee by the bank CEO’s, are part of the ongoing responses taken by both government and industry in tackling problems that gained headlines after industry malpractices with regards to handling claims’ were revealed, in particular in relation to the Comminsure scandal earlier this year.
The FSC code outlines minimum standards for the life insurance industry and covers issues including policy design, sales practices, cancellation rights, claims management and complaints and disputes. Although the code has been critisised for only covering around 30% of the industry, being vague and full of loopholes, it was welcomed by the Minister for Revenue and Financial Services, Kelly O’Dwyer, who said it was a “significant achievement…but importantly only marks the beginning of an ongoing process, as the code is further refined and developed”. One area in particular where the code needs to go further is addressing response times as part of the claims process. A loved one passing can be one of the most stressful times in a person’s life and this should not be compounded by lax response times for insurance claims.
The government has also just tabled a bill that will cap upfront and ongoing commissions for life insurance sales at 60% for the first year and 20% payable from year 2 onwards, with a two-year claw-back provision to discourage product churn. Till now, financial advisers selling this “product” may receive an upfront commission of up to 120% of the premium for the life insurance policy. Ostensibly, this high rate of commission was to “encourage” the take up of life insurance policies and to reimburse the financial adviser for all of the costs associated with the work required in that first year to get the policy into force. Life insurance traditionally is one area where Australians are chronically under-insured. But the conflict it has presented, along with continued instances of malpractice in the industry has proven too much for the government to allow to continue as it faces continued pressure for a Royal Commission into the finance industry.
It is important to note that lowering commissions for policy sellers such as advisers will benefit the insurers bottom line. What we must see, in line with reduced commission, is an alignment of benefits to the consumer, such as lower premiums and better service in terms of claims handling, an investment in product and rehabilitation innovation and enhancements to policy maintenance and service. This in turn will make it easier for advisers to recommend good insurers and hopefully increase volume of life insurance sales in the industry.
In investigating claims and dispute processes, ASIC looked at 15 different insurers, covering around 90% of the market. ASIC said that while it found no evidence of systemic misconduct and that 90% of claims were paid in the first instance, it did identify a number of areas of concern. Across the industry ASIC found claims were declined for 4% of life insurance cases; 7% of income protection; 14% of trauma and 16% of TPD (Total and Permanent Disability) cases. More worryingly, ASIC identified 3 insurers that had significantly higher denial rates of TPD claims with one in particular denying 37% of all TPD claims. The investigation also found that a massive conflict of interest was apparent with some insurance companies linking staff bonuses with claim denial rates.
Significantly, ASIC found that there were higher rates of rejected claims when insurance was sold directly to consumers, without financial advice. Insurance is marketed and sold directly to consumers by insurance providers and online sites. Joel Edelman, a senior adviser at The Principal Edge alluded to this fact earlier in the year in one of our “Ask an Adviser” articles relating to the Comminsure scandal, when he said:
“The situation with CommInsure also provides a timely reminder as to one of the benefits of working with an advisor. As advisors, we regularly consult with the insurance providers to obtain a deeper understanding of how they are advancing definitions and their decision process when upgrading policies. At every client review we consider the appropriateness of the insurer, their definitions and how the insurer’s claims management process is administered and resourced.”
At this stage ASIC has refused to name these companies, or the insurers with higher denial rates saying the data was “not entirely reliable”. However, it has said it will work with another government regulator, the Australian Prudential Regulatory Authority (APRA), to establish a new public reporting framework for life insurance claims and outcomes.
For the life insurance sector, further scrutiny and public reporting of claim denial rates means that the industry is now on notice. Those companies that have problems with their processes will soon be outed and a better outcome for consumers is the hopeful result.
*From Appendix 2, page 107, ASIC Report 498 Life insurance claims: An industry review
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Comments13
"As an old Lifie, I was proud to know the company I acted as an agent for would often state, "We are in the business of making claims. We calculate the risks to us and charge premiums accordingly. We take the statement "Utmost Good Faith" very seriously." Today, most of the life insurers are owned by banks and the goal is to generate profits. Millions of policies were issued via employer sponsored and Industry funds without underwriting and now the chickens are coming home to roost. Profits are being threatened and the owners of the insurers have to act. They are adjusting policies; restricting benefits and adding clauses that reduce risk to the insurer. In effect, a lot of the insurance written via employer sponsored and Industry super funds is no longer worth the paper its written on. Utmost Good Faith - a dead concept me thinks!"
