10.1 Claims handling practices by life insurers are subject to certain legislative
requirements as well as commitments made by life insurers who are subject to the
Financial Services Council's (FSC) self-regulatory mechanism known as the Life
Insurance Code of Practice (Code). Work is also being done by the Insurance in
Superannuation Working Group to establish the Insurance in Superannuation Code
of Practice (Super Code) in relation to both default and retail group
insurance and trustees. The Super Code is currently in draft form and the
Insurance in Superannuation Working Group envision that it will also consist of
commitments similar to the FSC's Code, some of which will govern claims
10.2 This chapter considers the evidence provided to the committee during
this inquiry regarding claims handling by life insurers. The evidence
highlighted the concerns held by a number of individuals and groups that
certain claims handling practices 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. This chapter also considers the evidence submitted regarding the developments
in the life insurance industry in response to claims handling concerns.
10.3 The following issues are discussed in this chapter:
- Oversight of claims handling practices;
- A policyholder's right to reasons where a claim has been denied;
- Inconsistency in claims handling data;
- Definitions in insurance policies;
- Pre-existing conditions and non-disclosure;
- Mental health claims;
- Independent medical examiners;
- Incentives for staff to reject or delay claims;
- Underwriting direct insurance;
- Legacy products; and
- Early intervention—rehabilitation payments.
Oversight of claims handling practices
10.4 The Australian Securities and Investments Commission (ASIC) informed the
committee that Corporations Regulation 7.1.33 excludes certain insurance claims
handling activities by advisers and life insurers from being defined as a 'financial
service' for the purposes of sections 766A(1)(b) and 766A(2)(b) of the Corporations
Act 2001 (Corporations Act).
10.5 As a result, ASIC's powers under the Corporations Act generally do not
apply to oversighting the conduct of insurers and financial advisers in this claims
handling context, including whether insurers have provided financial services in
an efficient, honest and fair way.
10.6 Additionally, ASIC informed the committee that the current exemption
limits ASIC's ability to respond to conduct such as:
- an insurer relying on the terms of the contract to deny a
claim (even where the exclusion clause relied on may be outdated or
- unnecessary or extensive delays in handling claims;
- incentives for claims handling staff and management,
including whether they are in conflict with the insurer's obligation to assess
each claim on its merit; and
- surveillance practices by investigators, particularly for
mental health claims.
10.7 ASIC acknowledged it is aware of arguments that sector-specific
legislation through the Insurance Contracts Act 1984 (Insurance
Contracts Act) should be sufficient in ensuring claims are handled
appropriately. However, ASIC was of the view that claims handling practices,
like other financial products and activities, should be captured under the Corporations
10.8 Doing so would provide ASIC with greater scope to address non-compliance
with the matters that are currently excluded. It would also allow the overarching
requirement to act efficiently, honestly and fairly to be applied to the claims
10.9 Treasury explained that the government is considering the merits of ASIC's
recommendation that would mean the claims handling processes of insurers would
be captured under the definition of a financial service in the Corporations Act,
thereby allowing ASIC to address claims handling conduct. Treasury has conducted targeted consultation on the matter and is now determining
the best way forward prior to providing advice to the Minister.
10.10 Consumer and not-for-profit
groups, such as the Financial Rights Legal Centre (FRLC) and the Consumer
Action Law Centre, supported ASIC's proposal to remove the exemption in Corporations
10.11 Both the FRLC and
the Consumer Action Law Centre were also of the view that the review of ASIC's
penalty powers should include consideration of more significant penalties in
relation to claims handling misconduct.
10.12 The committee
notes that Corporations Regulation 7.1.33 excludes certain insurance claims
handling activities by advisers and life insurers from being defined as a
'financial service' for the purposes of sections 766A(1)(b) and 766A(2)(b) of
the Corporations Act.
10.1 The committee recognises that the ability of a regulator to oversight the
claims handling processes of insurers and address non-compliance is crucial to
ensuring that consumers are protected through means that are both appropriate
10.13 The committee recommends that the Australian Government review Corporations
Regulation 7.1.33 to ascertain whether the exemption provided by this
regulation limits in any way ASIC's ability to oversight the claims handling
processes of insurance companies.
A policyholder's right to reasons where a claim has been denied
10.14 As discussed in chapter
8 on access to medical information, the Disability Discrimination Act 1992 (Disability Discrimination Act) exempts life insurers from its application in
order to assess an individual's risk when setting premiums or policy terms.
However, insurers can only use the exemption to make decisions that are based on
actuarial or statistical evidence and in the case where no such evidence exists,
have regard to other relevant factors.
10.15 This exemption
was further explained by Dr Stephen Carbone, Policy, Research and Evaluation
Leader at beyondblue, who noted that while a consumer has a right to know how
an insurer reached its decision under section 75 of the Insurance Contracts Act,
the customer must ask for such reasons. This means that there is no positive
obligation for insurers to explain to a consumer why an application has been
10.16 Additionally, Ms
Michelle Cohen, Senior Solicitor at the Public Interest Advocacy Centre (PIAC),
told the committee about how it is difficult to obtain written reasons for why
a decision has been made. Ms Cohen stated that even where written reasons are
provided under section 75 of Insurance Contracts Act, they are not targeted to
the part of a person's medical history relied on by the insurer when making a
10.17 PIAC suggested
that insurers who rely on the exemption under the Disability Discrimination Act
should be required to provide copies of the actuarial and statistical data or
any other material relied on, along with a plain English summary to the insured
party. Furthermore, PIAC argued that this documentation should be provided to
the insured party without them needing to contact the insurer or lodge a formal
complaint to the Disability Discrimination Commissioner.
10.18 The committee
notes that section 75 of the Insurance Contracts Act already provides that
policyholders have a right to know how a life insurer has reached a decision.
However, the committee also notes that there is currently no positive
obligation on an insurer to provide the reasons for a decision to a
10.19 The committee recognises
the importance of transparent processes in enabling consumers to understand how
the decisions made by life insurers have been reached.
10.20 To this end, the
committee is of the view that life insurers should be required to provide a
policyholder with written reasons when making a decision to reject an
application or deny a claim for life insurance. Furthermore, these reasons
should be provided as a plain English summary of the evidence and should be
targeted to the part of a person's medical history relied on by the insurer.
The committee is also of the view that any statistical and actuarial evidence
and other material relied on by the insurer should be made available on request.
10.21 The committee recommends that a requirement be inserted, where
necessary, into both the Insurance Contracts Act 1984 and the Disability
Discrimination Act 1992 to the effect that an insurer must provide a person
with written reasons when an application for insurance has been rejected or an
insurance claim denied. The committee further recommends that the written
reasons be provided as a plain English summary of such evidence and be targeted
to the part of a person's medical history relied on by the insurer. The
committee also recommends that the statistical and actuarial evidence and other
material relied on by the insurer be available on request.
Inconsistency in claims handling data
10.22 ASIC's report on
claims handling in the life insurance industry (Report 498) did not
identify any cross-industry misconduct in relation to the payment of life
insurance claims or claims procedures within the life insurance industry.
10.23 Report 498 found
that once claims decisions are made, 90 per cent of claims are paid, with 96
per cent of death claims being paid once decided.
10.24 However, Report
498 also identified the need for data on life insurance claims to be consistent
and more transparent. Report 498 proposed that ASIC and the Australian
Prudential Regulation Authority (APRA) work with insurers and other stakeholders
in order to establish a consistent reporting regime regarding claims data,
outcomes, timeframes and disputes across policy types that is publicly
available. The FSC submitted that it will be working with both ASIC and APRA to develop a
consistent reporting framework.
