Insurers should have a greater obligation to investigate a client’s health history when they are switching policies, one licensee has argued.
Responding to the Senate’s Scrutiny of Financial Advice inquiry, Centrepoint Alliance, the parent company of Professional Investments Services and Associated Advisory Practices, has highlighted the imbalance that exists with regard to the conduct obligations of participants in the financial services industry.
According to Centrepoint, while financial advisers are exposed to a very high level of prescription over their conduct requirements, the same level of detail does not exist for other participants, such as responsible entities, company directors and insurers. The licensee believes that in order to strengthen protections for financial services consumers, the conduct obligations of other participants need to be bolstered.
In the case of insurance providers, Centrepoint notes that the only obligations which apply to insurers when considering an application for insurance are to inform an applicant of their duty of disclosure and to act in utmost good faith. The licensee argues that these should not form the only obligations on an insurer who enters into a contract with a consumer.
…insurers should bear a greater burden of responsibility when an insured party who is advised fails to disclose relevant information about their circumstances
‘It may be that when a switch is involved, especially one from a long standing policy, that could trigger an obligation on the insurer to make further inquiries – or at least to outline when insurers need to take greater care,’ Centrepoint submitted.
In making this point, Centrepoint cited the recent case of Commonwealth Financial Planning v Couper, in which the financial adviser’s conduct was the sole focus of the legal case, and not the insurer’s responsibility in accepting the policy.
Centrepoint acknowledged that while the case shone a light on how some financial advisers fail to take adequate care when recommending that a client switch their insurance policy, it also highlighted the importance of an applicant’s duty of disclosure without placing a similar level of importance on the insurer to conduct due diligence into the risks of insuring the person.
‘The judgment of Couper outlined that when Mr Stevens (the applicant) submitted his insurance application he misrepresented the heights at which he worked as a dogman as well as his alcohol consumption. Mr Stevens’ application was accepted by the insurer on the integrity of his disclosures without any corroboration (what is known in the industry as approval without underwriting). His misrepresentation was uncovered by the insurer after Mr Stevens submitted a later claim under the policy and formed the basis by which his insurance claim was declined. However, in addition to declining the claim the insurer also avoided Mr Stevens’ insurance contract in its entirety due to Mr Stevens’ misrepresentation,’ the submission stated.
‘The end result of the unfortunate situation was that the licensee of the financial adviser was held predominantly, if not solely, responsible for Mr Stevens’ loss of his existing insurance policy. This is even though Mr Stevens had misrepresented his health history, and there was little examination of how this result may have turned out differently had the insurer underwritten the policy – or at least conducted due diligence – before accepting Mr Stevens’ application.’
Centrepoint argued that, had the insurer conducted a thorough search of Mr Stevens’ medical history prior to accepting his application, it is likely the insurer would have declined to provide cover.
…everyone involved in an insurance switch needs to accept responsibility for their involvement…
‘It should be noted that insurers have systems in place with Medicare (and private health insurance providers) to enable them to request an insured’s medical information promptly and relatively inexpensively. Advisers or their licensees do not have these same systems available to do the same. As the information is available to an insurer but not to the adviser or licensee (or at least less readily available due to lack of established practices and search costs), it may be that insurers should bear a greater burden of responsibility when an insured party who is advised fails to disclose relevant information about their circumstances. This is because if a core reason that the insured switched policies is due to an impression of equivalent comparative cover, it should be incumbent upon the party who can confirm equivalence (ie: the insurer) to confirm equivalence before accepting the application.
‘Mr Stevens’ case highlights that everyone involved in an insurance switch needs to accept responsibility for their involvement in one policy being replaced with another. The case also highlighted that it is not always in everyone’s interests for insurers to avoid conducting due diligence prior to approving an insurance application because it can be an integral component in ensuring that an insured person does not move away from an insurance policy that affords them better protection and cover. It also highlights how over-reliance by an insurer on the insured’s duty of disclosure can lead to shifting the responsibility for switching policies to advisers and licensees, when the insurer’s conduct may also have contributed to the switch taking place.’
Centrepoint was not the only stakeholder to draw the Senate Committee’s attention to the discrepancies between the regulatory responsibilities placed on different participants in the financial services industry.
