In brief
This is a significant week for the life insurance industry, with the re-introduction by the Federal Government of a Bill to reform commissions payable on life insurance policies, the release by ASIC of findings of its review of life insurance claims, and the launch yesterday by the Financial Services Council of its Life Insurance Code Of Practice. Partner Michelle Levy, Managing Associate Simun Soljo, and Lawyer Nicholas Borger report.
Life insurance remuneration Bill
The Federal Government today re-introduced into Parliament the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016. The Bill had previously been introduced to implement the life insurance remuneration reforms that came out of the Trowbridge review of the life sector and the Financial System Inquiry, but lapsed before the last federal election.
The Bill will amend the Corporations Act 2001 (Cth) to make life risk policies subject to the conflicted remuneration regime with an exemption from the ban for policies that have a flat commission structure, and for policies with upfront and ongoing commissions which are within specified caps and which are subject to a clawback requirement.
The commission caps and clawback will be specified in a legislative instrument to be issued by ASIC. Up front commissions will phase down over three years to a maximum of 60 per cent, while ongoing commissions will be capped at 20 per cent of the annual premium. The 'clawback' requirement will require 100 per cent of the upfront commission in the first year and 60 per cent of the upfront commission in the second year to be repayable should a policy lapse.
If passed, the amendments will commence on 1 January 2018.
ASIC review
ASIC today released Report 498 Life insurance claims: Industry review, outlining the findings of its review of the life insurance sector's handling of claims over the period 1 January 2013 to 31 December 2015. The review was commenced in April 2016 in response to media reports on a number of concerns about life insurance claims handling practices of CommInsure.
The review covered data provided by 15 insurers, estimated to make up more than 90 per cent of the life insurance market, and assessed the four most common life insurance products:
- life cover;
- total and permanent disablement (TPD);
- trauma; and
- income protection.
The review assessed claims outcomes and trends by distribution channels covering group, individual retail policies sold by advisers and direct policies issued without advice being given to the insured.
The review also included an analysis of claims-related disputes, reports of misconduct and a targeted review of PDSs and policy documents provided by insurers.
ASIC's findings
ASIC did not find evidence of systemic misconduct across the life insurance industry in relation to claims payments or procedures. The review found that, overall, where a decision has been made, 90 per cent of claims are paid in the first instance.
But ASIC's work is not over. It will increase surveillance of areas of concern identified in the review (including those insurers with the highest decline rates and highest proportional dispute numbers), and will also conduct a major review of distribution of direct life policies. This is in parallel with its ongoing review of CommInsure and the claims reviews being undertaken by life insurers themselves at ASIC's request.
In the report, ASIC was concerned that in a small number of cases claims were declined by insurers on 'technical' grounds which are not in the 'spirit' or 'intent' of the policy. The review also found that ex gratia payments were made to policyholders in some cases, but those payments were made inconsistently across the sector. ASIC was concerned about this uncertainty. ASIC did not make any specific recommendations in this regard, but it seems to be suggesting that some industry-wide approach based on 'fairness' might be developed to claims which 'any reasonable consumer or community' would expect should be paid even though the claim may not be covered under the 'fine print'. This suggests that ASIC may expect insurers not to rely on their legal rights in some circumstances to deny claims.
The review found that the overall declined claim rate across the industry was 9 per cent. However, ASIC expressed concern that there was often a wide variation across different products. For example, the review found that declined claims were highest for TPD (16 per cent average declined claim rate) and trauma (14 per cent average declined claim rate) and that declined claims were higher for direct policies than group or retail policies. Declined claim rates also varied widely between insurers, with TPD denial rates varying from 37 per cent to 7 per cent.
Further actions by ASIC
Coming out of the review, ASIC has said it will focus on the following to improve claims outcomes:
Follow up ASIC surveillances and reviews
ASIC intends to target areas of concern from the review with targeted surveillance of particular insurers with the highest decline rates and highest proportional dispute numbers. ASIC intends to focus in particular on TPD claims procedures and timeframes. ASIC will also conduct a major review of distribution of direct policies.
Strengthening industry standards and practice
ASIC has recommended that the insurance sector undertake the following:
- review the currency and appropriateness of policy definitions;
- examine and ensure advertising and representations about coverage align with the definitions and the policy, and report discrepancies to ASIC;
- ensure that timeframes are consistent with industry standards and expected timeframes effectively communicated to policyholders; and
- ensure that incentives and performance measures for claims handling staff and management do not conflict with the obligation to assess each claim on its merits.
ASIC's recommendations are intended to supplement the recently released Life Insurance Code of Practice. ASIC broadly supports the Code but has made a number of recommendations as to how the Code may be improved, including that superannuation trustees agree to adopt the minimum standards in the Code in so far as they apply to claims handling by trustees of claims lodged under group policies.
Public reporting of life insurance claims
ASIC intends to establish, with APRA, a consistent public reporting regime for claims data and claims outcomes across all policy types to address the 'clear need for better quality, more transparent and more consistent data on life insurance claims'.
Strengthening the regulatory framework for claims handling
'Handling insurance claims' is specifically excluded from the definition of financial service in the Corporations Act (under section 766A(2)(b) of the Corporations Act and regulation 7.1.33(1)-(2) of the Corporations Regulations 2001 (Cth)). ASIC is recommending that the Government remove this exemption so that insurers will be subject to the broad standards of conduct that apply to other parts of their businesses (eg sale of their policies) and to extend ASIC's powers under the Corporations Act to cover claims handling, including conduct such as unnecessary or extensive delays in handling claims, surveillance practices by investigators and incentives for claims handling and management staff.
ASIC is also recommending that more significant penalties for misconduct in relation to insurance claims handling are included in the current review of ASIC’s penalty powers.
Other life insurance reviews
ASIC is currently undertaking a separate investigation into the activities of CommInsure and has not released any findings from that review. ASIC has also required life insurers to undertake review of their claims handling systems, and these reviews are ongoing, but the indications provided to ASIC are that insurers have not identified significant concerns with their claims decisions.
Code of Practice
The Financial Services Council (FSC) yesterday released the Life Insurance Code of Practice. The Code responds to some of the issues ASIC has raised in its review, and the ASIC report cross-refers to various parts of the Code which address some of the concerns raised by ASIC.
The FSC says that the 'Code sets out the life insurance industry's key commitments and obligations to customers on standards of practice, disclosure and principles of conduct for their life insurance services, such as being open, fair and honest', and 'sets out timeframes for insurers to respond to claims, complaints and requests for information from customers'.
The Code will monitored by a committee (the Life Code Compliance Committee) which will be able to receive complaints about non-compliance and ultimately sanction life insurers if they do not correct breaches of the Code.
The Code will be mandatory for life insurers who are FSC members from 1 July 2017. It will not apply to superannuation trustees or to financial advisers.