The life insurance industry is a significant part of the
financial services sector in Australia. It has a noble purpose in providing
financial protection to policyholders in times of need and financial distress.
Despite this, there are sections of the industry that can and must do better in
delivering the protection they promise whilst remaining financially viable long
into the future. The committee has taken a broad view of the life insurance
industry covering direct, retail and group life insurance products including
life cover, total and permanent disability cover, trauma cover, and income
protection. The committee's inquiry has followed on from, and overlapped with, significant
reviews and legislative changes, as well as ownership changes in the industry.
The committee's report has focussed on areas where substantial changes are
required to ensure the life insurance industry is held to account in relation
- effective consumer protections and industry codes of practice;
- the transparency of remuneration, commissions, payments and fees;
- the provision of advice in the best interests of consumers;
- group life insurance arrangements that do not disadvantage
certain groups of consumers;
- appropriate access to personal medical and genetic information;
- fair claims handling practices.
The consumer protections that currently apply to life
insurance are substantially weaker than the consumer protections that apply to other
financial and non-financial services and other products sold together with life
insurance. This leads to confusion for consumers in understanding and asserting
their rights. The committee also considers that the inconsistent application of
consumer protection law also creates inappropriate incentives for industry
participants that are subject to weaker consumer protections. The committee is therefore
recommending that consumer protections for financial products including life
insurance be aligned with Australian Consumer Law. This recommendation includes
removing a number of exemptions that the life insurance industry currently
enjoys compared to other financial services. To ensure that life insurance
industry participants are treated fairly, the committee is recommending that
the changes uniformly cover all types of life insurance, all sectors (direct,
retail and group), and all industry participants.
Industry codes of practice can form an effective means of
guiding the interaction of corporations with their customers. The committee
welcomes the recent development of two codes of practice in the life insurance
industry. However, the committee is not convinced that a self-regulatory
approach is sufficient. The committee is therefore recommending that the
co-regulatory approach foreshadowed by the ASIC Enforcement Review Taskforce
position papers be adopted across the financial services sector including the
life insurance industry. The committee encourages the implementation of one
single combined code of practice. At a minimum, the co-regulatory approach should
require codes to be registered with ASIC, be mandatory for all industry
participants, give the code compliance committees the power to determine
whether breaches have occurred, give the Australian Financial Complaints
Authority the power to enforce compliance through determinations, and provide
genuine remedies for breaches of the code, including financial remedies,
thereby creating an incentive for compliance. It is recognised that any
enforceable code with regards to insurance in superannuation would need to
expressly permit trustees to act in members' best interests.
As a matter of practice, ASIC focusses its activities on systemic
and systematic misconduct. However, under the proposed co-regulatory arrangements,
ASIC may not have the power to undertake enforcement action for systemic and
systematic code breaches. This would result in a very significant gap in
consumer protections. The committee is therefore also recommending that ASIC be
given the power to undertake enforcement action in relation to systemic or
systematic breaches of codes of practice in the financial services sector,
including in the life insurance industry.
Remuneration, commissions, payments and fees
The committee notes that the rules banning conflicted
remuneration have been introduced specifically in order to mitigate some of the
risks around conflicts of interest in the life insurance industry. However, evidence
to the committee, particularly from ASIC, indicates that a plethora of hidden
payments including commissions, fees, performance-related payments, soft dollar
benefits, and non-financial benefits still exist within the various structures
of the life insurance industry. These money flows continue to exist to varying
degrees across all three sectors: retail, direct, and group. The wrong type of
financial incentives have contributed significantly to a range of poor
practices and misconduct in the financial services industry including
misleading advice and mis-selling with poor outcomes for customers.
The committee is therefore recommending that ASIC and APRA conduct
detailed examinations of all payments, benefits, and fees across all sectors of
the life insurance industry and that the government consider further regulation
following the results of those examinations.
Retail life insurance and approved product lists
Approved Product Lists (APLs) are used by advice licensees and
advisers selling life insurance to maintain a list of life insurance products
that they have available to sell. APLs are also used for providing financial
advice. The way that APLs are currently constructed can lack transparency and
generate conflicts of interest that lead to selling life insurance on the basis
of misleading advice that herds customers to products from insurers that pay
the most to be on the APL. The committee is not convinced that the draft APL
Standard being proposed by the Financial Services Council will adequately
address the full range of concerns identified by this inquiry.
