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It’s a hard-knock life

In the past week, government, regulators and the Financial Services Council (FSC), the peak body for life insurers, have been queuing up to fix the life insurance industry. The applause for all three has been, at best, muted.

First up was the FSC presenting its new Life Insurance Code of Practice.

The Federal Government managed to reintroduce a bill reforming commissions for life insurance advisers, and the Australian Securities and Investments Commission (ASIC) weighed in with a report on the industry’s problems.

All these activities aim to help the poor consumers who have been robbed by dreadful life insurers who have rejected their claims, and to rein in advisers who have been pocketing commissions for flogging the same policy over and over again – or so the narrative goes.

A life insurance code of conduct is well overdue, and after taking such a long time to get it together one might have expected it would be met with some enthusiasm.

No such luck. The FSC has managed to produce something that is neither fish nor fowl.

The code is expected to be distributed with each new policy taken out. It’s 32 pages long and will accompany the 100-page product disclosure statement (PDS), the five or six-page policy summary and the advisers’ disclosure notices.

The Government and insurers have welcomed the code, but has anybody considered who is going to read it?

Experience from across the fence in general insurance should have adequately demonstrated to the life insurance cohort that consumers don’t read the PDS they’re given – or, for that matter, much of the other information provided.

Visually, the new life code is confusing, with words highlighted in bold because they are relevant to the consumer. The result is an unfriendly looking document. Which is a shame, because this is something that needs everything going for it to make people progress beyond the cover.

Of course, the code will be of great use to lawyers, and the question is how long it will be before it makes its first court appearance in the hands of an angry consumer.

Making it even more confusing is the fact that the code doesn’t include group life insurance, the one that most people have.

This is a problem that won’t be easily solved, because the big industry superannuation funds which dominate group life have their own associations and codes of practice.

Back in Canberra, the reintroduction of the Government’s life insurance commission bill didn’t come as a surprise.

The Government, with support from the FSC and ASIC, wants commissions removed from the industry. They cost life insurers about $3 billion a year, so any reduction will boost their bottom lines considerably.

Under the new commission rules, the cost will probably fall to about $1 billion in a couple of years. Will premiums fall in line with the drop in commissions? Consumers probably shouldn’t hold their breaths.

But while all the focus is on the upfront end of the sale, something has been forgotten: who pays for an adviser to deal with a disputed claim?

Yes, every adviser has clients who never make claims, and with the commission payments they make a comfortable profit.

But that can be offset by the client with a disputed claim that takes months to settle. Under the new rules, the only option to recoup the cost of handling this is to charge a fee. Has anybody, from regulators to government ministers, thought about the outcome when an insured is presented with a $5000 bill for something they used to get for nothing?

Next up was ASIC’s review of the life industry, raising many problems, despite 90% of claims being paid.

The review followed reports from Fairfax and the ABC about people’s claims being denied. 

There were a number of factual errors in these stories, such as the involvement of industry superannuation funds in the claims process, but politicians called in ASIC.

Reviewing claims is not simple. Many factors affect the final decision.

Curiously, in the ASIC report there is little reference to the legislation that regulates the life industry, especially the Insurance Contracts Act 1984.

This is important, because it covers rules of disclosure by insureds. But in ASIC’s review, non-disclosure as a reason for claims rejection seems to get short shrift.

Complying with the legal requirements of being a life insurer does not seem too important for ASIC.

This is from the report’s executive summary: “Although the considerable majority of claims are paid, we are concerned that in some cases claims are being declined on technical or contractual grounds that are not in accordance with the ‘spirit’ or ‘intent’ of the policy.”

This has to be one of the most curious statements on regulating the financial services industry that ASIC has issued. Does this mean insurers should ignore non-disclosure and pay the claim?

The regulator seems to have forgotten there are two parties to an insurance contract, and both have equal status.

ASIC also wants insurers to justify their fraud investigations, and it will be interesting to see how companies defend themselves on this matter.

Despite paying claims, the life insurance industry will come under more ASIC scrutiny and face reports that benefit the consumer.

With so many reports bemoaning life insurers – one prominent media figure last week called life insurance a lottery – it is hard to see why consumers will seek cover.

Many financial advisers who sell life insurance will probably leave the industry in the next couple of years. And with more regulation, how many insurers will follow suit and call it a day?

NAB has sold MLC, Macquarie has sold its life business, and ANZ is rumoured to be considering selling OnePath.

Will the fact the industry paid about $8 billion of claims last year continue to be ignored while the focus remains on a small number of denials?

Welcome to the new world of life insurance, or what’s left of it.

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