10.25 The FRLC also
recommended a public reporting regime similar to the one proposed in Report 498.
However, the FRLC proposed that data regarding claims and claims outcomes be
made available to consumers when purchasing and renewing a life insurance
policy and that such data include the names of insurers alongside claims rates.
10.26 The committee
notes that on 9 November 2017, ASIC and APRA released the initial results from
the pilot data collection on life insurance claims. The initial data
complemented ASIC's finding in Report 498 that insurers pay 90 per cent of life
insurance claims in the first instance. ASIC and APRA also released an
information paper outlining common data quality issues and the next steps in
their joint data project. The information paper announced a second round of
pilot data collection and highlighted that definitions for insurers regarding
claims handling terms will be released shortly.
10.27 ASIC informed the
committee that the consistent reporting regime and the final data collected is
expected to be released sometime in 2018.
10.28 The committee
recognises that with three different distribution channels operating in life
insurance—retail, direct, and group—a consistent and publicly available reporting
regime regarding claims data, outcomes, timeframes and disputes across policy
types is of vital importance.
10.29 The committee
welcomes the collaboration between ASIC and APRA on this project and looks forward
to the findings from the next stage of the joint data project.
10.30 The Committee
acknowledges that APRA previously gave evidence that it was concerned that
insurers do not have a sufficient understanding of declined claims data which
may present a prudential risk if not rectified soon. ASIC later stated that it
is working with APRA to establish a transparent public reporting regime for
life insurance claims information.
Definitions in insurance policies
10.31 This section
considers policy definitions used by life insurers and specifically, concerns
related to life insurers relying on inconsistent and out-dated definitions for certain
conditions during the claims assessment process. Arguments were made to the
committee for the standardisation of policy definitions across life insurance
10.32 Report 498
found that while the overall number of disputes about policy definitions in
life insurance was low, policies that have traditionally technical definitions
such as Total and Permanent Disability (TPD) and trauma policies had higher
10.33 The Financial
Ombudsman Service Australia's (FOS) submission also highlighted a potential
misalignment between community expectations and insurance definitions and noted
that disputes regarding policy definitions occur in circumstances where the
definition is ambiguous, restrictive and does not reflect current medical
10.34 Report 498 found
a variance in the definitions used for medical conditions across the industry
and that even a subtle difference in definitions affected the amount of cover
10.35 Report 498 also
found that claims had not been paid by some insurers due to a technicality or
an out-of-date policy definition while other insurers did provide a claim
payment as an ex-gratia payment even where a definition was not satisfied, as
the payment reflected the intent of the policy.
10.36 Mr John Berrill
of Berrill and Watson Lawyers explained the problem of
out-of-date definitions with the example of a trauma policy that included
definitions for a number of conditions such as heart attack, cancer and stroke.
With changes and advances in medicine over time, the way conditions are defined
change as well. However, if a policyholder held a trauma policy for 20 years
prior to having a heart attack, the definition of a heart attack would be the
definition in the 20 year old policy and would not reflect new medically
approved definitions. As Mr Berrill pointed out, this could render the policy
useless despite the policyholder meeting the current medical definition of a
10.37 Life insurers
noted that they are aware of the potential for misalignment between medical
definitions and policy definitions. In response to such misalignment, the FSC
stated that under the Code, life insurers who are FSC members will be required
to 'review key medical definitions every three years for relevant policies and
update them where necessary to ensure definitions remain current'.
10.38 As at July 2017,
the Code has minimum standards for Trauma/Critical Illness, Cancer, Heart Attack
and Stroke. In November 2016, the FSC informed the committee that the
consultation process for such definitions would include external medical
specialists, be subject to approval from the Australian Competition and
Consumer Commission (ACCC), and will provide confidence to those policyholders
with trauma insurance that they have a base level of cover.
10.39 In terms of
implementation and oversight of the minimum standards committed to in the Code,
FOS recommended that the new standards set out in the Code be:
- extended to all medical definitions;
- kept up to date with medical practice and community expectation;
- easier to understand; and
- standardised against a minimum benchmark.
10.40 The Association
of Financial Advisers (AFA) proposed the establishment of a medical advisory
board, subject to public scrutiny, to conduct an independent review every three
years of definitions used in insurance and to determine whether an upgrade of
policy definitions is required.
10.41 Mr Brett Clark,
Chief Executive Officer and Managing Director of TAL, stated that TAL has used
the minimum standards set out in the Code and backdated definitions in polices
to August 2009 to reflect the Code's minimum standards.
10.42 Similarly, Ms
Helen Troup, Managing Director of CommInsure, explained that CommInsure had
backdated the definition of heart attack to 2012 in their policies to reflect
the universal definition of a heart attack. In terms of rheumatoid arthritis,
CommInsure had backdated the definition by two years to reflect advancements
and understanding in medicine.
10.43 Ms Annabel
Spring, Group Executive Wealth Management at the Commonwealth Bank of
Australia, noted the work the FSC has done in creating minimum standards around
trauma, with the FSC definition now covering 80 per cent of claims. However, Ms
Spring proposed that there should be a standard definition for TPD.
10.44 Both the Australian
Lawyers Alliance (ALA) and Ms Kim Shaw, a Principal at Maurice Blackburn Lawyers
(Maurice Blackburn), also raised specific concerns with how TPD is currently
defined for insurance within superannuation. These concerns focused on the
differences in how 'permanent incapacity' is defined by the Superannuation
Industry (Supervision) Act 1993 (SIS Act) and how TPD polices are defined
by insurers. Specifically, concerns related to differing views on a person
being 'unlikely' to return to work versus being 'unable' to return, as well as
the type of employment such a person could return to.
Blackburn explained that the most prevalent change to the group insurance
industry is the shift by insurers away from the legal test of 'unlikely' in
relation to a person's ability to return to work to that of 'unable'. The
'unlikely' test in relation to 'permanent incapacity' is defined by the SIS Act
…if a trustee of the fund is reasonably satisfied that the
member‘s ill health (whether physical or mental) makes it unlikely that
the member will engage in gainful employment for which the member is
reasonably qualified by education, training or experience.
10.46 While under
Regulation 4.07D of the Superannuation Industry Supervision Regulations 1994, TPD
definitions for group insurance must be 'consistent' with the 'unlikely' test, insurers
have moved away from this. Maurice Blackburn submitted that in 2014 a fund with over a million members
removed the word 'unlikely' from the definition of TPD and replaced it with a
requirement that a person be 'unable' to ever engage in any employment for
which, through education, training or experience, they are or may become suited
10.47 The interpretation
of 'unlikely' by Australian courts in relation to TPD includes consideration of
the job market and the prospects of a disabled job applicant obtaining and
maintaining employment. 
10.48 However, Maurice
Blackburn were of the view that the life insurance industry determine whether
someone is 'unable' to return to work based only a medical assessment that is
separate from real world considerations, noting:
…it is possible to argue that even a quadriplegic is
theoretically capable of work and may not satisfy an “unable” definition,
notwithstanding that their actual employment prospects in a competitive
employment market are negligible.
Blackburn argued that the move away from the 'unlikely' test is evidence of a
clear intention by insurers to limit the amount of claims they have to pay.
This is despite the fact that the claimant may never be able to work at a level
similar to that before the claim was made.