Rick 13:23 on 17 Oct 16
"It seems to me that if an insurer is selling a policy with minimal or zero up front underwriting, that the only outcome the insured can expect is that come point of claim they will be put through the wringer to get their expects benefit. I do work as an adviser, and I work for one of big four banks. (Not the CBA). It seems to me via many years of experiance that people don't value personal insurance and see it as a waste. It is up to us demonstrate that while you are put through a bit of pain up front, and will pay more for your protection, should point f claim come about you will get what you are paying for. This also goes for those discounted mass marketed and even some of the cheaper group policies that are out there."
RJT 11:54 on 16 Oct 16
"It seems unfair that one insurer could deny up to 37% of all TPD claims and that we as consumers could not be told which company that was!! Why are we protecting insurers from evidence that is "not entirely reliable", when insurance companies would rely on "not entirely reliable" evidence in their decision to deny a claim??!!!"
Sandra 09:56 on 16 Oct 16
"Given the significant growth of life insurance sold online with little or no health evidence (short form applications) there is a greater chance for non disclosure from the life insured and incorrect completion of applications by the phone staff who may have little experience and education. A recipe for a significant increase in knock backs at claim time. These policies are sold quickly with no requirements to understand the clients needs or circumstances and the policies are issued with the underwriting to occur at claim time. In my opinion we have not even started to see the numbers of claims being refused due to non disclosure/adviser error. The professional adviser has a business to protect and a reputation to uphold for many years in the business. We do complete full fact finders and SOAs that are full of compliance. Get the message out, you need advice!"
Nick Tunbridge 17:28 on 14 Oct 16
"How has everyone seemed to have forgotten the reasons that upfront commissions reached present levels. They were increased from an average 90% when brokers and CAR docs were the go to the present levels primarily because the dealers now have to ensure advisers are suitable educated, provide PD days, provide and Pay for PI cover, report to ASIC, appoint auditors, audit the advisers, etc. Commissions were increased as the life companies responsibilities were reduced and the dealers increased and subsequent costs escalated."
Rick Dougherty 16:05 on 14 Oct 16
"This seems like a biased article. Full of stats & espousing the virtue of cutting remuneration to advisers. However the one part of the article that references advisers proves that consumers are better off with advice because there is a significant lower rejection rate when advisers are involved. However ASIC or the article writer gives no stats on this aspect!"
Michael Chalmers 15:28 on 14 Oct 16
"I agree with Ingrid - Adviser will know through their experiences with different insurers who are reputable and who are not. How about an anonymous (or not) site where advisers can talk of their experiences with insurance companies. We get the potential hard word from sites like this - what about a site like - Insurance Company Ratings...!!??"
Ben 15:15 on 14 Oct 16
"Consumers and Financial advisers should benefit from ASIC’s findings by naming the companies in question. By not revealing the names consumers will continue to be ‘caught’ in inferior, non-paying policies. We all have an obligation to protect consumers and the reputation of financial planners. "
Ingrid 15:05 on 14 Oct 16
"Gold Star to Max Clay - Just wanted to see who was awake on this Friday afternoon!!"
Adviser Ratings 14:59 on 14 Oct 16
"I wonder why there never seems to be any scrutiny of industry funds with the inferior definitions and poor claims processes. Can't wait to see the premium savings being passed onto customers with the reduced commissions that are paid. Funny how stamp duty costs that add up to 10% of the premium are never mentioned in these detailed reports."
Frank 14:39 on 14 Oct 16
"without advisers clients dont have the proper care and empathy they require for the long haul, setting an insurance program from start and helping them with claims for example 20 years on , this takes advisers from the beginning to assisting clients continually , we are rewarded for long term care of these people. reducing commission is only creating bigger problems of under insurance for all Australians and merely helping the bottom line of insurance companies , we feel that you need to help advisers and promote the long term benefit of dealing with real people , after all people still need people!"
Frank Starvaggi 14:33 on 14 Oct 16
"In the 5th paragraph of the article you talk about TPD (Temporary and Permanent Disability) ? Don't you mean Total & Permanent Disability or (TPD) !!!!! "
Max Clay 14:32 on 14 Oct 16
"The FSC is the Bank lobby group - they are looking after the interests of BIG BANKS - not consumers. They supported the Gov reducing commissions. The LIF Bill will do nothing more than advance the greed of the Banks, will destroy competition from the non-bank sector and contains not one proven benefit for consumers."
Adviser 14:30 on 14 Oct 16