In brief - Take action now by reviewing insurance policies and updating Codes of Practice
The recent report of the Productivity Commission into Competition in the Australian Financial System excluded life insurance. However, there has been a litany of inquiries into different aspects of the financial services system, in particular those that touch upon life insurance, leading to LIF and FOFA.
Among other things, these have resulted in the conflict remuneration regime in the Corporations Act 2001 (Cth)
being applied to life insurance from 1 January 2018. The industry and ASIC are still measuring and monitoring the impact of these reforms.
Parliamentary Joint Committee on Corporations and Financial Services recommendations will cause substantial changes
The Committee's recommendations are fairly remarkable and, if effected, will cause widespread change in the industry, from product design to distribution, remuneration and claims. The application of the Banking Executive Accountability Regime (BEAR) would also be a significant change.
It is also fair to observe that the changes would cause further commodification in the industry, with a marked standardisation of covers. Life insurers would likely find a reduced area for product differentiation, leading to increased price competition and the need to streamline processes to ensure operating profit. This would likely lead to further mergers and offshore acquisition to bring about the economies of scale that a commoditised industry would need to survive.
The Committee expressed dissatisfaction with the exemption of life insurance contracts from the general consumer protection regime for non-financial services and notes that section 15 of the Insurance Contracts Act is "no longer credible".
Of note is that it considers that general insurance should also be brought into the general consumer protection regime in Australia. It seems that the safe harbour for life and general insurers created by section 15 of the Insurance Contracts Act has a limited life.
It is clear that the recommendations if implemented will have a significant impact upon the life insurance industry. The effect of the changes (in the context of the current inquiries and reviews) are sufficiently grave as to merit high level executive monitoring immediately.
Recommendations by the committee include new powers for ASIC including undertaking enforcement action
- Section 15 of the Insurance Contracts Act should be amended. This will bring all life insurance industry sectors, including direct, retail and group and all life insurance products (eg life, trauma, disability, income protection, funeral insurance) into the consumer protection fold
- The exemptions from the product design, distribution and intervention power should be reconsidered. This may or may not result in inconsistencies with ASIC's other powers and the legislative framework in respect of remuneration and best interest duties
- ASIC should engage with life insurers to begin removing unfair terms from life insurance contracts as soon as possible
- The BEAR should apply to life insurers and should be extended to include consumer related conduct matters and enable ASIC powers to take action on these matters (the Committee recognises that the current BEAR as it relates to ADIs will need "bedding down")
- The penalty amounts under ASIC-administered legislation should be set at three times the benefits obtained for every party to the transaction, including advisers, licensees and insurers
- ASIC should conduct random audits of life insurance advisers and statistics and registers should be updated and published
- Voluntary codes of practice are problematic. The government should implement the co-regulatory approach in the ASIC Enforcement Review Taskforce Position Paper without exemptions for any part of the life insurance industry
- ASIC should be given the power to undertake enforcement action (halting misconduct, remedies and sanctions) in relation to systemic or systematic breaches of codes of practice in the financial services sector, including in the life insurance sector
- The Financial Services Council (FSC) and Insurance in Superannuation Working Group (ISWG) codes of practice should be combined if possible
- ASIC should conduct a systematic review and risk assessment of all payments and benefits flowing between participants in each sector of the life insurance industry
- The remuneration arrangements in the industry (in particular shelf space fees) were heavily criticised
- ASIC and APRA should immediately undertake an audit of all superannuation trustees in respect of commissions and other fees, and whether trustees are complying with their SIS Act covenants under sections 52(2)(c) and 52(7)(c)
- The life insurance industry should have, as a matter of urgency, a balance of affiliated and non-affiliated products on their Approved Product Lists (APLs), and if affiliated products are recommended, the affiliation should be disclosed, and the customer should be given a comparison with non-affiliated products
- The industry should transition to open APLs
- ASIC and the ACCC should jointly investigate whether the past use of APLs in the life insurance industry breaches any anti-competitive laws
Superannuation trustees who have access to information on accounts that are duplicated, have low balance risks or lack contributions, should be required to contact members annually to inform them, in summary form and in plain English, of:
- the status of their accounts, and
- whether their insurance policy is still providing coverage, and
- report to members in a timely manner when trigger points such as low balance risk are reached, and
- report to the ATO which can then use the income taxation assessment process to update taxpayers
The government should consider legislating to protect the retirement savings of members with low account balances and members who do not receive any value from default insurance.