10.50 The ALA also
submitted that insurers are moving away from the requirements of 'qualified' as
contained in the SIS Act towards requirements of 'any employment' for TPD
claims. The ALA noted that the SIS Act definition of 'permanent incapacity'
does not refer to any employment that a person is or may become suited to
through retraining or further education.
10.51 It was the ALA's
view that a person's inability to return to an occupation that reflects their
current education, training and experience will impact on both their financial
position and their ability to save for retirement. Where an insurer requires a
person to return to employment in a new field, this is often only possible
after significant re-training. However, it is not clear who is responsible for
paying for the re-training. Furthermore such employment would likely be at a
lower level and salary. In the ALA's opinion these consequences are ones that
should be covered by life insurance, not created because of it.
10.52 Conversely, the Association
of Superannuation Funds of Australia (ASFA) submitted that the regulatory
definition for TPD as stated in the SIS Act has caused difficulties and drawn
out decision making processes as the SIS Act definition does not make provision
for any future rehabilitation or changes in technology that may allow the TPD
claimant to return to work. Additionally, a one-time assessment of disability
to determine whether it meets the SIS Act definition may in fact incentivise a
claimant to not recover some ability due to fears of not being paid a lump-sum
10.53 The ALA asserted
that minimum standards and clear policy definitions for group insurance,
including medical and policy definitions, must be legislated. Those covered by
group life insurance are vulnerable as they do not receive any advice on
whether their group coverage is correctly matched to their circumstances.
Legislated minimum standards and clear policy definitions in group insurance are
- protect consumers and provide certainty that the product matches
- reduce complexity for insurers by making it easier for them to
appropriately price products; and
- ensure that there is meaningful oversight of the implementation
and use of the standards and definitions.
10.54 The consultation
paper for the draft Super Code notes that the Insurance in Superannuation
Working Group considered the extent to which the standardisation of definitions
in insurance within superannuation can occur, but concluded that this is a longer
term project that will be considered in future iterations of the Super Code.
10.55 Evidence to the
committee highlighted that policies with technical definitions can have high
decline rates. This suggests that there may be a significant gap between how society
may define a certain event, such as a heart attack, and how the same event is
defined by life insurers. The move by life insurers away from the common
understanding of TPD and an individual's ability to return to employment, as
encapsulated in the SIS Act, also demonstrates this gap.
10.56 The committee
notes the work being done by the FSC to ensure policy definitions of certain
conditions are up-to-date. The Insurance in Superannuation Working Group's
position that it will consider the standardisation of definitions in the future
iterations of the Super Code is also noted. However, the committee is concerned
that the Insurance in Superannuation Working Group has postponed consideration
of minimum standardised definitions.
10.57 In this regard,
the committee is firmly of the view that all definitions should be up-to-date
and standardised across all types of life insurance policies. This would
provide certainty to consumers and policyholders about what they are covered
for, including the extent to which any associated conditions that may arise
from the initial condition, such as mental ill health, are covered by the
10.58 The committee
also believes that the FSC and the Insurance in Superannuation Working Group
should seek the views of a panel of independent medical experts—that is,
medical experts independent of the life insurance industry—when reviewing the
appropriateness of all definitions, noting a review may need to occur more
frequently than every three years.
10.59 As detailed in
chapter 4 of this report, the committee supports the
co-regulatory approach outlined in ASIC's Enforcement Review position paper,
particularly the requirements for codes to be registered. Such a co-regulatory
approach will allow for appropriate oversight of the commitments made in a
code, including those relating to keeping policy definitions up-to-date and
ensuring review of these definitions occur in a timely fashion.
10.60 The committee recommends that in relation to definitions in life insurance
policies, the life insurance industry must:
- regularly update all definitions in policies to align with
current medical knowledge and research;
- standardise definitions across all types of polices;
- use clear and simple language in definitions; and
- clearly explain which associated conditions that may arise from
the initial condition, including mental ill health, are covered by the insurance
10.61 The committee recommends that the Financial Services Council's Life Insurance
Code of Practice be updated to reflect Recommendation 10.3.
10.62 The committee recommends that the Insurance in
Superannuation Working Group's Insurance in Superannuation Code of Practice be updated to reflect Recommendation 10.3.
Pre-existing conditions and non-disclosure
10.63 In the context
of life insurance, pre-existing conditions are illnesses or conditions that a consumer
may have had prior to obtaining an insurance policy. Life insurance policies
often contain exclusions for some or all pre-existing conditions.
10.64 As discussed in
chapter 8 on access to medical information, under the Insurance Contracts Act,
a consumer must disclose all relevant information to an insurer. This means
that where a consumer has a pre-existing condition this must be disclosed to
the insurer when applying for insurance.
10.65 Where relevant
information has not been disclosed to the insurer, section 29(3) of the Insurance
Contracts Act allows an insurer to avoid the policy within the first three
years, even in circumstances where the failure to disclose was not fraudulent. Remedies
for insurers other than contract avoidance due to non-fraudulent non-disclosure
also include adjusting the monetary amount that is insured and the retrospective
varying of the contract to allow the insurers to be placed in the position they
would have been in if the non-disclosure did not occur. If the failure to
disclose was fraudulent, section 29(2) of the Insurance Contracts Act allows
an insurer to avoid the contract at any time.
10.66 In Report 498,
ASIC found that the definition for pre-existing condition exclusions varied
greatly across policies and that, in general, for policies that were
non-advised such as direct and group policies, all pre-existing conditions were
excluded from coverage.
10.67 ASIC also found
that pre-existing condition exclusions did not necessarily require the
diagnosis of the condition but rather whether symptoms existed that would lead
a reasonable person to obtain medical treatment or assistance.
10.68 ASIC also noted
that non-disclosure of pre-existing conditions happened for a number of reasons,
such as the policyholder not being formally diagnosed with the condition or
being told that they have been cured of the condition. There can also be disagreement
between insurer, policyholders and doctors about whether a pre-existing
condition relates to a claim.
10.69 Mr Peter Kell, Deputy
Chairman of ASIC, discussed ASIC's concerns over life insurers looking at a
customer's medical history to identify a pre-existing condition that was not
disclosed in order to inappropriately deny claims. Mr Kell stated that ASIC is
of the view that law reform regarding how insurers use medical evidence to
identify pre-existing conditions may be beneficial.
10.70 The committee
received evidence about insurers determining a person had a pre-existing undisclosed
mental health condition despite a lack of evidence to support such a
conclusion. For example, beyondblue submitted that in some cases where claims
have been denied or contracts avoided due to the insurer's determination that a
customer did not disclose a past mental health condition, the insurer has
actually only relied on the fact the person had a single mental health episode,
or simply required assistance with managing every day stress, or made a passing
comment about their mood to a treating doctor.
10.71 Likewise, PIAC observed
that an insurer usually only makes an allegation of non-disclosure against the
policyholder after the policyholder has made a claim for a benefit. Ms Michelle Marie Cohen, Senior Solicitor at PIAC, referred to the distress and
humiliation felt by a client of PIAC when an insurer imputed that they had a
pre-existing mental health condition.
10.72 The labelling of
a mental health issue as a pre-existing condition also concerned some witnesses
such as Dr Kym Jenkins, President Elect Royal Australian and New Zealand
College of Psychiatrists, who informed the committee that insurers use a
one-size-fits-all approach that views mental illness as a homogenous illness
with no regard to severity or length.
