Chapter 2

Background on the life insurance industry


2.1                  This chapter provides background on the life insurance industry. It begins by setting out the different types of life insurance policies that are available, the three ways in which policies may be purchased, and the revenue and expenses of the industry. It then covers the regulation of the industry including the revamping of the dispute resolution process. The remainder of the chapter summarises recent legislation, inquiries, reviews, reforms and other events relating to life insurance. The chapter concludes with some discussion of Treasury's capability and capacity to develop and maintain policy and regulatory settings in relation to life insurance. Proposals for red tape reduction are also noted.

Nature of the life insurance industry

2.2                  As at September 2017, there were 29 life insurers in Australia.[1] The big four banks each owned life insurance businesses until 2017, when some of those life insurance businesses were either completely or partially sold. The compatibility of life insurance and banking, and the associated question of vertical integration, were significant issues during the inquiry and are discussed further in chapters 5 and 6.

2.3                  Life insurance covers a range of insurance products including:

2.4                  Life only and income protection policies were the most common life insurance policies, comprising 32 per cent and 21 per cent respectively of the total policies in place in June 2013.[3]

2.5                  To acquire life insurance, customers are generally charged a monthly premium that is calculated by the insurer using information about the customer's age and health status. Insurance premiums usually increase with age due to the increased likelihood of making a claim. For insurance such as life, TPD, or trauma cover, there is often a choice between stepped or level premiums:

2.6                  The term 'underwriting' in the insurance industry has two distinct meanings. It can mean the act of providing insurance cover for a risk. It is often applied in this sense in the general insurance market. It can also mean the business process of assessing risk prior to the issue of a policy, or prior to agreeing to an increase in cover. In the life insurance market, this usually involves the following steps:

  1. The prospective insured completes and submits an application form which contains answers to detailed questions about the insured's medical conditions, medical treatments and lifestyle.
  2. This information is considered by an underwriter who applies the life insurer's risk appetite and underwriting guidelines to the risk. This step may require the underwriter to ask further questions of the applicant. It may also require the applicant to submit to medical tests or medical examination; and
  3. The underwriter determines whether the risk should be accepted, not accepted, or accepted subject to the imposition of exclusion clauses or increased premium (premium 'loading').[5]

2.7                  Not all life insurance is underwritten at the time of purchase. Indeed, life insurance held in group superannuation is not ordinarily underwritten. Most direct life insurance is underwritten at the time of purchase. Retail life insurance procured through an adviser is typically fully underwritten at the time of purchase.[6]

2.8                  The life insurance industry can be categorised into three sectors based on the three ways in which consumers may purchase life insurance:

2.9                  The majority of life insurance policies are held within group superannuation. In 2015, there were 14 million group policies, 4 million retail policies, and 3.9 million direct policies.[8]

2.10             In each of the three sectors, there are different arrangements for purchasing life insurance, associated with the how the life insurance is sold:

2.11             Table 2.1 below provides a comparison some of the elements of the direct, group, and retail sectors of the life insurance industry including the features, numbers of policies, rates of claims accepted and denied, and risks identified by ASIC. These elements are considered in greater in later chapters of the report.

Table 2.1: Comparison of life insurance industry sectors

Life Insurance

Direct / Non-advised


Retail / Advised

Key features

Simpler products that consumers may be able to understand

Gives access to many consumers who may otherwise be unable to afford premiums

If appropriate personal advice is provided, consumers may have access to tailored life insurance that best fits their personal circumstances

Number of policies in 2015




Claims declined (2013–2015)

12 per cent

8 per cent

7 per cent

Claims accepted in full (2013–2015)

74 per cent

77 per cent

76 per cent

Own occupation cover prohibited#


Since 1 July 2014


Claim approval / Conditions of release


Insurer / Trustees decisions on conditions of release


Risks identified by the Australian Securities and Investments Commission (ASIC)

Sales practices

Lapse rates

Credit protections for businesses

Member awareness of cover and impact on superannuation balances

No cover despite payments in some cases

Conflicted remuneration

Poor quality advice

Unnecessary switching

Source: Australian Securities and Investments Commission, Submission 45, pp. 30–31; Australian Securities and Investments Commission, Report 498: Life Insurance Claims: An industry review, October 2016, pp. 5, 35, 76, 107; Riskinfo Magazine, Changes to insurance in Super, (accessed 5 September 2017); Australian Prudential Regulation Authority, Annual Superannuation Bulletin, June 2016, p. 7. #in other parts of the industry both own and any occupation cover can be acquired.

