The Australian Securities and Investments Commission (ASIC) has warned it could take action against individual disability income insurance (DII) providers, after its review found some are using “intrusive measures” such as physical surveillance without basis to assess claims.

Physical surveillance was conducted in 1% or 57 of the almost 4800 individual DII claims received between January and June last year, the ASIC review found.

ASIC says use of surveillance may have been unwarranted in 17.5% of those claims because the insurer had not shown that other investigative methods had been exhausted.

The review also found physical surveillance was used in 10 mental health claims and ASIC considers that surveillance may have been unwarranted in half of these cases.

Around 5% or 252 claims were subject to non-disclosure investigations and five insurers appeared to commence the probes only on the basis that the claim was lodged within three years of policy inception or renewal, heightening the risk of “fishing”, ASIC said.

“Following the review, we remain concerned that some insurers still appear to be ‘fishing’ for non-disclosures to avoid paying out legitimate claims,” Deputy Chair Karen Chester said.

“We are putting insurers on notice that we will take action where we see consumer harm from poor claims handling practices.”

She says the regulator is also concerned over handling of mental health claims and investigations.

“Non-disclosure investigations and physical surveillance are intrusive measures and insurers must ensure they have reasonable grounds to undertake them,” Ms Chester said. “We expect physical surveillances to be used as a last resort only.”

Ms Chester says the review – similar to the one on total and permanent disability it carried out after the Hayne royal commission – sought to test whether insurers were now entrenching good practices, especially with the industry now being subject to new claims handling obligations.

ASIC says it has written to the life insurers covered by the review to outline areas for improvement and communicate expectations for their use of investigative tools, including the obligation to handle claims efficiently, honestly and fairly.

Life insurers who took part in the review are AIA, Tal, Zurich, MLC, Resolution Life Australasia and Westpac Life (now Tal Life as of August 1).