A scathing report into Total and Permanent Disability (TPD) insurance has found the sector riddled with industry-wide problems in design and claims-handling processes that have left it little better than junk insurance.

The Australian Securities and Investments Commission (ASIC) analysed data from 35,000 TPD claims from 2016-2017, focusing on AIA, AMP Life and National Mutual, Asteron Life & Superannuation, MetLife, MLC Life, TAL, and Westpac Life. These companies represent 65-70% of all TPD claims. In Australia 12 million people hold TPD cover, mostly through superannuation.

The report reveals that up to 500,000 people working in casual or high-risk occupations are having their claims assessed under the restrictive Activities of Daily Living (ADL) definition – meaning they can only claim if they suffer catastrophic injuries rendering them unable to dress, wash or feed themselves.

And 60% of claims under this narrow definition of cover are declined – five times higher than the average declined rate for all other TPD claims.

ASIC Commissioner Sean Hughes says it is alarming that three claims a day are assessed under this restrictive definition.

“People who hold this type of automatic cover through superannuation are typically paying the same premium – for what is essentially junk insurance – as people who can access less restrictive definitions under general TPD cover,” he says.

The declined claim rates for TPD policies in group insurance that were assessed using an ADL definition ranged as high as 87% under GESB Super, and 82% under LGIA Super, both of which offer AIA policies. West State Super – also offering AIA policies – has a decline rate of 79%, while MasterKey Super – which provides insurance through MLC Life – has a 73% decline rate.

Some 12% of claims were withdrawn because of an “unnecessarily challenging and onerous” claims handling process, including multiple requests for further medical assessments, allegations of fraud, surveillance, excessive delays, fishing for non-disclosure, poor staff communication practices, and changing claims staff.

Insurers also lack key claims data to help them identify key products’ value, or locate problems in their claims handling processes. All seven insurers failed ASIC’s criteria for good data.

Mr Hughes says it is “inexcusable” that insurers don’t use or even collect data to help identify poor consumer outcomes. Some insurers have not provided data five months after ASIC’s request.

Some insurers only have paper file records, some don’t know how many claims they assessed under the ADL definition, there is no standard definition for key data, and every insurer’s data feedback contains errors. Some resubmitted errors after ASIC informed them of their mistake.

Mental illness has the highest declined claims rate of 16.9%, followed by injury/fracture at 16.1%.

ASIC is warning insurers to take care their claims handling processes are not operating unfairly for consumers. It is planning targeted surveillance of insurers with high rates of declined claims, and will be chasing insurers on changes to their products and restrictive definitions, over the next two years.

It will also intervene if insurers don’t improve their claims handling processes. The regulator has set a deadline of March 31 next year for insurers to report back.