Life insurers and superannuation funds should provide regular updates to policyholders of the level, type, extent and cost of life insurance cover that they have using a standard form disclosure format, enabling them to compare with other funds or, in the case of superannuation, make them aware that they have access to life insurance.
Recommendation for an industry uniform authorisation form for access to medical information
The FSC and the Royal Australian College of General Practitioners (RACGP) should implement agreed protocols for requesting and providing medical information including an industry uniform authorisation form for access to medical information at application and claim time which explains to consumers/policyholders in clear and simple language how information will be stored and used by third parties.
If the FSC and the RACGP have not agreed to protocols within six months:
- at application time, life insurers must only ask for a medical report specific to the consumer's relevant medical conditions but not for clinical notes regarding the consumer/policyholder
- at claim time, life insurers can only ask for a medical report that is specifically targeted to the subject matter of the claim but not for access to clinical notes regarding the consumer/policyholder
A life insurer must obtain consent from a policyholder each time it intends to:
- request a policyholder's medical records, reports or other medical information from their General Practitioner or other treating doctor, and
- share a policyholder's information with a third party
Authorisation forms for a life insurer to access a consumer's/policyholder's medical information should be contained in the contract (and not outside it) so that consumer protections apply, including laws on unfair contract terms.
Life insurers should institute real-time disclosure that would allow consumers to track the progress of their claim.
The FSC, in consultation with the Australian Genetic Non-Discrimination Working Group, should consider a moratorium on life insurers using predictive genetic information (subject to limited exceptions) and standards should be updated accordingly.
Life insurers should be banned from using predictive genetic information until standards are updated.
The government review of Corporations Regulation 7.1.33 to consider whether the exemption of insurance claims handling processes should continue.
An insurer should provide a person with written reasons when an application for insurance has been rejected or an insurance claim denied with a plain English summary of the evidence targeted to the part of a person's medical history relied on by the insurer. The statistical and actuarial evidence and other material relied on by the insurer should be available on request.
The life insurance industry should:
- regularly update all definitions in policies to align with current medical knowledge and research
- standardise definitions across all types of polices
- use clear and simple language in definitions, and
- clearly explain which associated conditions that may arise from the initial condition, including mental ill health, are covered by the insurance policy
Codes of practice must be updated to require:
- where a pre-existing condition is to be used by an insurer as the basis for denying a claim or avoiding a contract a direct medical connection between the prognosis of a pre-existing diagnosed condition and the claim must be established, and
- the statistical and actuarial evidence and any other material used to establish a pre-existing condition, as well as a written summary of the evidence in simple and plain language, be provided by the life insurer to the consumer/policyholder on request
There should be a mandatory and enforceable Code of Practice specifically in relation to mental health life insurance claims and related issues and require that insurers:
- ensure that applications for insurance that reveal a mental health condition or symptoms of a mental health condition are not automatically declined
- refer applications for insurance that reveal a mental health condition or symptoms of a mental health condition to an appropriately qualified underwriter
- give an applicant for insurance the opportunity to either withdraw their application or provide further information, including supporting medical documents, before declining to offer insurance or offering insurance on non¬standard terms
- where an insurer offers insurance on non-standard terms, for example, with a mental health exclusion or a higher premium than a standard premium, specify:
- how long it is intended that the exclusion/higher premium will apply to the policy
- the criteria the insured would be required to satisfy to have the exclusion removed or premium reduced
- the process for removing or amending of the exclusion/premium, and
- develop, implement and maintain policies that reflect the above practices
The FSC and the ISWG consult with financial legal services and mental health advocacy groups to determine appropriate timeframes for claims decisions and that codes of practice be updated accordingly.
The FSC and the ISWG mandate an upper limit on the number of medical assessments that can be requested of a policyholder and the specific circumstances in which this upper limit could be deviated from.
The "concentration of power" in the Claims Management Industry, as well as the Independent Medical Examiner market be monitored by the ACCC.
The government should consider random audits of both historical and future medical reports procured by independent medical examination companies, comparing the original reports as drafted by doctors with those used by life insurance companies as the basis for the decision.
The government should introduce legislation to facilitate the rationalisation of legacy products noting that such legislative change should include a no-disadvantage rule.
The FSC, with the RACGP and key stakeholders, explore issues relating to those with dementia claiming on life insurance.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2023.