The PJC has questioned the validity of underwriting in direct insurance and asked if direct insurance contracts should be compared with those offered to consumers who purchase life insurance through financial advisers.
An analysis of the PJC hearings by Riskinfo found the Committee raised the matter of direct insurance underwriting at each of three hearings conducted in late February and early March and expressed concerns over the uncertainty created with underwriting at claim time.
In an exchange with advice representatives from Synchron and Bombora during the Melbourne hearing PJC member Western Australia MP, Matt Keogh, in seeking further information, stated, “The problem is not that the insurer is waiting to underwrite their insurance—they are on risk for that. The problem is that the insurer is using that as an excuse to not pay when they are legally obliged to pay.”
This was echoed in the Sydney hearing by PJC Chair and Western Australia MP, Steve Irons who questioned whether underwriting was only an assessment of the ability to pay a premium.
At the same hearing, Keogh asked if consumers were warned about the lack of detailed underwriting at application and whether life insurers should be paying claims but were using underwriting at claim time to avoid doing so.
He also queried whether the ability of a direct policy to exclude cover without underwriting at application was a problem with the terms of the insurance contracts in use rather than with the process of underwriting.
Fellow PJC member and NSW MP Jason Falinski raised the issue of disclosure of pre-existing conditions highlighting that this is not always mentioned to consumers purchasing insurance.
“I have serious concerns with direct insurance, because it is not underwritten when you take the policy out”
“What they say is that the onus is on you to declare any pre-existing conditions, without running you through what those pre-existing conditions may be,” Falinski stated during an exchange with representatives from the AFA, who had also raised concerns around direct insurance underwriting.
“The point is more that you ring up to buy those products, and you think at the end of it, ‘Well, I answered a couple of questions, so now I’m insured.’ No-one says to you in that process, ‘You’re not insured until you’ve declared everything, and you have this duty.’ Is that right?,” Falinski asked AFA President, Marc Bineham and then Chief Executive, Brad Fox.
“Do you think there is an asymmetric information problem here and the consumer needs to be clearly made aware that they have not actually entered into an insurance contract—or a binding contract, at least—until they have gone through that next step?,” Falinksi added.
NSW Senator, John Williams gave the clearest expression of concern by a Committee member stating during the Canberra hearing: “I have serious concerns with direct insurance, because it is not underwritten when you take the policy out” when questioning a former financial adviser who had appeared as a witness.
Williams also stated a few moments later: “Is this a really serious problem in the life insurance industry? I say that because people put their head on the pillow at night saying, ‘I’m right. I’m covered. My family is protected,’ and then, of course, the family are left in a terrible state.”
A full examination of the PJC’s key questions and areas of interest can be found in this story – Inside the Mind of the PJC – featured in March edition of the Riskinfo eMagazine.
Matt Keogh’s claim about direct insurers not paying claims when they are legally obliged to is an interesting one. Direct insurers have every legal right not to pay if the client had pre-existing conditions which are excluded in the PDS, and the client signed a document saying they have read the PDS and accepted the terms.
However could direct insurance be regarded as an “unconscionable contract”?
Purchasing life & disability insurance is complicated. Much moreso than car or home insurance. Clients don’t understand the meaning or ramifications of the fine print in insurance contracts. Yet direct insurance is promoted as “easy” and “simple”. Clients signing up for life or disability insurance without the aid of professional advice are at a distinct disadvantage. Direct insurers deliberately exploit this disadvantage.
Does this then fall within the legal definition of an unconscionable contract?
It would be hard to argue that the Insurer had any dominant power over the insured.
Perhaps Fraud in the factum – causing one to enter into a transaction without accurately realising the risk or obligations incurred.
I will argue that majority of direct insurance policy holders, do not have access to financial advice.
And a large proportion of those, do not have the literacy capacity to understand these insurance contracts.
I think the point being is that direct insurers have very little risk in underwriting at claim time. If they find a pre-existing condition they can avoid the claim and just refund premiums and they are free to take on huge amounts of customers this way in the hope that they simple cancel the policy in the future because direct insurers also do not provide premium projections at the time of the sale.
All risk insurance sales regardless of advised or direct should have two level playing fields as a matter of law. One should be full underwriting at the time of application and premium projections should be given to the customer at the time of the sale so that there are no nasty surprises.
The FSC would fight this because they want to sell more direct junk insurance and get rid of advisers. It would also mean more upfront work, possibly less business but more claims would be paid.
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