This article was written by Jim Boynton and Kenneth Tam.
This week, the Government, ASIC, APRA and the Financial Services Council announced a number of important developments for the Australian life insurance industry.
Life insurance companies should review their claims handling practices, remuneration structures and practices generally in light of the developments discussed in this alert.
Government re-introduces bill on life insurance adviser remuneration
The Australian Government reintroduced the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill on 12 October. If the bill is passed, all advisers will need to transition to a new remuneration structure by 1 January 2018. The bill is substantially the same as the previous bill.
Please see our earlier alert which discusses the previous bill in more detail.
ASIC review of life insurance claims
ASIC issued its report titled “Life insurance claims: An industry review” that considered the claims handling practices of 15 insurers. Life insurers are paying a considerable majority of claims. A major theme was the concept of “fairness”. Five actions coming out of the report are:
- Public reporting of life insurance claims: ASIC and APRA will work with insurers and other stakeholders over 2017 to establish a consistent public reporting regime for claims data and claims outcomes, including claims handling timeframes and dispute levels across all policy types. Data will be made available on an industry and individual insurer basis. In her response to the ASIC report, the Minister for Revenue and Financial Services stated that this “data will be available to consumers for the first time at the individual product and distribution channel levels, providing a means for consumers to assess the claims performance of the life insurance sector”.
- Strengthen the regulatory framework for claims handling: ASIC recommends the removal of the current exemption for ‘insurance claims handling’ from the definition of ‘financial service’ in the Corporations Act, and the introduction of more significant penalties for misconduct in relation to claims practices. Minister O’Dwyer has asked Treasury to proceed with this recommendation and undertake targeted consultation on the merits of removing the exemption for claims handling practices. The Minister also states that the introduction of penalties for misconduct in relation to claims practices will be considered as part of the forthcoming review of ASIC’s enforcement powers, which will be launched in the coming week.
- Strengthen the dispute resolution framework for claims handling: ASIC recommends that the coverage of life insurance claims by dispute resolution schemes be considered as part of the current Ramsay Review into external dispute schemes.
- Follow up ASIC surveillances and reviews: ASIC will target the areas of concern identified in the review, including surveillance of individual insurers that have the highest decline rates and highest proportional dispute numbers, and examining TPD claims procedures and timeframes. TPD has the highest level of claims denied relative to other life insurance cover types. ASIC will also conduct a major review of life insurance sold direct to consumers without personal advice. One of ASIC’s findings is that there are higher claims denial rates in this area.
- Strengthen industry standards and practices: ASIC makes the following recommendations for the industry, to supplement the Life Insurance Code of Practice discussed below. These recommendations include:
- immediately review the currency and appropriateness of policy definitions
- examine and ensure advertising and representations about the cover align with the definitions and the policy
- ensure that claims timeframes are consistent with industry standards and expected claims timeframes are adequately communicated to policyholders
- ensure that incentives and performance measurements for claims-handling staff and management do not conflict with the obligation to assess each claim on its merit.
Life Insurance Code of Conduct
The Life Insurance Code of Practice was launched by the FSC on 11 October. The aim of the Code is to:
- promote high standards of service to consumers
- provide a benchmark of consistency within the industry
- establish a framework for professional behaviour and responsibilities.
The areas covered by the Code includes sales practices and advertising, policy changes and cancellation rights, and the process for customers to make complaints. As part of this model of self-regulation, there will be an independent committee overseeing compliance, and there is a list of sanctions specified in the Code including a compliance audit requirement and corrective advertising. The Code will be binding on FSC members and they will need to be fully compliant by 1 July 2017.
Minister O’Dwyer expects that the FSC and life insurance industry to take the necessary steps to ensure that the Code is enforceable across the whole industry, by gaining ASIC approval of the Code.
APRA identifies other claims handling improvements
APRA sent letters to life insurers and superannuation trustees setting out its expectations for improvements to the oversight and handling of insurance claims. APRA identifies the following as key areas for improvement:
- closer co-operation and alignment between trustees, insurers and reinsurers to optimise outcomes for beneficiaries
- clarify the approach to claims in the claims philosophy of both the trustees and insurer to improve claimants’ understanding of how claims will be managed
- better sharing of information between trustees and insurers
- review insurance benefit design and definitions with a stronger focus on delivering insurance benefits appropriate for members at an appropriate cost.
Parliamentary inquiry into life insurance
In September, the Senate referred the life insurance industry to the Joint Parliamentary Committee on Corporations and Financial Services to report by 30 June 2017. Submissions close on 18 November 2016 and the terms of reference are available here. Sales practices and complaints from customers and employees are likely to be an important focus of the enquiry. With short notice often given to organisations to attend an inquiry (1 week notice is likely), life insurers should be preparing now for any appearance. We would be happy to discuss with you our expertise in this area to ensure you are fully prepared.
Please refer to our earlier alert on other developments.