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.
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were accepted by the issuers of direct life insurance with 15 per cent of claims rejected and 27 per cent of claims withdrawn, as part of a review which lead to the creation of the report.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
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”.