Dr Carbone argued that the term pre-existing is too broad and questioned why a
condition that was present a decade or two ago can be seen as
pre-existing to circumstances that exist currently.
10.74 Dr Carbone also drew
attention to the adverse consequences of people not seeking medical treatment
due to a fear of insurers using mental health as a
pre-existing condition to deny claims.
10.75 The FSC stated
that insurers only investigate a policyholder's non-disclosure in specific
circumstances. Triggers for an investigation can include the amount of time
between a policyholder acquiring a policy and making a claim, with a longer
period between acquisition and claim unlikely to be a trigger, and where a
treating doctor has mentioned a non-disclosed condition in a report relating to
10.76 The FSC
explained that insurers assess the non-disclosed condition by reviewing
sufficient medical information regarding the policyholder's history. The FSC assert
that where the non-disclosure is not relevant to the claim, policyholders are
protected by the following principles as established by courts and disputes
- The non-disclosure has to be significant enough for an
underwriter to deem that the insurer would not have accepted the risk on the
- The insurer has to be satisfied that a reasonable person
would have disclosed the condition.
10.77 The evidence
submitted by the FSC emphasised the obligations insurers are under to ensure
that non-disclosure can only be used to deny a claim or avoid a contract in
circumstances where the disclosure is significant enough that the insurer would
have charged higher premiums had it known about the pre-existing condition and
where a reasonable person would have disclosed the condition.
10.78 However, other
evidence provided during this inquiry suggests that life insurers use pre-existing
conditions to unfairly deny claims. The committee heard that this can occur
when a life insurer imputes that a policyholder had, for example, a
pre-exiting mental health condition despite their being little evidence on
which to base such a claim.
10.79 The committee is
particularly concerned about allegations that seemingly benign information,
such as a discussion with a doctor about a mood, is used by life insurers as a
basis for determining someone has a pre-existing mental health condition. The
committee is concerned that such behaviour, or the perception of such behaviour
by life insurance companies, is highly likely to dissuade people from seeking
appropriate treatment and evidence was presented that this was already
occurring. Furthermore, such behaviour is inimical to the proper recognition of
the complex and non-homogenous nature of mental health conditions.
10.80 The committee is
of the view that its recommendations in chapter 8 regarding an insurer's access
to medical information may help prevent the inappropriate use of information to
determine the non-disclosure of a pre-existing condition.
10.81 Nevertheless, in
addition to those earlier recommendations, the committee is also of the view
that the FSC should include explicit commitments within its Code to the effect
that a pre-existing condition is to be used by an insurer as the basis for
denying a claim or avoiding a contract only where a direct medical connection
between the pre-existing condition and the claim can be established.
Furthermore, the Code should require the life insurer to provide the statistical
and actuarial evidence and any other material used to establish a pre-existing
condition, as well as a written summary of the evidence, to the policyholder.
10.82 The committee recommends
that the Financial Services Council's Life Insurance Code of Practice include explicit commitments that:
- where a pre-existing condition is to be used by an insurer as the
basis for denying a claim or avoiding a contract a direct medical connection
between the prognosis of a pre-existing diagnosed condition and the claim must be
- the statistical and actuarial evidence and any other material used
to establish a pre-existing condition, as well as a written summary of the evidence
in simple and plain language, be provided by the life insurer to the consumer/policyholder
Mental health claims
10.83 Report 498 found
that policyholders making a mental health claim face a challenging burden in
demonstrating to insurers the validity of their condition. ASIC noted that the evidence
required for a mental health claim is substantial and includes 'the need for
policyholders to attend psychiatric assessments, complete activity diaries,
submit regular progress claim forms, provide medical reports and attend
interviews with private investigators, as well being the subject of
10.84 Based on its
findings, ASIC concluded that industry standards for the assessment of mental
health claims are required in order to adequately protect policyholders.
submitted that a person's mental health condition can be exacerbated or
re-emerge in response to an insurer, or a specialist working for an insurer,
questioning the validity of their mental health claim. Dr Michelle Blanchard, General Manager of Research, Policy and Programs with
SANE Australia provided several case studies that reinforced beyondblue's
10.86 Dr Kym Jenkins, President
Elect of The Royal Australian and New Zealand College of Psychiatrists, was
critical of the way that life insurers have a tendency to treat mental health
as a homogenous issue. She also questioned the selection of data used by life
insurers to assess a mental health claim, and also whether such data is
up-to-date. Other witnesses including representatives from Mental Health Australia, the
National Mental Health Commission and SANE Australia raised similar questions.
10.87 Evidence was
presented to the committee that individuals may not seek treatment for mental
ill health due to concerns of how this information will be used by life
10.88 In terms of how
the life insurance industry has responded to mental health claims, the FSC stated
that the industry pays a large and growing amount of benefits in response to
mental health conditions The FSC also noted that the industry is considering
mental health as a potential area of focus for the second iteration of the Code
and will require life insurers to ask specific and clearer questions in
relation to mental health issues. However, the FSC have stated that they 'are not going to have a specific mental
health chapter'. The FSC has also established a steering group with mental
health representatives to better understand mental health conditions that may
lead to impairment or absence from work. The FSC has also held two roundtable
sessions with mental health advocacy groups such as the National Mental Health
Commission and Mental Health Australia.
10.89 Under Standard
21 that sits alongside the Code, life insurers who are FSC members must have a
minimum standard mental health education and training program that staff
interacting with customers must undertake to ensure that staff have adequate
mental health awareness. The FSC was of
the opinion that many insurers go beyond the minimum standard required. The FSC also asserted that there is a trend
amongst insurers to have mental health claims teams, most of which consist of
allied health professionals and relevant medical expertise.
10.90 Viewed as a
necessary part of the claims process, insurers believe surveillance provides
them with a way to guard against false claims and fraud.  However, ASIC's Report 498 noted that five
per cent of the evidence-related disputes that it examined concerned
allegations of surveillance practices that were seen as unfair or even caused a
person's mental health condition to worsen.
10.91 Mental health
professionals provided real life examples that reflected ASIC's finding. Dr
Jenkins explained to the committee that for someone who has made a mental
health claim, it can be destructive to subject them to surveillance when their
mental health has since improved and they are trying to move forward.
10.92 In terms of how
insurers engage with surveillance practices, the FSC informed the committee that
only an estimated one to five per cent of claims are subject to surveillance.
The FSC believe that surveillance in relation to mental health is even rarer.
10.93 Additionally the
Code provides commitments that life insurers will only use surveillance, which
must be undertaken by a legitimate investigator, where there is an
inconsistency in the information provided. The Code also contains a commitment
that surveillance will cease where it is shown that it is negatively impacting
the claimant's recovery.
10.94 Mental health
advocacy groups advised the committee that it remains unclear what data is used
by life insurers to assess mental health claims and whether this data is
10.95 The committee
believes that providing consumers and policyholders with appropriate written
reasons, as discussed earlier in this chapter, will illuminate the nature of
the actual data that is being used by insurers in relation to both assessing
mental health claims and in their determination of whether there has been
non-disclosure of a mental health pre-existing condition.
10.96 Furthermore, the
committee believes that the release of such data will allow for a conversation
between mental health advocacy groups and the life insurance industry regarding
the appropriateness of the data.