The committee is therefore recommending that the life insurance
industry should have, as a matter of urgency, a balance of affiliated and
non-affiliated products on their APLs, and if affiliated products are
recommended, the affiliation should be disclosed, and the customer should be offered
a comparison with non-affiliated products. Beyond this, the committee further
recommends that the industry transition to open APLs.
Group life insurance
The committee considered issues associated with group life
insurance through superannuation, including opt-out requirements, member
awareness of cover, and the impact of premiums on small super balances.
Evidence to the committee from a broad range of stakeholders
strongly supported the opt-out model for life insurance within group
superannuation, particularly as a means of addressing the problem of
under-insurance. Nevertheless, concerns were raised in relation to the opt-out
model, particularly for those with low super balances such as low-income
earners, women, and young people. The mechanism for opting out of life
insurance held within group superannuation does not appear to be
The committee views the current dearth of action by
superannuation trustees and life insurers to fix the problem of duplicate
insurance within group superannuation as completely unacceptable. The committee
is therefore recommending that superannuation funds, superannuation trustees,
and life insurers be more proactive in informing customers about the status of
group life insurance accounts.
Access to medical information
Life insurers request authorisation to access a consumer's
medical information. This request for authorisation may occur at the time a
consumer acquires a life insurance policy and also at the time of making a
claim. The amount and type of medical information a consumer authorises a life
insurer to access and share is typically broad, particularly at the time of
The committee is also very concerned about evidence provided
that patients are reluctant to seek necessary treatment, particularly for
mental ill health, due to concerns over life insurers having access to their
full medical record and then using such information to limit or deny coverage
or a claim.
The committee is firmly of the view that life insurers
should only have access to targeted medical information. The committee is
therefore recommending that the Financial Services Council and the Royal
Australian College of General Practitioners collaborate to prepare and
implement agreed protocols and standards for:
- requesting and providing relevant medical information only, not
complete medical files;
- uniform authorisation forms for access to medical information;
- appropriate storage of medical information; and
- real-time disclosure to consumer about the progress of their
claim, including requests for medical records.
As the use of genetic testing in health care increases,
concerns have been raised around privacy and genetic discrimination. In
response to concerns over genetic discrimination, several countries have
enacted legislation or voluntary agreements to restrict or fully ban the use of
genetic information by insurance companies.
The committee is of
the view that it is inherently unfair to limit or deny a person access to
products such as life insurance based on factors that are out of their control.
The committee is concerned that the use of genetic information by life insurers
has impacted on participation in public health research projects and other
forms of research. The committee is recommending that the Financial Services
Council, in consultation with the Australian Genetic Non-Discrimination Working
Group, assess the consumer impact of imposing a moratorium on life insurers
from using predictive genetic information.
The committee was concerned to hear about claims handling
practices that may be used by life insurers as a means to delay or deny a claim
or limit the amount of payment made when a claim is successful. The committee is
also concerned about the transparency of the claims handling process and the
lack of reasons provided to customers when claims are denied. Evidence to the
committee highlighted that policies with technical definitions can have high
The committee is therefore recommending that the life insurance
- regularly update all definitions in policies to align with
current medical knowledge and research;
- standardise definitions across all types of polices and use clear
and simple language in definitions;
- set industry standards for claim timeframes and limits on the
number of medical examinations;
- clearly explain which associated conditions that may arise from
the initial condition, including mental ill health, are covered by the policy;
- develop a mandatory and enforceable Code of Practice for its
members in relation to mental health life insurance claims and related issues.
The committee is also recommending that the current
exemption under the Corporations law that excludes certain claims handling
activities by life insurers from ASIC's oversight should be reviewed.
The committee considers that life insurance plays a vital
role in Australia's social and economic life, and that the recommendations made
in this report will help to improve the transparency, accountability, and
effectiveness of the life insurance industry.
As Chair, I thank my fellow committee members for their
collegiate approach to considering the issues that arose during the inquiry.
The committee also thanks those individuals and witnesses that made submissions
to, and appeared as witnesses before, the inquiry. Their contributions provided
a strong evidence base which informed our deliberations.