Direct Insurance to be Reviewed as ASIC Finds Claims Issues

The Australian Securities and Investments Commission (ASIC) will embark on a major review of the direct life insurance sector after it found policies sold through that channel had higher claims denial rates compared to policies sold through advisers and group insurance policies.

ASIC will also seek to remove an exemption within the financial services conduct provisions of the Corporations Law that currently means insurance claims handling are not subject to the law. The regulator will also recommend to Government that significant penalties for misconduct in this area are included in the current review of ASIC’s penalty powers.

Review Findings

The moves follow the completion of ASIC’s life insurance claims review in which it stated that it found no evidence of cross-industry misconduct and that approximately 90% of claims were paid in the first instance.

In Report 498: Life insurance claims: An industry review, ASIC stated that despite these outcomes, it still had concerns around higher claims denial rates and claims handling procedures associated with certain types of policies, particularly that rates of declined claims were highest for TPD cover, with an average declined claim rate of 16%, and trauma cover with an average declined claim rate of 14%.

The regulator also found variation in declined claims among insurers, with TPD denial rates being as high as 37% and trauma (up to 25%) for some types of cover.

ASIC also stated there were higher claims denial rates in relation to insurance policies sold directly to consumers without financial advice and that declined claim rates for direct insurance were at 12% while those for retail insurance were 7% and group life was at 8%.

Claims handling and denials also made up 72% of all life insurance disputes, according to ASIC which stated that most disputes related to the evidence the policyholder was required to provide to the insurer to assess their claim or the timeframes taken by an insurer to assess a claim.

“…this is the first time this type of data has been collected. Many insurers found it challenging to provide the data…”

Data Issues

In the report, ASIC said while it had gathered claims data from across the sector there was a need for better quality, more consistent and more transparent data about insurance claims.

“As far as we are aware, this is the first time this type of data has been collected. Many insurers found it challenging to provide the data requested by us in the review. Life insurers will have to continue to invest in their systems to be able to provide robust and granular data. This data will then be more useful in identifying trends and issues within a product, an insurer or the industry as a whole,” ASIC stated.

ASIC Action

ASIC also called for the life insurance to make a number of key recommendation including;

  • Immediately review the currency and appropriateness of policy definitions
  • Examine and ensure advertising and representations about the cover align with the definitions and the policy, and report any discrepancies to us
  • Ensure that claims timeframes are consistent with industry standards and expected claims timeframes are adequately communicated to policyholders
  • Ensure that incentives and performance measurements for claims-handling staff and management do not conflict with the obligation to assess each claim on its merit

ASIC will also work with the Australian Prudential and Regulatory Authority (APRA) to establish a new public reporting requirement for life insurance industry claims data and claims outcomes.

The two regulators will also work with insurers and other stakeholders during 2017 to establish a consistent public reporting regime for claims data and claims outcomes, including claims handling timeframes and dispute levels across all policy types

ASIC will also recommend to Government the strengthening of the legal framework covering claims handling and the consumer dispute resolution framework for claims handling should be strengthened.

APRA Action

Separately, APRA has written to life insurers and superannuation trustees outlining its expectations for improvements to the oversight and handling of insurance claims following its own request for data in this area.

APRA stated this will include;

  • Reviewing insurance benefit design and definitions with a stronger focus on delivering insurance benefits appropriate for members at an appropriate level of cost
  • Better sharing of information between insurers and trustees, including claims data and trends
  • Clarifying the approach to claims in the claims philosophy of both the insurer and trustee to improve claimants’ understanding of how claims will be managed

Ministerial Response

The Minister for Revenue and Financial Services, Kelly O’Dwyer said the Turnbull Government welcomed the release of the ASIC review and has asked Treasury to proceed with the recommendation to remove the exemption for ‘insurance claims handling’ from the definition of a ‘financial service’ in the Corporations Act. Treasury has also been asked to undertake a targeted consultation on the merits of removing the exemption.

The Minister also said the introduction of penalties for misconduct in relation to claims practices would be considered as part of the pending review of ASIC’s enforcement powers.

The review by ASIC covered 15 insurers covering more than 90% of the market and examined three years of data from 1 January 2013 to 31 December 2015 in the areas of term life cover, total and permanent disablement (TPD), trauma, and income protection.

The ASIC Report can be accessed here.

The APRA Letter can be accessed here.

 

  • boris

    Wow have they only just realised this. I would say the quoted 12% decline rate by direct insurance is a lot lower than the real story.

  • Rob De Martini

    Wow, we advisers could have told ASIC what they and insurers spent many dollars and man hours to discover. Retail insurers pay claims. No mention of CommInsure in all of this, because, they would also probably find that THEY pay claims too. But curiously, Kelly O’Dwyer has slipped in a little curious issue. What is the purpose of removing claims handling from the definition of a financial service. Maybe because lawyers (the no win no fee variety) asked for this? Please explain!

  • Dean

    Interesting that this comes out on the same day LIF is tabled in parliament! Lower claims acceptance on direct policies is one of the financial underpinnings of LIF. The main reason FSC wants to introduce LIF is to remove access to affordable advice so that more people buy direct insurance that doesn’t require underwriting and doesn’t pay claims.

    • ken Ryan

      I like the bit about re introducing the legislation with Level Commissions if this does not proceed ?? Surely that is an outrageous statement based on frustration and I would think illegal. Almost sounds like “Third line forcing” Government style
      Give us a break