The Association of Financial Advisers (AFA) has called for a raft of changes to take place within the operations and culture of life insurers claiming the same level of change which has been required of advisers needs to take place among product providers to regain consumer confidence in the sector.
The AFA made the call in its submission to the Parliamentary Joint Committee (PJC) Inquiry into the Life Insurance Industry in which it recommended that underwriting take place on all life insurance products at time of application, a freeze on premiums during the first two years of a policy and the banning of inappropriate insurer sales practices.
The Association’s submission, which suggests 26 changes across six key areas, also called for Parliamentary scrutiny of the Life Insurance Code of Practice produced by the Financial Services Council (FSC), claiming there were a number of deficiencies in the Code, including a lack of commitment to advisers and advised insurance.
Insurer Obligations
In calling for underwriting to take place at time of application the AFA said the practice of underwriting at claim time should be banned across the board as it meant that consumers were paying premiums without being covered under the terms of their policy.
The AFA was dismissive of the desire of insurers to have flexible insurance arrangements for consumers stating that “…continuing to provide cover without underwriting is unacceptable given the consequences to consumers who may not be aware that they are not actually covered until they claim”.
“…continuing to provide cover without underwriting is unacceptable…to consumers who may not be aware that they are not actually covered until they claim”
In focussing on life insurers, the AFA also called for a ban on any insurer sales practice that was likely to interfere with the quality of financial advice and that insurers respected the obligations of financial advisers to act only in the best interests of their client.
As such it called for the end of any incentives that may conflict with an adviser’s obligations including arrangements to use in-house product and to reward threshold based volumes from advisers or licensees as well as influencing the restriction of Approved Product Lists (APLs) through reduced pricing for advisers.
The AFA also called for life insurers to not increase premiums during the first two years of policy commencement, except for CPI increases in the sum insured.
It argued this was required during the clawback period to protect consumers from misleading sales practices designed to increase sales while hiding the actual cost of the policy which appears later through premium increases after the policy is put in place.
“The two-year clawback shifts an unfair proportion of the responsibility for lapsed policies onto the financial adviser in its current form. Restricting premium increases during the clawback period will bring greater fairness to this blunt instrument,” the submission stated.
The FSC Life Insurance Code of Practice
While the AFA had made comments directly to the FSC during the development of the Life Insurance Code of Practice it ramped up its focus on the Code stating it “…falls short of what is needed to adequately reform the culture within life insurers, deliver better practices and protect the interests of Australian families relying on their life insurance to protect them”.
The AFA was also critical of gaps in the Code including that not all life insurance policies will be protected by the Code with extra carve outs for legacy products still in use and claims subject to legal proceedings as well as improvements to medical definitions and the requirement to underwrite policies.
“…should the insurer cohort not improve protections voluntarily, they too should be subject to a statutory Code like advisers will be”
“These selective omissions and carve outs are not in the interest of consumers and requires scrutiny from Parliament to find out why they are necessary.
We recommend the Committee review the FSC’s Code to consider whether the voluntary measures set out in the Code are a sufficient commitment from insurers to reform their practices and culture,” the AFA stated.
The Association also called for the Government to take over the Code and make it a statutory measure if insufficient action has been taken by the time of its first review in 2019 with ASIC to review whether the Code has addressed distribution practices towards advisers and building confidence with consumers.
“A statutory Code is going to be part of the standards that financial advisers are required to comply with in future under professional standards reforms and should the insurer cohort not improve protections voluntarily, they too should be subject to a statutory Code like advisers will be,” the submission stated.
Reforms Beyond Advice
In making the broad range of recommendations the AFA stated that ASIC Report 498 indicated there was scope to improve the claims practices and policies of life insurers and “…that life insurance reform needs to be approached holistically in order to avoid the unintended consequences of limiting the scope of reforms to only adviser related issues”.
“The reforms already implemented to the retail advised life insurance channel are substantial…They do not require further scrutiny from this Committee.”
“There are significant weaknesses that exist in the direct and group life insurance channels and whilst we believe those channels have a vital role to play, they need improvement to bring greater community benefit. Collectively, all three channels of life insurance need to reclaim their social license through improved conduct and standards.”
The AFA also called on the PJC not to revisit issues covered by previous reviews and inquiries into life insurance related financial advice and to let any measures take affect before being re-examined further.
“The AFA believes that as the measures that resulted from these inquiries have had bi-partisan support and were the result of extensive consultation with all stakeholders…those measures need time to show their value before they are reviewed again by this or another Parliamentary Committee,” the submission stated.
“The reforms already implemented to the retail advised life insurance channel are substantial and they will drive innovations and improvements to the benefit of consumers over time. They do not require further scrutiny from this Committee. The direct and group channels however need to embrace the same opportunities to improve and bringing greater attention to this is warranted.”
It is all very well for the AFA to call on the PJC, NOT to revisit issues covered by
previous reviews and to let any measures take affect before being re-examined
further, due to the bi-partisan support and extensive consultation with all stakeholders and therefore the measures need time to show their value.
This all sounds logical to the uninformed and the AFA comment that these reforms will
drive innovations and improvements to the benefit of consumers over time, is a hollow promise, considering that there is nothing in the LIF reforms to force Life Insurers to give any improvements to the consumer.
What has been accurately displayed, has been scandal after scandal from some Big Banks / Life Companies whose behaviours and actions does not lead us to believe they
will do anything to improve outcomes for consumers.
The AFA does not want to dredge up “OLD” information as a lot of water has passed under the bridge and the Life companies “definitely” would prefer to see the reforms
passed as is, as it is not only a ‘get out of jail’ card, it also opens up the Bank vault of Australians savings and invites the Life Companies to help themselves to gouge all Australians and screw small Business advisers to the wall with no mandated code or regulation, “as it stands”, to protect anyone but the Life Companies.
The FSC Life Insurance Code of Conduct is a biased document and the PJC should be
allowed to finalise its investigation to expose the inequalities in the Life Insurance Industry.
Then a comprehensive set of rules and regulations can be enacted, based on truth and fairness to all parties, rather then the current bill, which has been based on
misinformation and a blatant misunderstanding of the real issues.
This is an excellent initiative by the AFA. Would the FPA care to join?
“continuing to provide cover without underwriting is unacceptable given the consequences to consumers who may not be aware that they are not actually covered until they claim” – nothing is more corrosive to people buying insurance than this, especially as they may in a substantial number of cases be able to get cover that will pay elsewhere. It is a reprehensible practice as the possibility of not being paid is neither obvious nor very clearly explained nor is even an option given at purchase time to opt into underwriting.
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