Insurers Look to Government for Legacy Product Solution

Life insurers have supported calls for the consolidation of legacy products indicating it would reduce the costs of back-end administration and provide more contemporary products for those holding insurance policies.

Such moves, however, would require a legislative instrument to enable consolidation and the insurers questioned how such an instrument would operate.

The comments were made at a recent Parliamentary Joint Committee hearing into the life insurance industry with the heads of TAL and AMP Life claiming they would be supportive of such moves if they were taken by the Federal Government, which had so far been slow to act on the issue.

Addressing the PJC, TAL Chief Executive and Managing Director, Brett Clark said the consolidation of legacy products was likely to reduce the complexity and customer confusion around older products and also reduce costs to consumers.

“…the legacy issue has continued without resolution. It is an area in which, frankly, the industry could do with some legislative help…”

“There’s certainly a cost on industry on managing legacy products and legacy systems. If there’s a framework that can be put in place that makes that easier, that lowers costs, then ultimately that feeds into the economics of the business and helps in customer premium affordability and customer outcomes,” Clark said.

AMP Group Executive, Insurance, Megan Beer said the individual cost per policy was not significant but it did impact the ability of the insurer to examine a claim and make a timely determination.

“We are increasingly talking to our customers more and more over the phone. One of the things we would love to be able to do is to effectively work with a customer over the phone and say, ‘Yes, your claim will be paid, and we’ll process the money as fast as we can,” Beer said.

The insurers stated the reason for their lack of movement to date in tackling legacy products was because it would be labour intensive and could only happen on a wider basis with Government assistance.

Clark said any changes to legacy products were difficult because “…once a customer buys a product they’re effectively entitled to that for their entire life, as long as they keep paying the premiums” and any widespread changes still required individual customer consent on every product and every policy.

“That can be done, but, obviously, it’s extremely onerous and difficult. If there’s an opportunity to create some sort of legislative framework that would allow us to do that on a bulk basis…that, for me, sounds like something definitely worthy of consideration,” Clark said.

AMP Chief Executive, Craig Meller added that many older life insurance products carried investment components and consolidating legacy products would trigger tax consequences, and, additionally, an insurer would have to prove that every client would be better off under a new policy.

“There would need to be a legislative agreement to allow that transition to happen without a tax consequence and, therefore, there is no way that we could advise a client in an old whole-of-life policy to move, even if it was appropriate, because of the tax issues,” Meller said.

“Therefore, the legacy issue has continued without resolution. It is an area in which, frankly, the industry could do with some legislative help to solve,” Meller added,

In the past, APRA has challenged the view that a legislative instrument was the only way for life insurers to deal with legacy products and told the PJC in its own submission that insurers had not adequately invested in systems and processes that administer these policies (see: Legacy Products Left Behind by Insurers).

In that submission, APRA claimed life insurers were not collecting data on legacy claims which in turn left no reliable data that could be used by Government to create a working solution.