Investors have learned some important lessons about the life insurance market over the past year, as successive reviews of the industry have revealed poor claims handling, flaws in product design and high costs.
The most important takeaway is to review your current life insurance contract to make sure that it provides adequate protection, is competitively priced and is structured to produce the best outcome.
Michael Rice, the chief executive of finance industry consultantcy Rice Warner, says few people take the time to understand their life insurance. If they did, they would get much greater value out of the product.
Anthony Jones, the principal of financial planning group Templetons Financial, says this is particularly important for trustees of self-managed superannuation funds. Under superannuation law, SMSF trustees must have an investment strategy, setting out the fund’s investment objectives and specifying the types of investments the fund can make.
The strategy must be reviewed regularly to ensure it continues to reflect the purpose and circumstances of the fund and its members. One of the issues the strategy must address is whether the fund should hold life insurance for fund members.
Life industry under the spotlight
In October last year, the Australian Securities and Investments Commission reviewed the claims handling performance of life insurers, focusing on life, total and permanent disability, trauma and income protection policies.
The regulator identified “issues of concern” in relation to rates of declined claims and claims handling procedures associated with particular types of policies (notably TPD), particular insurers and particular causes for consumer disputes.
ASIC said that in some cases claims were being denied on technical or contractual grounds that were not in accordance with the “spirit” or “intent” of the policy.
“Fairness should be given greater consideration by insurers. An issue arises when a policyholder’s reasonable expectations about policy coverage do not align with the technical wording of the policy,” ASIC says.
Declined claims rates were highest for TPD, with an average declined claim rate of 16 per cent. Trauma was 14 per cent. The average declined claim rate for life cover was four per cent for income protection seven per cent.
Declined claim rates were higher for non-advised policies.
A small number of insurers had substantially higher declined claim rates. For TPD one insurer declined 27 per cent of claims, another 25 per cent and a third 24 per cent.
ASIC found that of all life insurance disputes, 72 per cent were claims-related. “From our analysis, there is a two per cent likelihood that the average claim will result in a dispute dealt with through the insurer’s internal dispute resolution process and a 0.9 per cent chance that it will result in a dispute lodged with either the Financial Ombudsman Service or the Superannuation Complaints Tribunal,” it says.
ASIC has proposed a new public reporting regime for life insurance claims data and claims outcomes, as well as measures to a to strengthen the legal framework covering claims and the consumer dispute resolution framework.
Earlier this year Commonwealth Bank released a review of claims handling practices at its life insurance arm CommInsure. The review, conducted by Deloitte, did not identify any systemic issues relating to denied claims but it made a number of recommendations aimed at improving customers outcomes.
It says CommInsure’s case managers need to do a better job documenting their assessments and communicating with customers.
A Parliamentary Joint Committee on Corporations and Financial Services inquiry into the life insurance industry, which got underway last September, has uncovered deep discontent with sales practices in the industry. Problems arising from the widespread practice of signing up consumers to life cover without full underwriting of the risk has become a focal point of the inquiry.
A number of submissions have called for a return to full underwriting of all policies as a consumer protection measure.
About 50 per cent of Australia’s life insurance is arranged on an advised basis through financial planners and the rest through direct and group channels. Direct and group policies (sold through superannuation funds) are usually not subject to underwriting until a claim is made.
The Association of Financial Advisers says what this means is that policy holders pay premiums for years without necessarily being covered under the terms of the policy.
AFA chief executive Brad Fox says the life industry has adapted its marketing practices over the years to make the sale process simple and quick. “The client gets a nice experience upfront but it can be a different experience when they claim,” he says.
Financial services company Clearview says there are a number of other pitfalls with group insurance sold through superannuation funds, including the limited amount of standard cover provided and general ignorance about policies and coverage for benefits that cannot be claimed (such as casual workers paying for income protection).
“Many workers have cover they don’t know about, while others think they are adequately covered when they are not,” Clearview says.
It says group insurance should be offered on an opt-in basis.
The Association of Independently Owned Financial Professionals has called for all policy documents to be rated by an independent panel to give consumers a clear idea of the quality of the cover they are considering.
Law firm Maurice Blackburn says some insurers will disallow entitlement to a claim if the policyholder has another insurance policy (with another super fund, for example), despite continuing to charge premiums for the product.
Time to act
Rice Warner’s Rice says the key lesson for investors and consumers in all of this is to review life policies regularly.
“The first thing to do is conduct a needs analysis. If I had my life cover in my super fund I would ask my fund to organise a session with an adviser. If I had bought the cover from an adviser outside super I would go back to the adviser for a review,” he says.
“Then I would shop around to see if I could get the same level of cover more cheaply, or see if I could get extra benefits for the same cost. When you start comparing life insurance products it can get pretty complicated, so I would probably use an adviser to help me.”
Rice says some SMSF trustees will join a separate fund and put in just enough contributions to get access to he low cost group cover the fund offers.
Rice expects to see changes to the industry and the way products are structured, as a result of all the inquiries. He says this is another reason to get to understand life insurance better and review policies regularly.
“Some products that are a waste of money, such as funeral cover, will probably disappear. Group cover will probably move to a more needs-based approach. Adviser commissions are heading down.”
Templetons’ Jones says another reason its pays to review life policies on an ongoing basis is that new players are coming into the market, making it more competitive.
Japanese life insurance giant Nippon Life entered the Australian insurance market in 2015 when it acquired 80 per cent of National Australia Bank’s life business. “It is a fluid market and it is getting more competitive,” Jones says.
Templetons offers its SMSF trustee clients access to group life insurance, with the “group” made up of Templetons clients. Unlike the group products sold by super funds, policies are fully underwritten when the policies are sold.
Jones says the policy offers the security of full underwriting with the cost advantage of group cover. “We tender to the market every three years and we lock in premium rates for three years,” he says.
And because the policy is sold by an adviser, the policyholder will have someone to represent their interests at claim time.