10.97 The committee agrees with ASIC's position that industry standards for the
assessment of mental health claims are needed. A suitable way to achieve this may
be through a separate Code with commitments specific to mental health claims
and other related issues. The committee notes that if ASIC's proposal for a
co-regulatory system, as discussed in chapter 4, is implemented by the government
the enforceability of such a code would be strengthened.
10.98 With around half of Australians expected to experience a mental illness
at some point during their life and evidence presented to the committee
suggesting that 'psychological conditions are the most common reasons for
patients to visit a GP in the first place', the committee is strongly of the view that mental health needs to be addressed
in a specific manner by life insurers.
10.99 In addition, the committee is highly concerned about evidence presented
that individuals are not seeking treatment for mental ill health due to
concerns about the use of this information by life insurers. This is
undermining our public health message which continues to work to reduce the
stigma that remains around mental health experiences. Any role life insurers
have in impacting on individuals seeking necessary treatment must be addressed.
10.100 The committee
deals with rehabilitation below, and for sound reasons as articulated in the
section on early intervention and rehabilitation payments at the end of this
chapter, is cautious about allowing insurers to be directly involved in funding
rehabilitation. However, the committee considers that broad-based preventative
initiatives is in a different category, and believes that consideration should
be given to allow insurers to more actively promote and fund evidence-based
best-practice preventative health measures targeted at promoting good mental
health at a general level.
10.101 The committee
recommends that after consultation with relevant medical professionals independent
of the life insurance industry and mental health advocacy groups, the Financial
Services Council establish a mandatory and enforceable Code of Practice for its
members, or a dedicated part of its existing Code of Practice, specifically in
relation to mental health life insurance claims and related issues.
10.102 The committee further
recommends that these consultations discuss requiring insurers to:
- ensure that applications for insurance that reveal a mental health
condition or symptoms of a mental health condition are not automatically
- refer applications for insurance that reveal a mental health
condition or symptoms of a mental health condition to an appropriately
- give an applicant for insurance the opportunity to either withdraw
their application or provide further information, including supporting medical
documents, before declining to offer insurance or offering insurance on
- where an insurer offers insurance on non-standard terms, for
example, with a mental health exclusion or a higher premium than a standard
- how long it is intended that the exclusion/higher premium will
apply to the policy;
- the criteria the insured would be required to satisfy to have the
exclusion removed or premium reduced;
- the process for removing or amending of the exclusion/premium;
- develop, implement and maintain policies that reflect the above
10.103 The committee
recommends that consideration be given to allowing insurers to more actively
promote and fund evidence-based best-practice preventative health measures
targeted at promoting good mental health at a general level.
10.104 The committee received
evidence about the financial and health burden delays during the claims process
may cause. The committee also heard allegations about life insurers
deliberately delaying the assessment or payment of claims. However, while evidence
also pointed to a lack of transparency around the claims process, life insurers
did inform the committee of the measures they are taking to improve
communication and reduce delays when making a claims decision.
10.105 Report 498 found
that a life insurer's requests for evidence and claims management practices,
such as the handling of documentation, contributed to delays in the claims
process. Delays also occurred as a result of matters such as the level of insurance cover
and the complexity of the claim.
10.106 The Code
contains a commitment that life insurers who are FSC members will make all
efforts in meeting timeframes prescribed in the Code. The Code outlines that
for non-income related claims, a decision will be made in 10 working days, once
the life insurer has all the information that it reasonably requires.
10.107 However, such a
commitment comes with the caveat that unexpected circumstances may affect how
long it takes for a claims decision to be made. Examples of unexpected
circumstances include where a superannuation trustee is carrying out their
legal obligation to review the life insurer's decision, as well as the time a
policyholder or their doctor takes to provide information to the life insurer. If such unexpected circumstances have occurred, a life insurer will make a
decision within one year after it is notified of the claim.
10.108 In addition, the
Code also contains a commitment that life insurers will assist a policyholder
during the assessment of their claim where the policyholder can demonstrate
that they are in urgent financial need.
10.109 In terms of
default and retail group insurance in superannuation, Berrill and Watson
Lawyers submitted that delays may be a result of the claims being passed back
and forth between the life insurer and the superannuation trustee in
circumstances where the life insurer requests more information from the
policyholder and the trustee must carry out their obligation to review each of
the life insurer's requests and decisions. Mr Berrill told the committee that there are no statutory time limits for the
processing of life insurance claims in superannuation, unlike those that are
applicable to workers compensation insurance.
10.110 The Insurance in
Superannuation Working Group has created non-statutory timeframes in its draft
Super Code for the processing of life insurance claims in superannuation. The
draft Super Code builds on the timeframes currently committed to in the Code.
10.111 Industry Super
Australia stated that the new code for group insurance will improve
communication with consumers and policyholders about how long a claim will take
to be assessed.
10.112 Mr Shane Tregillis,
Chief Ombudsman at FOS, informed the committee that while the Code has
commitments regarding timeframes for claims; such commitments must be
implemented. Mr Tregillis was of the view that timeframes regarding claims
should be clearly communicated to policyholders and only deviated from by
insurers in exceptional circumstances, with such circumstances explained to the
10.113 The FRLC expressed
concern that delays serve as an unethical way for insurers 'to drag out claims'.
Policyholders when faced with a heavy financial burden and subjected to
invasive practices become worn out and, as a result, withdraw their claims.
10.114 The FLRC were of
the view that, due to its self-regulatory and unenforceable nature, the Code
was insufficient to prevent unreasonable delays in claims assessment and that
law reform was therefore necessary to protect policyholders.
10.115 It should be
noted that Report 498 found that 3 out of 14 insures had high rates of withdrawn
claims ranging from 20 to 24 per cent. However, ASIC were unable to draw any
conclusions as to why high claims withdrawal rates occurred. This is in part
due to varying definitions of 'withdrawn' amongst insurers. ASIC noted that it
will explore the issue of withdrawn rates as a part of its further work.
10.116 The ALA, like
the FLRC, argued for legislation to be enacted for group insurance regarding
timeframes for claims handling. The ALA noted that while the common law allows
a court to make a decision in circumstances where an insurer has taken too long
to assess a claim, legislated timeframes for a claims decision along with consequences
for non-compliance need to be enacted as this will allow for an accountable, clearer
and more transparent process.
10.117 As noted in
earlier sections, the assessment process for making a mental health claim for
life insurance can place substantial additional stress on a policyholder. In
addition to those elements already discussed, mental health advocates, such as beyondblue,
informed the committee that delays in claims due to multiple requests for
evidence and a number of medical assessments can cause a person's mental health
condition to worsen.
10.118 In a survey
conducted by the Mental Health Council of Australia and beyondblue, respondents
shared their experiences of increased stress as a result of the insurance
claims process. This was particularly the case where the claims process was
delayed due to extensive requests for evidence by insurers, including requests
to undertake medical examinations by examiners not known to the person making
the claim. It was unclear to Dr Carbone why multiple medical assessments are needed, other
than to allow for insurers to find an assessment that would allow it to deny a
claim. Dr Blanchard from SANE Australia provided several case studies to the committee
that reinforced the findings made by Mental Health Australia and beyondblue.
10.119 Berrill and Watson
Lawyers noted that there is a lack of transparency around claims handling
processes, particular in relation to timeframes. Berrill and Watson Lawyers explained
that all insurers have claims manuals which outline to staff the claims
assessment process, the documents that are required for claims assessment, and the
processing timeframes. However, in its experience 'claims manuals have
sometimes operated as a blunt instrument to delay claims'.