2.12             Remuneration flows within and between the various components of the life insurance industry are complex. There are a range of commissions—upfront, trailing, hybrid, and level—and various fees and other monetary payments as well as non‑monetary payments and so-called 'soft dollar' benefits. These payments are explored in greater detail in chapter 5.

Sustainability of the life insurance industry

2.13             Both revenue and expenses in the life insurance industry rose in the 2016–17 financial year. For the year ending 30 June 2017, total revenue was $34.0 billion, up from $28 billion in the previous 12 months. This revenue mainly comprised net policy revenue of $15.9 billion and investment revenue of $14.8 billion.[10]

2.14             For the year ending 30 June 2017, total expenses were $30.2 billion, up from $24.2 billion in the previous 12 months. Total expenses in the year ending June 2017 mainly comprised increases in net policy liabilities of $12.3 billion, net policy expenses due to claims of $9.4 billion and operating expenses of $8.4 billion.[11]

2.15             The Australian Prudential Regulation Authority (APRA) informed the committee that it has identified prudential risks in the life insurance industry, relating to issues including:

2.16             Price Waterhouse Coopers (PwC) indicated that revenues and profits are not predicted to grow in the life insurance industry for the next few years. This is in contrast with predicted 5 per cent growth in revenues and profits for other financial services such as deposits, loans and wealth management.[13]

2.17             PwC noted that the life insurance industry has significant issues with public trust. While 78 per cent of Australians view life insurance as important, only 42 per cent believe their life insurer will be there for them in their time of need. Several recent high profile reputational scandals have only widened the gap between insurers and customers when it comes to trust. As a population, Australians may be underinsured. For example, PwC noted that life insurance premiums as a proportion of GDP are much smaller than in comparable developed countries such as Sweden (1.5 times smaller) and Japan (2 times smaller).[14]

Regulation of life insurance

2.18             The responsibility for the regulation of the life insurance industry is divided between ASIC and APRA as follows:

2.19             Life insurers and advisers are subject to the statutory standards and requirements of the Acts administered by ASIC and other agencies, including:

2.20             Life insurance has also recently become subject to self-regulation through an industry code. This is discussed further in chapter 4.

Dispute resolution

2.21             All Australian Financial Service (AFS) licensees, credit licensees and trustee companies are required to have:

2.22             There are two ASIC-approved EDR schemes in Australia that deal with complaints from consumers and retail investors about financial services providers and credit service providers:

2.23             Superannuation fund members can make complaints to a third body, the Superannuation Complaints Tribunal (SCT) established under the Superannuation (Resolution of Complaints) Act 1993. As it is a statutory tribunal, the SCT is not directly subject to ASIC oversight. The SCT can review decisions and the conduct of superannuation providers, including:

2.24             In September 2017, the government announced it will implement the Ramsey review recommendation to create a single dispute resolution service called the Australian Financial Complaints Authority (AFCA) to replace the three existing schemes. The legislation to implement AFCA is intended to:

2.25             The committee notes the creation of AFCA and notes that it will allow consumers to challenge decisions made by life insurers and obtain a binding judgement, without needing to go to court.[20]

Previous inquiries, reviews, reforms and events

2.26             There have been a number of recent developments and reforms in the life insurance industry. This section provides a brief summary and timeline of pertinent events relating to life insurance over the last few years, up until the start of this inquiry. Where reviews and significant events have occurred during the inquiry, those are discussed in the relevant chapter of the report.

