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ASIC Raises Concerns Over Lapses, Claims in Direct Insurance Market

ASIC has expressed concerns over the high cancellation rates of direct life insurance, as well as the lower levels of accepted claims, prompting it to move to end outbound sales calls and pressure selling by insurers.

ASIC Chair, James Shipton

The regulator announced the actions following the release of Report 587 – The Sale of Direct Life Insurance, which found that

  • one in five of all policies taken out were cancelled in the cooling off period
  • one in four of all policies that remained in force beyond the cooling off period were cancelled within 12 months
  • three in five of all policies sold were cancelled within three years.

In the report, ASIC stated the high cancellation rates in the cooling-off period “…may indicate that consumers immediately realised they had made a bad decision or had been pressured into buying a policy they did not need”, which was an area also examined by ASIC.

The regulator also found that only 58 per cent of claims were accepted by the issuers of direct life insurance with 15 per cent of claims rejected and 27 per cent of claims withdrawn, as part of a review which lead to the creation of the report.

The review covered six direct life insurers

  • CommInsure
  • ClearView
  • NobleOak
  • Suncorp
  • TAL
  • OnePath

as well as three distributors selling for life insurers

  • St Andrew’s Life Insurance and its distributor Select AFSL
  • Hannover Life Re and its distributors Greenstone Financial Services and Auto & General Services.

The review examined whether the way direct life insurance products were designed and sold contributed to poor consumer outcomes and included term life, trauma, TPD, income protection, and accidental death insurance.

Commenting on these statistics in the report, ASIC stated, “High lapses and unsuccessful claims indicate that consumers are frequently not able to make informed decisions when buying life insurance direct and are at high risk of buying cover that they do not want or that is not right for them”.

ASIC identified inappropriate sales practices as the cause of the high lapse rates, and after monitoring nearly 550 sales calls found direct insurers

  • did not provide adequate explanations of exclusions for pre-existing medical conditions
  • did not consistently provide clear explanations of the likelyfuture cost of their policy
  • used pressure selling techniques including using deferred payments or the cooling-off period to push asale
  • refusing to send out paperwork unless a consumer committed to buy
  • engaged in ‘downgrading’ to close asale by offering a more limited life insurance policy when a consumer was declined for their original choice of cover
“…cancellation rates and poor claim outcomes show that people are being sold products they don’t want, can’t afford, or don’t perform as they expected”

ASIC also found that consumers who purchased life insurance in response to outbound sales calls were more likely to have been told that they did not need to get a medical examination and did not need to answer any questions about their medical history.

“This suggests that they were offered products with pre-existing condition exclusions—but these consumers were also less likely to be aware of any exclusions for their policy,” ASIC noted in the report, adding “We do not consider that selling a product as complex as life insurance on an outbound basis is conducive to consumers making informed decisions.”

ASIC also stated it was concerned about the value of accidental death insurance and its review found it offered little benefit with the claims ratio for 2015-17 financial years only at 16.1 per cent, prompting the regulator to state it would monitor the sale of the product and intervene if necessary.

Commenting on the release of the report ASIC Chair, James Shipton said, “Life insurance is a long-term product but cancellation rates and poor claim outcomes show that people are being sold products they don’t want, can’t afford, or don’t perform as they expected”.

“Aggressive selling practices and products that don’t pay out when consumers expect undermine trust in the industry. However, selling direct life insurance can be done well and we have seen this where firms have moved away from riskier business models, such as outbound sales and reliance on products with broad exclusions,” Shipton said.

ASIC stated it expected the life insurance industry and direct insurance providers to respond to the issues raised in the report by raising standards in the next version of the Life Insurance Code of Practice including:

  • Provide adequate explanations of key exclusions and future cost
  • Stop pressure selling
  • Establish a clear target market for limited value products and only sell those products where there is genuine consumer need
  • Ensure that automatic cover increases do not exceed what the consume can claim—Firms must ensure that automatic indexation increases do
  • Implement training and quality assurance frameworks that establish standards, monitor sales conduct, and resolve poor consumer outcomes

ASIC also stated, “We expect that firms selling direct life insurance will not wait for the Code to be updated but will review the findings and recommendations in this report and implement changes as required to improve consumer outcomes”.

  • Damian Eales

    Advisers knew these stats years ago, good old ASIC, way behind the times.Now they will claim they have identified a problem and as the knight in Shining Armour they will ride in and fix it.

    • Ken

      Apparently by reading the article they expect the insurance industry to fix it up themselves?
      Really must be too hard to march in there and slap them with a fine or de register them for not complying with the clients best interest
      Oh that’s right it does not apply to them !! Let’s bull#^*<t our way along and we can call it general advice then whatever we tell them does not count !! Dear lord what a mess this has all become all through greed and mercanary actions from the insurers and banks

  • Jeremy Wright

    This pretty much sums up what we have been saying for years.

    Direct product floggers have been responsible for a huge percentage of lapses in the retail Life Insurance arena, as the weakness in enforcement of anything that resembles a Best Interest Duty requirement, has led to a sales culture of lies and deceit, with a, “Do not ask and you do not need to answer” mentality, or even a requirement to provide anything that resembles quality cover.