There is a vital need to enhance the responsibility of product providers
The Financial Planning Association called for greater regulatory oversight of product providers and research houses: ‘There is a vital need to enhance the responsibility of product providers and fund managers in developing products for consumers, and ensuring compliance with responsible entity requirements. There is also a need to ensure product providers and their appointed third-party gatekeepers are held accountable for any wrong-doing resulting in consumer loss.’
The Association of Financial Advisers (AFA) argued it was essential that failures be appropriately attributed: ‘Many of the significant consumer loss cases have involved product failure and frequently the resultant losses suffered are incorrectly attributed to financial advice and/or financial advisers. It is important to note that product failure should not be confused with advice failure.’
For more on the AFA’s submission to the Scrutiny of Financial Advice inquiry, see: Disclosure, SoAs Next Advice Battleground?
Submissions to the inquiry have now closed, and the Committee is expected to provide its report in July.
Not every application can be underwritten, or needs to be. The insured has the most knowledge about their situation and it is their responsibility to be honest, it doesn’t sound like he was. I can’t see why the adviser or insurer should be accountable for someone else’s honesty, seems unfair.
I don’t think insurers will oppose a drastic lowering of non-medical limits and getting medical reports or tests more often. But how happy will advisers and clients be when applications take so much longer to complete or don’t complete because people don’t turn up for the tests?
Care should be taken in stating matters which are not quite accurate. Insurers do not normally access Medicare reports at the time of underwriting but sometimes do so at the time of claim. The process to access Medicare reports is slow and the information usually available is time limited. to start asking for Medicare reports on all New Business cases would have the potential to bring gthe whole access system to a grinding halt. To say such cases are not underwritten is incorrect since the underwriter will underwrite the disclosures made by the applicant and decide if futher medical or other reports are required. Where insurers should perhaps take more care, is when they decide to depart from their normal underwriting procedures for New Business simply because a case is a switched one.
ASIC know, or to use their own logic, ought to know, that advisers are just one part of the problem. Insurers and their BDMs are driven by sales targets, and within a good insurer there should be a constant tension between BDMs and underwriters, just as there should be a tension between the claims department and the “gatekeepers ” – the underwriters.
But underwriters particularly come under pressure when an insurer has a bank distribution arm and the pressure is on the bank adviser to get his points for the week, regardless of the needs of the client. Remember this client did not get his loan, so the focus turned to getting “something ” from the client
I too am disturbed by this case and the judges findings. Why wasn’t this client penalized in some way because of his non-disclosure. It goes to show courts will always believe a clients statements over those of the advisers actions, regardless of the facts. Its not the first case where a judge has gone “native “and it won’t be the last.
ASIC are apparently operating under the delusion that all problems on the risk side originate with the proposition that risk advisers are paid commission, and up-front commission at that.. ASIC appears to ignore the fact that when an adviser changes dealer, pressure is applied to re-write business. Even more so if the adviser joins a dealer owned by an insurer.
Then there is the vexed question of take-over terms ie minimal underwriting for business already on the books with other insurers. ASIC should insist that such business written with minimal underwriting be paid on level commission only-that would stop the dancing, or at least slow it up. (BDMs would not be happy) And while ASIC is on the job, properly supervise re-insurers who back-up the take over terms policy and even pay commission to the insurer above certain levels of cover
I once asked a re-insurer exec why re-insurers supported take-over-terms, given its built-in risk of being caught with a bad book. He argued it was commercial reality, and then complained that his company had been forced to “back up ” 4 different insurers as a large case was shopped by an accountant adviser every year for three years past initial policy issue. He said that because of takeover terms, he, the re-insurer, only got the opportunity to fully underwrite the case once – at initial policy issue. He was mighty relieved when the case went of to yet another insurer for whom he had no re-insurance treaty- its called “pass the parcel ”
Everyone was happy – the accountant adviser had full pockets ( and probably still charged a review fee ) the first four insurers had been in the game but had not been caught with the risk, and the clients premiums were static
If ASIC was really serious about getting rid of “bad apples ” it should address ALL components of the problem, not just those at the bottom of the food chain.
Pigs might fly !
BillB, one would hope that the Life Insurance and Advice Working Group will have the fortitude to address your very points.
I also trust that you put in your submission by today 🙂 as this is our chance at ensuring they hear the valid points you have made.
I know I’ve put these very points in mine. Can’t do any more.
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