Insurance contracts amendment — 2013

2.27             The Insurance Contracts Amendment Act 2013 made a number of amendments to the existing duty of utmost good faith provisions, such as:

FOFA reforms — July 2013

2.28             In July 2013, the Future of Financial Advice (FOFA) reforms became mandatory. A series of amendments to the FOFA reforms were finalised in March 2016.[22] While life insurance was exempted from the conflicted remuneration provisions in FOFA, other elements of the FOFA reforms, such as the best interests duty, do apply to life insurance.[23]

ASIC's review of retail life insurance advice — October 2014

2.29             In October 2014, ASIC's Report 413 on retail life insurance advice made the following findings:

2.30             As a result of its findings, ASIC recommended that insurers change their remuneration arrangements, and that advisers review their business models to address structural barriers to the provision of compliant life insurance advice.[25]

2.31             Recent developments in remuneration arrangements for the life insurance industry are examined in chapter five of this report.

Trowbridge Review — March 2015

2.32             In response to the ASIC review of retail life insurance, industry bodies commissioned the Trowbridge Review to develop recommendations that would enable the retail industry to implement ASIC's findings. The Trowbridge Review recommended:

Financial advisers register — March 2015

2.33             A register of financial advisers was launched in March 2015. It provides information to consumers on advisers who have findings against them for poor financial advice, including advice in relation to life insurance. The primary objective of the register is to improve transparency and therefore help consumers to choose a financial adviser. Secondary objectives include assisting AFS licensees to improve recruitment practices, manage risks, and monitor financial advisers.[27]

APRA action on group life insurance — May 2015

2.34             In December 2013, APRA wrote to group insurers with concerns about poor experiences for participants in the group life insurance market. Subsequently, APRA sought feedback from market participants and, in October 2014, released Prudential Practice Guide 270 on Group Insurance Arrangements.[28]

2.35             APRA intervened in the group life insurance industry again in May 2015 after identifying the existence of substantial losses arising from total and permanent disability policies issued to trustees of industry superannuation funds. The most common factors identified for the losses included:

2.36             APRA issued a public letter to group life insurers setting out the above concerns, and requested insurers and trustees consider taking action on the following:

Funeral insurance review — October 2015

2.37             Although not technically a form of life insurance, funeral insurance shares certain characteristics with other forms of insurance such as life insurance. In October 2015 ASIC released Report 454 on funeral insurance which identified concerns including:

2.38             Based on its findings, ASIC recommended that insurers:

2.39             ASIC identified that high cost funeral insurance was being sold to people who were unlikely to benefit from it and that some customers had paid more in premiums than the benefit sum insured. ASIC also identified an 80 per cent cancellation rate on funeral insurance.[33]

2.40             ASIC is responsible for the licensing of life insurers which issue funeral insurance and funeral bonds. However, providers of the following products are exempt from the requirement to hold an AFS licence:

2.41             The committee has recommended changes to consumer protections relating to funeral insurance in chapter 3.

Financial System Inquiry — October 2015

2.42             The Financial System Inquiry (FSI) which concluded in October 2015 set out to establish a direction for the future of Australia's financial system. Reforms to life insurance were proposed, including:

Life insurance reform package — November 2015

2.43             In November 2015, the government announced a reform package that was agreed to by the life insurance industry. The package addressed commissions and the remuneration of life insurance advisers where life insurance is sold through advisers, including:

Standards for financial advisers — December 2015

2.44             Following recommendations made in the December 2014 report of the Parliamentary Joint Committee on Corporations and Financial Services,[37] in October 2015, the Australian Government announced proposed reforms to increase the professionalism, education and training standards of financial advisers.[38] In December 2015, the Government released draft legislation for consultation and is continuing to consult on some elements of the proposed legislation.[39]

2.45             On 22 February 2017, the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 came into force. This Act includes requirements that both new and existing financial advisers satisfy compulsory education standards such as the passing of an examination and ongoing professional development. These requirements will commence from 1 January 2019 and new advisers must hold a relevant degree from this date. Existing advisers will have until 1 January 2021 to pass an examination and until 1 January 2024 to comply with other required education standards.[40]