10.120 Based on its
observation of industry practice, Berrill and Watson Lawyers recommended that claims
manuals be provided to customers in order to improve the transparency of the
10.121 In response to
these concerns, BT Financial stated that the Code will positively influence the
claims process and encourage timely management of claims.
10.122 BT Financial
acknowledged that while training and accreditation in relation to claims
handling exists, there is no industry standard or prescribed continuing
education. BT Financial therefore saw an opportunity for the Australasian Life
Underwriters & Claims Association and the FSC to create an industry
accredited program for claims handlers.
10.123 The committee
was also informed of initiatives being undertaken by life insurers in order to
alleviate claims delays. For example, MLC are continuing to improve their
claims handling processes and reduce delays by working towards customers having
a dedicated case consultant to ensure proper communication between parties and
faster decision making.
10.124 The committee
acknowledges the commitment made in the Code to timeframes an insurer must
abide by when assessing a claim. The committee also recognises that life
insurers to whom the Code applies have only recently been bound by the Code and
are still taking steps to implement the Code's commitments.
based on the evidence received, the committee recommends that the FSC and the
Industry Superannuation Working Group should consult with financial legal
services and mental health advocacy groups to determine appropriate timeframes
for claims decisions. The Code and the draft Super Code should be updated to
reflect the outcomes of such consultation. This approach will ensure that the timeframes
committed to in each code will balance the needs of the life insurance industry
10.126 Furthermore, the
committee received a body of evidence that policyholders may have to undergo
multiple medical assessments, the reasons for which appear, at times, unclear
to a policyholder. The committee is concerned that multiple medical assessments
can delay a claim, have a detrimental effect on a policyholder's health, and
create a financial burden.
10.127 The committee is
concerned that there does not seems to be an upper limit on the number of
medical assessments that life insurers can ask a policyholder to undergo. While
the committee is not inclined to prescribe an upper limit on the number of
medical assessments, the committee is firmly of the view that the FSC and the
Industry Superannuation Working Group should consult with relevant stakeholders,
including medical professionals that are independent of the life insurance
industry and mental health advocacy groups, to determine an acceptable upper
limit for medical assessments to be included in both the Code and the Super Code.
10.128 As stated in the
sections of this chapter on definitions and mental health claims, the committee
supports the co-regulatory approach outlined in ASIC's Enforcement Review
position paper, particularly the requirements for codes to be registered. Such
a co-regulatory approach will allow for appropriate oversight of the
commitments made in a code to timeframes for claims decisions and the number of
medical assessments to be undertaken by a policyholder.
10.129 The committee
recommends that the Financial Services Council and the Insurance in
Superannuation Working Group consult with financial legal services and mental
health advocacy groups to determine appropriate timeframes for claims decisions
and that the Life Insurance Code of Practice and the Insurance in
Superannuation Code of Practice be updated to reflect the outcome of such
10.130 The committee
recommends that after consultation with relevant stakeholders, including
medical professionals that are independent of the life insurance industry and
mental health advocacy groups, the Financial Services Council and the Insurance
in Superannuation Working Group mandate through the Life Insurance Code of
Practice and the Insurance in Superannuation Code of Practice an upper
limit on the number of medical assessments that can be requested of a
policyholder and the specific circumstances in which this upper limit could be
Independent medical examiners
10.131 A life insurer
may use an Independent Medical Examiner (IME) to provide a medical report on a
policyholder's claim before it makes a claims decision. IMEs are usually
registered medical practitioners and as such are subject to the same legal and
ethical obligations and standards as all other registered medical
10.132 The FSC explained
that an IME will be used particularly in circumstances where there is a
difference of opinion between a policyholder's General Practitioner and their
10.133 The committee
was also interested in understanding how the IME market operates as well as the
market share of different medico/legal businesses. The committee was keen to
ascertain whether any undue concentration of power may exist in this market
that could impact on the practices of IMEs.
10.134 While not
willing to share its exact market share, Mr Tim Morphy, Director and Chief
Executive Officer of MedHealth, told the committee that MedHealth owns and
operates six business units, all of which mostly facilitate the provision of
IMEs to life insurers in Australia.
10.135 In answers to
questions on notice regarding the growth of MedHealth's medico/legal businesses,
Mr Morphy stated that during 2014–2016, the medico/legal business of MedHealth
has had an average organic growth rate of 6.3 per cent per annum.
10.136 Despite numerous
requests to witnesses and research into the matter, the committee was unable to
obtain information on the market share of medico/legal businesses providing IME
services. The committee is concerned that this information either does not
exist or is not easily accessible. Understanding market concentration is
important for determining the competitiveness of the IME market. A lack of
competitiveness in the IME market may lead to a risk that IME businesses will
not maintain appropriate practices for both quality assurance and managing
conflicts of interest between an IME as a medical professional and the commercial
objectives of the IME business.
10.137 The committee is
also unclear about the extent to which the IME market is currently monitored.
To this end, the committee is of the view that the IME market is worthy of greater
scrutiny and oversight to ensure that appropriate practices are adhered to.
10.138 The committee
recommends that the concentration of power in the Claims Management Industry,
as well as the Independent Medical Examiner market be monitored by the Australian
Competition and Consumer Commission to ensure appropriate quality assurance
practices are in place and conflicts of interests are managed.
10.139 During the
course of the inquiry, the committee was particularly concerned to hear
allegations that medical reports had been altered in order to enable life
insurance companies to avoid paying claims. Senator Williams spoke to two
doctors who stated that they had completed medical reports for independent
medical examination companies, only to find out later that important elements
of their reports had been altered before transmission to the life insurance
companies. The committee was unable to call the doctors before it out of regard
that their professional identities not be revealed.
the committee is of the view that the seriousness of the allegations merits
further investigation in order to determine whether malpractice is occurring
and, if so, the extent to which it is occurring. The committee recognises that
one way forward would be for an audit to take place. That audit would compare
the original medical reports as drafted and kept on file by doctors with those
used by life insurance companies as the basis for the decision.
10.141 The prospect of
a comprehensive audit should be sufficient to ensure that the highest standards
of probity pertain to the entire independent medical examination process. At
the very least, if no evidence of report tampering is found, such an audit
should restore confidence in the independent medical examination process. On
the other hand, if evidence of report tampering is found, the legal
consequences are substantial.
10.142 The committee
recommends that the government consider establishing mechanisms to ensure the
appropriate bodies are able to undertake random audits of both historical and
future medical reports procured by independent medical examination companies,
comparing the original reports as drafted by doctors with those used by life
insurance companies as the basis for the decision.
Incentives for staff to reject or delay claims
10.143 During the
inquiry, the committee examined whether life insurers incentivise staff to
reject claims through key performance indicators and other benefits. Ms Julia
Angrisano, the National Secretary of the Finance Sector Union, discussed with
the committee how call centre staff had a target imposed on them regarding the
number of policyholders they referred to the retention team, who would then try
to convince the policyholder to hold off from seeking payment for a claim.
10.144 Mr Kell informed
the committee that in relation to CommInsure and its claims staff, ASIC had
found that 'net-loss ratios and income protection termination rates' were a
part of claims staff's key performance indicators. ASIC found this to be an
unacceptable conflict of interest.
10.145 However, Mr Kell
observed that CommInsure had since removed these key performance indicators,
and that the Code now prohibits such incentives.
10.146 The committee is
very disturbed by any incentives that life insurers had in place to incentivise
staff to reject claims through key performance indicators and other benefits.