    Australians are struggling financially and will look at anything to lessen their financial burden, so when a friendly Direct product flogger quotes a cheaper price and forgets or does not bother to provide a Like for Like comparison, Australians will seek the cheaper alternative, not realising the Direct product is at best, inferior, though more likely, just rubbish that satisfies little of a clients needs.

    If ASIC is serious, then it needs to properly regulate and enforce this insidious snake oil Industry and bring it to heel.

    • emkay

      Most of the quotes I have seen are near double advised cover. Problem is the consumer sees TV ads ad nauseum and think it must be good it’s on TV.

  • Adam p

    ODwyer and her FSC buddies orchestrated the LIF con so the Banks and Insurance Companies could make Advisers life harder and flog more of thus rubbish Direct Life Insurance.
    ODwyer and the FSC directors should be held personally liable for all the unpaid Direct Life claims.
    ODywer, you have been a wrecking ball to the Advice industry, thankfully you are gone but your long list of biased and over complication of Super, LIF, FASEA, Independent Advice rules will long live to be a blight on the Advice industry.
    ODwyer the terrible.

  • Astounded

    Similar statistics about the direct insurers have already been previously reported in past editions of Risk Info and ASIC have finally uncovered what advisers have known for years. Mr Trowbridge should be ashamed at trying to have the direct insurers excluded from LIF!
    That leads to the next point – weren’t the direct carriers already bound by best interests duty? Specialist Risk Advisers have been unfairly treated these past few years when generally, they did the right thing by the many Australians they have helped. And yet ASIC expect the direct insurers to implement changes to improve consumer outcomes. These direct carriers need more than a little slap on the wrist. Why don’t ASIC apply the same rules to these direct insurers?

  • Mervin C Reed

    It is good to see James Shipton as the new ASIC Chair actually getting to some of the real issues rather than perceptions. The direct insurance business has been a rip off for years and now ASIC knows this.

    Its a bit like ASIC and Managed Investments coming on to the Market. ASIC now has the power to stop the duds but does not do this very much.

    It would be interesting if James Shipton made the time and effort to sit down with 3 or 4 of us older Advisers and Planners and had a discussion. This is not an AFA/FPA group but just a bunch of older advisers and planners who have been in this Industry for more than 25 years.

    We have been trying for years to get ASIC to put in place an advisory council made up of Advisers. If they had one then they would get to some of this stuff a lot earlier and cut out a lot of disasters, before they hurt thousands of people.

    Still we await the Chairman’s interest in having an interesting older group provide some input. Accept our views, don’t accept our views – its entirely up to him.

    • Warren B

      Well said Mervin, totally agree.

  • GregF

    Simple solution – ban the sale of policies that are not underwritten at time of application – or ban those that are underwritten at time of claim – one or the other. Will eliminate the majority of denied claims, as they will not be accepted in the first place. Anything out of the box with direct (loadings, exclusions etc) would usually be declined. Secondly, it will also reverse the high lapse rates as an application will actually involve a bit of effort from the applicant, rather than a 20 minute phone call involving no medical history.
    And while they are at it, how about they ban solicitors advertising to help members of a super fund ‘apply’ for a TPD claim. The only time a solicitor should be involved is in the case of a dispute, and even then only as a last resort. If a person meets a TPD definition of a particular super fund, that fund should provide every resource to the member be able to lodge that claim. For the industry super funds (and the regulators) to sit back and watch these greedy bastards take a third or higher of someone’s TPD payment is criminal in my opinion. Far worse than any of the ‘horror’ stories from the Royal Commission (sorry, did I say commission)

  • Alan

    For goodness sake, this is old old news. I have been retired for 3 years and the lapse rates and shonky direct sales were happening for years before that.
    Talk about being completely asleep at the wheel, it is just shameful that ASIC hasn’t done something about it.
    But you know why, they were more worried about the little fish, individual advisers like me who they thought were ripping people off when it was always the big players.
    They recalled a file of mine at random while I was overseas on holiday hoping to catch me out but it turned out to be perfectly compliant. Shame on them.
    But that’s the way this industry always was, so glad to be out of it.

  • Lester Beling

    The rules were unclear and the likes of direct markets became sexy with the invention of websites that priced insurance with STARS on the best products, a bit like the Heart Foundation and the ticks of approval. I have said for over 35 years that the system is broken, but no ones HOME, forget the FCA / FOS etc, they are just part of the inventory. Sadly most insurance sales people became sexy as well with being called a Financial Planner – Win – Win??

  • Bob

    I agree with the notion that forcing all products to be underwritten at time of sale would solve most of these issues. You can only ever have one reputation and the damage direct sales firms do to our industry is significant. They are in this space without maintaining the same standards as the planners must and they do most of their selling via the media who appear (for the sake of protecting a key advertising revenue source) to have given them a significantly lower negative exposure in both news and current affairs. The usual “dog at a bone” approach is noticeably absent following the interviews at the RC.