Life insurance sold through car dealerships — February 2016

2.46             In February 2016, ASIC released the following reports:

2.47             ASIC's Report 471 concluded that car yard life insurance:

2.48             ASIC suggested that follow-up actions may include:

2.49             In September 2016 ASIC's Report 492 on the sale of add-on insurance through car dealers revealed that add-on insurance products:

2.50             ASIC informed the committee that:

ABC Four Corners coverage — March 2016

2.51             In March 2016, the ABC Four Corners aired a story raising allegations that CommInsure had inappropriately tried to avoid insurance payouts.[45]

Senate Economics Reference Committee Inquiry — March 2016

2.52             The Senate Economics References Committee was conducting an inquiry into the Scrutiny of Financial Advice in the 44th Parliament. In March 2016, the Senate referred additional terms of reference regarding the life insurance industry to that committee. The inquiry received a number of submissions and held one hearing prior to the inquiry lapsing with the dissolution of the 44th Parliament in 2016.[46]

The role of actuaries within insurers — June 2016

2.53             APRA released a discussion paper on the role of appointed actuaries within insurers in June 2016. APRA was concerned that appointed actuaries had become increasingly compliance focussed, limiting their ability to provide strategic advice to management, particularly for life insurance. APRA also noted an increased turn-over of appointed actuaries within the life insurance industry. APRA proposed reforms which required changed behaviour from insurers, actuaries and APRA including:

Life Insurance Code of Practice — October 2016

2.54             The Financial Services Council (FSC) released a draft Life Insurance Code of Practice (Code) for public consultation in August 2016. The finalised Code commenced on 1 October 2016, with a transition period until 30 June 2017.

The Code applies to:

  1. registered life insurance companies issuing Life Insurance Policies that are covered under membership of the FSC; and
  2. any other industry participant, including a non-FSC member, which adopts the Code by entering into a formal agreement with the FSC and the Life [Code Compliance Committee] to be bound by the Code.

The Code does not apply to:

  1. superannuation fund trustees;
  2. financial advice companies or financial advisers; or
  3. other industry participants, unless they have adopted the Code.[48]

2.55             Life insurance codes of practice are discussed further in chapter 4.

ASIC Review of life insurance claims — October 2016

2.56             In October 2016, ASIC released a review of life insurance claims. ASIC did not find evidence of cross-industry misconduct across the life insurance sector in relation to life insurance claims payments and procedures. However, ASIC did identify concerns in relation to declined claims rates and claims handling procedures associated with some types of insurance, such as total and permanent disability policies, some insurers for particular policy types and particular causes for some consumer disputes.[49]

2.57             ASIC also made the following observations in its review:

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.

We identified that fairness should be given greater consideration by insurers. Not all insurance claims will be successful, but an issue arises when a policyholder's reasonable expectations about policy coverage do not align with the technical wording in the policy.[50]

2.58             In its review, ASIC set out five actions to improve standards in life insurance claims handling:

2.59             Subsequently, in March 2017, ASIC indicated that it had obtained agreement from life insurers to undertake an independent review of their life insurance claims management practices, procedures, and product design and structure. ASIC noted that as a result of the independent reviews, some insurers are looking at improving their claims processes and policy documentation.[52]

2.60             In November 2017, APRA and ASIC released an information paper on industry-aggregate results on a new data collection pilot on life insurance claims. The paper indicated that insurers finalised 103 100 claims during 2016, of which about 92 per cent were admitted and about 8 per cent were declined.[53]

2.61             ASIC also found that lapse rates were generally higher for direct or non-advised distribution channels, ranging from 12 per cent to 36 per cent. ASIC was concerned that these lapse rates may be a result of inappropriate sales tactics that target consumers who do not need or want the product. ASIC also noted that the government has announced that its proposed reforms on commissions (discussed in chapter 5) will also now apply to direct or non-advised life insurance sales. This may address some inappropriate sales practice issues.[54]

2.62             ASIC indicated that it will explore lapse rates in a review of direct sales practices. The review will assess what changes could be made to sales practices, including disclosure, so that the way in which policies operate is better aligned with consumers' expectations.[55]