The committee considers this to have been particularly egregious. As noted in
chapter 5 of this report, the then ASIC Chairman Mr Greg Medcraft has stated on
several occasions that incentives send signals and the wrong type of incentives
send the wrong signals.
10.147 The committee
notes ASIC's monitoring of these matters and welcomes the move by the FSC to
prohibit such incentives within the Code.
10.148 At the risk of
being overly repetitive, however, the committee reiterates its support for
co-regulation of industry codes as a means to ensure that measures such as the
prohibition of perverse incentives are not only mandatory, but also
Underwriting direct insurance
10.149 This section
discusses the prevalence of underwriting at the time that a customer purchases
direct life insurance, as well as arguments put to the committee about
consumers not being underwritten at the time of purchasing direct insurance.
10.150 As discussed in
chapters 2, 8 and 9 of this report, underwriting can be a process of risk
assessment conducted by the life insurer that aims to ensure the premiums paid
by the prospective policy-holder are proportionate to the risks faced by that
10.151 As also discussed
in chapter 2, retail-advised insurance is underwritten at the time of purchase
as part of the service provided by the adviser.
10.152 Retail advisers outlined
some of the risks for consumers of not being underwritten at the time of
purchasing direct life insurance. The Association of Financial Advisers
submitted that if a consumer was not underwritten at the time of purchase, the
life insurer would only assess that person's risk, and in turn the level of
their cover, at the time of claim. This could mean that the policyholder may be
unaware that they were paying premiums for a policy without technically being
covered by that policy.
10.153 Mr Mark
Schroeder, a financial adviser from Schroeder Capital Pty Ltd, held a similar view
and argued that the likelihood of a policyholder being paid at the time of
claim was significantly reduced for a direct policy not underwritten at the
time of purchase.
10.154 ASIC Report 498
found that across the distribution channels of direct, retail and group life
insurance, direct life insurance had the highest decline rate in terms of
claims outcomes. For direct insurance 12 per cent of claims were denied,
compared with 7 per cent in retail and 8 per cent in group life insurance.
10.155 However, Report
498 also found that the claims acceptance rate across the three channels of
distribution were fairly similar with direct found to have a 74 per cent
acceptance rate, retail 76 per cent and group 77 per cent.
10.156 ASIC did not
draw any concrete conclusions about whether the higher claims decline rates
were due to underwriting practices at the time of claim by direct insurers. In
light of Report 498's findings, ASIC will undertake a review of the direct life
10.157 The FSC pointed
out that the perceived higher decline rate for direct insurance in comparison
to the other channels of distribution for insurance is likely due to the fact
that in retail and group insurance the relevant adviser or trustee will filter
out any claims that are likely to be declined prior to submitting the claim to
an insurer. As direct insurance does not have an intermediary such as a trustee
or an adviser, all claims are submitted to the insurer.
10.158 The FSC
submitted that a spectrum of underwriting options existed in the direct market
and that underwriting at time of purchase occurs for many direct products. In
situations where underwriting did not occur as part of the application process,
the insurer would then determine whether the claim met the policy terms and
conditions including any exclusions for a pre-existing condition.
10.159 For example, Mr
Andrew Hagger, Chief Customer Officer at the National Australia Bank, explained
that for those MLC direct products that are not underwritten at the time of purchase,
consumers are made aware of policy exclusions through product disclosure
statements and the questions that consumers are asked at the time of
10.160 Mr Brett Clark,
Chief Executive Officer and Managing Director of TAL, stated that TAL offers
underwriting to all its direct customers. However, in about 30 per cent of
cases the consumer chooses not to complete the underwriting. In such
circumstances, TAL offers policies that exclude pre-existing, known conditions
for a waiting period comprising the first five years of cover, after which, the
customer is fully covered. Additionally, consumers are fully informed of the
status of their cover.
10.161 Mr Richard
Enthoven, Chairman of Greenstone Pty Ltd, stated that Greenstone Pty Ltd fully underwrites
Real Insurance direct policies at the time of purchase through a
tele-underwriting process that involves a series of up to 100 questions. Mr Bernard Grobler, Chief Operating Officer of Greenstone Pty Ltd, explained to
the committee that an insurance product will only be sold after the questions
have been answered. Mr Grobler explained that this practice provides the customer with the certainty
of knowing what their policy covers them for.
10.162 Mr Grobler also
informed the committee that in the last 12 months only 33 direct insurance
claims were denied, in most cases, due to non-disclosure of
pre-existing conditions. Furthermore, where a claim was denied due to non-disclosure, all premiums were
returned to the policyholder.
10.163 Similarly, Mr
Nicholas Scofield, General Manager of Corporate Affairs at Allianz Australia
Insurance, explained that all of Allianz's direct life insurance customers are
underwritten at the time of purchase.
10.164 Based on the
evidence before it, the committee is unable to assess what proportion of direct
life insurance is underwritten at the time of purchase.
10.165 The committee
notes that ASIC Report 498 found that while direct insurance claims have a
higher decline rate compared to other types of insurance, the rate of claims
that are accepted is similar across the three distribution channels. It is
unclear from the data released by ASIC whether these high denial rates relate
predominantly to direct insurance that is not underwritten at the time of
10.166 The committee
also notes the evidence from the FSC that decline rates in direct insurance
could be due to the fact that, unlike retail and group insurance, there is no
intermediary in direct insurance to filter out the claims that are likely to be
10.167 The committee is
firmly of the view that there needs to be far greater clarity and transparency
around the data on the proportion of direct life insurance that is not
underwritten at the time of purchase as well as the data on the rates of denied
claims within the direct sector including the links, if any, between decline
rates and underwriting practices.
10.168 To this end, the
committee strongly encourages ASIC to include data on the connection between
denied claims and underwriting practices in its review into the direct life
insurance industry. ASIC is also strongly encouraged to assess the extent to
which advisers and trustees filter the claims that are submitted to an insurer in
the group and retail sectors and the effect this has on the rate of declined
claims, as compared to the absence of a similar intermediary in direct
insurance and the rate of declined claims in direct insurance.
10.169 In addition, the
committee is concerned that some consumers may not fully appreciate the claims process
if they are not underwritten at the time of sale, and what this may mean in
terms of their coverage and any increased likelihood of their claim being
denied. The committee endorses the approach taken by Greenstone and Allianz in
which a person is underwritten after answering a series of questions at the time
of purchasing direct insurance.
10.170 Life insurers produce
and release products that reflect the needs of consumers and the market. However,
as the social, legal, medical and financial environments continually change,
more up-to-date products are released by life insurers. This means that older
products, referred to as legacy products, are no longer made available to new consumers
but are still administered to the customers who obtained them previously in
accordance with the terms of the older policy.
10.171 Mr Stephen
Perera, Director of advice firm of Perera Crowther Financial Services, stated
that policyholders who have a legacy product are often left isolated and bound
by outdated terms and conditions.
10.172 Mr Perera
explained that individuals who are healthy would be able to pass an insurance
risk assessment that would enable them to access new and better products.
However, those individuals with legacy products who are less healthy than they
were when they initially purchased the product would be unlikely to pass any
risk assessment for a new insurance product. This means that an individual
would be forced to keep the out-dated legacy product in order to have some form
of insurance coverage. Furthermore, Mr Perera pointed out that these policyholders 'are eventually
priced out by premium increases'.