ASIC investigation of CommInsure — October 2016

2.63             In April 2016, ASIC commenced an investigation into CommInsure. The investigation relates to a range of concerns regarding CommInsure's life insurance business, including its claims handling practices and procedures. The investigation commenced following concerns raised in the media earlier in 2016.[56]

2.64             In March 2017, ASIC released the findings of its investigation into CommInsure, noting:

CommInsure had trauma policies with medical definitions that were out of date with prevailing medical practice, specifically for heart attack and severe rheumatoid arthritis. However, this was not against the law. This is because the law allows an insurer to set out the level of cover its policy provides, including out of date medical definitions as long as these are clearly disclosed in the policy.

ASIC found no evidence to support allegations that CommInsure claims managers applied undue pressure on doctors to change or alter their medical opinions.

In the course of the investigation, ASIC identified a number of areas where CommInsure needs to make improvements to its claims handling processes. Areas of improvement were also identified by Deloitte in their independent review of CommInsure's claim handling. Such improvements included, for example, better and more timely communications with consumers and enhanced training and assistance for claims managers.

ASIC's investigation also examined CommInsure's surveillance processes and looked at whether there was any compromise of a CommInsure database. No breaches of the law were uncovered, but areas for improvement were identified.[57]

APRA expectations for claims handling — October 2016

2.65             In October 2016, APRA set expectations for improvements to claims handling, including:

2.66             APRA indicated that where it is not satisfied with progress, it may consider taking supervisory actions such as requiring formal board-approved remediation plans, regular reporting to APRA, or other measures to address deficiencies and mitigate heightened conduct and operational risks.[59]

Insurance brokers annual review — October 2016

2.67              In October 2016, the Insurance Brokers Code of Practice Code Compliance Committee released its 2015–16 Annual Review. The review revealed that 32 per cent of brokers self-reported breaches, 23 per cent of breaches related to buying insurance, and 11 significant breaches were reported by nine insurers.[60]

2.68             In August 2017 the Insurance Brokers Code of Practice Code Compliance Committee released its 2016–17 Annual Review. Similar to the 2015–16 Annual Review, 42 per cent of brokers self-reported breaches and 23 per cent of breaches related to buying insurance. However, the 2016–17 Annual Review noted that the number of significant breaches reported by insurance brokers had increased to 34 from 11 in the previous year.[61]

2.69             With respect to the figures in the above reports, the committee notes that it has not been able to obtain disaggregated figures to separate life insurance from general insurance.

Australian banking industry: Initiatives update — October 2016

2.70             In October 2016, the second independent governance expert report on the Australian banking industry package of initiatives was released. The report proposed the following initiatives which are relevant to banking and life insurance:

2.71             The committee notes that its report on Whistleblower Protections was tabled on 13 September 2017 and includes recommendations on strengthening whistleblower protections in the corporate, public and not-for-profit sectors.[63]

Fees for no services — October 2016

2.72             On 27 October 2016, ASIC released Report 499 which examined the charging of advice fees without providing advice by major financial institutions.

2.73             ASIC noted that automatic payments may comprise initial and trailing commissions paid by financial product issuers to advice licensees and their representatives (advisers). In aggregate, these commissions increase the product costs or insurance premiums paid by customers. There is generally no specific advice service obligation tied to these commissions, which continue to be paid to advice licensees and advisers whether or not they give customers ongoing advice.[64]

2.74             ASIC found systematic failures across 21 holders of AFS licences. Most of the failures occurred prior to the mandatory implementation of the FOFA reforms in July 2013. ASIC noted that:

During the period of time covered by this project, the financial advice industry still had a culture of reliance on automatic periodic payments, such as sales commissions and adviser service fees.

Some advice licensees prioritised advice revenue and fee generation over ensuring that they delivered the required services.

Cultural factors in the banking and financial services institutions covered by this report may have contributed to the systemic failures we observed.

Some licensees and advisers failed to keep adequate records or to capture sufficient data electronically to enable monitoring and analysis.

Some licensees did not develop and enforce effective monitoring and checking procedures to prevent systemic failures.

On some occasions advice licensees proposed review and remediation processes that were legalistic and did not prioritise the interests of customers.[65]

2.75             As at 31 August 2016, $23.7 million in compensation had been paid to 27 000 customers. ASIC estimates that, as the compensation process continues, a further $154 million may be paid to a further 176 000 customers.[66]

Open data regime — July 2017

2.76             In July 2017 the government announced that it had commissioned an independent review to recommend the best approach to implement an open banking regime in Australia, with the report due by the end of 2017. The open banking regime is intended to provide greater consumer access to their own banking data and data on banking products will allow consumers to seek out products that better suit their circumstances, saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models to drive greater competition in banking and contribute to productivity growth. In August 2017, the government released an issues paper for consultation. As at 6 February 2018, forty submissions had been published on the Treasury website.[67]

Committee view

2.77             Life insurance is often sold with other financial products by banks and other industry participants. The committee notes that if life insurance is not included in the open data regime, the mobility goals of the regime could be significantly reduced because life insurance would be less mobile than other related financial products.

2.78             Even if a customer held life insurance as a standalone product, an open data regime would enable customers to have easy access to all their life insurance information including medical and underwriting information. This should mean that similar mobility advantages to those proposed for banking would accrue within the life insurance industry.

2.79              In addition, if an open data regime applied to life insurance, a consumer would be able to present all their information to an adviser. This should reduce the work involved for the adviser and therefore reduce the costs of helping a consumer choose products that better suit their circumstances. In turn, this should reduce the fees and commissions paid to switch products.

Recommendation 2.1

2.80             The committee recommends that life insurance be included in the open banking regime.

Red tape reduction

2.81             The FSC submitted a range of proposals to the committee regarding the reduction of red tape in the life insurance industry. The proposals included the following:

Committee view

2.82             The committee notes that some of the proposals for red tape reduction put forward by the Financial Services Council were received later in the inquiry and are of a very substantial nature.

2.83             For example, the committee considers that the proposal to allow life insurers to mortgage the assets held in their statutory funds and invest those funds in geared entities appears to be a potentially high-risk proposition that requires serious discussion. The committee would be keen to hear from the Australian Prudential Regulation Authority on this matter.

2.84             Given these proposals from the Financial Services Council were received later in the inquiry, the committee did not have an opportunity to hear the views of other submitters and witnesses with respect to these proposals. The committee is of the view that such matters need a proper airing during the course of an inquiry in a manner that allows the views of a range of stakeholders to be ascertained and weighed.

2.85             Nonetheless, the committee did raise the Financial Services Council's proposal to allow life insurers to mortgage the assets held in their statutory funds and invest those funds in geared entities with the Australian Prudential Regulation Authority (APRA). The committee thanks APRA for the clarity and promptness of its responses which it has published on the committee's website.[69]

2.86             As part of its response, APRA informed the committee that:

APRA has prudential concerns with geared investments undertaken directly from a statutory fund by mortgaging the assets of the fund. Statutory funds are an important mechanism for policy owner protection, and they operate by ensuring that assets held by the life company for the purposes of undertaking life insurance business are segregated for the purpose of meeting policy owner claims. The prohibition on mortgaging statutory fund assets is a fundamental part of a comprehensive regime regarding the management of statutory funds, along with other legislative provisions prohibiting reinsurance between funds, regulating how assets enter and leave the statutory fund, specifying the order in which assets are distributed in the event of the windup of an insurer and a range of other related matters. Allowing mortgaging of assets of the statutory fund risks weakening the policy owner preference afforded by the statutory fund as it provides the mortgagor with a claim on certain assets of the fund in preference to the protections and statutory priority afforded to policy owners.

2.87             While the committee would likely endorse some of the more straight-forward measures proposed by the Financial Services Council, nevertheless, given the gravity of the response from APRA, the committee considers that the government should not progress any reforms on these matters until an appropriate inquiry or consultation process has been undertaken.

2.88             Finally, the committee notes that it retains the ability to monitor further developments in this area through its ASIC Oversight process.