10.173 From an industry
perspective, the FSC noted that legacy products are difficult and expensive to
administer and lead to problems such as economically inefficient products and out-of-date
medical definitions within policies.
10.174 The FSC supported
the need to address the issues posed by legacy products through reform that
allows for product rationalisation.
10.175 The FSC also
observed that such reform required legislative change as the law does not allow
life insurers to change the definitions and terms of a policy unilaterally. This restriction on life insurers and the need for legislative change was also
noted by the Australian Prudential Regulation Authority (APRA) in its submission
to the Senate Economics References Committee's Inquiry into the Scrutiny of
10.176 The FSC observed
that consumers would be protected under product rationalisation due to a
requirement that changes to policies can only be made by the product issuer
where this is in the best interest of policyholders. This would be known as a
consumer interest test.
10.177 However, the
consumer interest test proposed by the FSC would be applied at the group level,
meaning it would be applied to the bundle of rights consumers with the same
policy have. As the FSC noted, the application of a group test would not consider
the best interest for each individual. The FSC submitted that the consumer
interest test should be:
- Based on the monetary benefits and rights enjoyed by the consumer
as at the Transition Date (rather than intangible product features, unless
these represent a monetary benefit or right);
- Determined as the accrued value of those benefits;
- Calculated by an independent expert or the Appointed Actuary; and
- Based on the overall bundle of rights consumers have and not at
the individual feature level.
10.178 Evidence to the
committee from life insurers such as TAL reflected the FSC's position. Mr Clark
from TAL told the committee that the Life Insurance Act 1995 should
be updated to respond to the complexity surrounding legacy products and the
burden it places on consumers and industry.
10.179 The Financial
System Inquiry recommended that product rationalisation should be implemented
to address the problems presented by legacy products. In part, product rationalisation would reduce the number of products available
on the market that no longer serve the interest of the consumer. The Australian
Government accepted this recommendation and announced that a mechanism would be
introduced to 'facilitate the rationalisation of legacy products'. The
government also recognised that there should be no disadvantage to the consumer
in this transition.
10.180 Evidence to the
committee from life insurers strongly supported the introduction of a
legislative mechanism that would facilitate the rationalisation of legacy
products. The committee recognises the administrative burden that legacy
products impose on life insurers. The committee also notes that the insurance
industry would prefer to rationalise legacy products by applying a consumer interest
test at the group level.
10.181 However, the
committee is also aware that many consumers still hold, and are potentially
trapped into still holding, outdated legacy policies. The committee is keen to
ensure that the rights of existing policyholders are protected and that any
product rationalisation does not disadvantage this cohort of consumers. To this
end, the committee recommends that a 'no disadvantage' rule apply to any
rationalisation of legacy products such that existing policyholders would, at a
minimum, be no worse off from being transferred to a new policy.
10.182 To be clear, the
committee is recommending that the determination of whether policyholders are
no worse-off under product rationalisation should be done on an individual
case-by-case basis and not by considering what is best for a group of
policyholders who hold the same legacy product. Though this may be done on a
class basis, similar to classes within schemes of arrangement under Chapter 2F
of the Corporations Act.
10.183 The committee
recommends that the Australian Government introduce legislation to facilitate
the rationalisation of legacy products noting that such legislative change
should include a no-disadvantage rule whereby:
- existing policyholders would, at a minimum, be no worse off from
being transferred to a new policy; and
- the determination of whether existing policyholders are no worse
off should be assessed on an individual case-by-case basis and not by considering
what is best for a group of policyholders who hold the same legacy product.
Though this may be done on a class basis, similar to classes within schemes of
arrangement under Chapter 2F of the Corporations Act 2001.
Early intervention—rehabilitation payments
10.184 The FSC informed
the committee about regulatory constraints on the ability of life insurers to
provide early rehabilitation benefits and medical expenses. The FSC argued that the potential improvement of an insurance policy over its
life would incentivise life insurers to invest in more active rehabilitation strategies
and lead to better social outcomes for individuals. In addition, the FSC noted
that higher return to work rates would reduce the costs borne by government.
10.185 The FSC argued
that current regulations prevent life insurers from funding medical treatment
and services to support early return to work. As a result, life insurers are
increasingly employing rehabilitation specialists to provide occupational or
vocational rehabilitation support to manage ongoing disability claims. The FSC
indicated that under current legislation, life insurers are not permitted to
provide a benefit to a claimant under a continuous disability policy for
treatment costs where either a corresponding Medicare benefit is payable or
where the treatment is a hospital treatment or general treatment. The FSC argued
that these restrictions should be removed.
10.186 Some other
industry participants also raised the issue of restrictions on rehabilitation
payments. The Commonwealth Bank suggested that the government consider reviewing legislation
to explore opportunities to allow life insurers to fund rehabilitative
treatments and assist workers in their return to the workplace. ASFA argued that members' best interests could be served by modifying or
removing the regulatory impediments that prevent insurers from providing
targeted rehabilitation benefits and/or staged payments.
10.187 In contrast, Dr
Stephen Carbone, Policy, Research and Evaluation Leader at beyondblue, had
concerns about some of the early intervention proposals put forward by life
insurers. Dr Carbone supported early intervention practices that aimed to
prevent the preconditions that can lead to people becoming unfit for work, for
example, early intervention practices that aimed to prevent job stress leading
to depression. However, Dr Carbone drew attention to a conflict of interest
that could arise when early intervention practices are focussed on treatment
because the life insurer would be both paying the policy claim and also be
closely involved in seeking the early return to work of the policyholder:
I think there needs to be an arms-length sort of relationship
because you can get perverse incentives. You can get pressure on the
consumer—the consumer being told that they are better than they believe
themselves to be and being forced into work that perhaps they are not ready for
or suitable for. It is just a complex situation when the person paying the tab
is also the one trying to get you back to work.
10.188 The committee
acknowledges the importance of early intervention and welcomes proposals that
would better enable early intervention and thereby improve the rehabilitation
prospects of people who have suffered injury or illness.
10.189 The committee
notes the arguments put forward by the FSC for the removal of regulatory
constraints on the ability of life insurers to provide early rehabilitation
benefits and medical expenses. The committee also notes that there was only
limited discussion during the inquiry of the issues raised by this proposal. Due
to the late arrival of the much more detailed proposal from the FSC, the
committee has not had the opportunity to hear from other witnesses and
submitters about any potential unintended consequences that may arise as a
result of the FSC's proposals. The committee is therefore recommending that the
government does not progress any reforms into life insurance funding for
rehabilitation services until a thorough inquiry or consultation process is
10.190 The committee
recommends that the Australian Government conduct a thorough inquiry or
consultation process before it progresses any reforms relating to life insurers
funding rehabilitation services, including impacts on private health insurance,
or Medicare, and any conflicts of interest that may arise for an insurer
vis-a-vis their customer and the most appropriate care.
10.191 The committee is
concerned that people struggling with dementia are having difficulties claiming
on life insurance. More than 500 000
Australians will have dementia by 2025 and dementia is now the leading cause of
death for Australian women.
10.192 With this background,
the committee is concerned that the Financial Services Council was not aware of
instances of those with dementia having difficulties claiming on life
10.193 The committee
recommends that the Financial Services Council, with the Royal Australian
College of General Practitioners and key stakeholders, explore issues around
those with dementia claiming on life insurance. Following this, the committee
recommends that together they prepare and implement protocols within the Code
specifically addressing the treatment by life insurers of those with dementia.
Mr Steve Irons MP