Inside the Mind of the PJC

The current Parliamentary Joint Committee Inquiry into Life Insurance will release its report in the middle of this year but the direction of that report may have already been flagged during recent public hearings held in the last month.
While the Life Insurance Framework received little attention a number of key related issues were frequently raised including commissions, churn and clawback.
In this article, Riskinfo Senior Journalist, Jason Spits takes a look at the questions asked, the areas covered and what this may mean for advisers.

Financial advisers looking forward to the removal of the Life Insurance Framework (LIF) and a return to pre-existing conditions will probably be disappointed in the current Parliamentary Joint Committee (PJC) Life Insurance Inquiry.

The reason for this disappointment is that the PJC seem to have accepted LIF as part of the future landscape of the life insurance sector, as reported by Riskinfo recently. (See: PJC Review Will Not Tackle LIF Reforms)

Despite this position the PJC has offered recurring glimpses into a number of key issues it sees as worth investigating and some of these bode well for advisers and consumers.

The LIF received very little attention from the PJC

Why is there a PJC Inquiry?

The current PJC Inquiry had its genesis in a previous inquiry which was unable to produce a final report before the last Federal election was called for May 2016.

That inquiry, the Scrutiny of Financial Advice (SoFA) – conducted by a Senate Economics References Committee, had been running since 4 September 2014 and, after two extensions of time, was due to report on 31 August 2016.

The second extension, granted on 2 March 2016, added additional terms of reference including the need for further reform of the life insurance industry, an examination of whether insurers were engaged in unethical practices to avoid meeting claims and if a life insurance industry code of conduct was required.

The extension, and additional terms of reference, were spurred on by claims in mainstream media in early 2016 that some insurers were denying claims based on outdated medical definitions or delaying payments on claims.

While that Committee was unable to produce a report due to the calling of the May 2016 Federal Election – which caused all ongoing inquiries to lapse – the key issues were picked up following the election and on 14 September 2016 the Senate referred an inquiry into the life insurance industry to the PJC, with a reporting date of 30 June 2017.

It is important to note the PJC was given similar terms of reference to the SoFA inquiry, with the relative benefits and risks to consumers of direct, group and retail advised insurance and the sales practices of life insurers and advisers, including the use of Approved Product Lists, to also be assessed by the PJC.

To date, the PJC has received 67 submissions, three responses to submissions, and conducted three days of public hearings at which 39 sets of witnesses spoke. These witnesses included individuals, industry bodies, consumer groups, superannuation funds, lawyers and regulators and represented 34 of the submissions released so far by the PJC.

Encouragingly for advisers a number of questions were asked about what impact the reduction of commissions would have on their ability to service clients

Areas Under Consideration

While the PJC has not released any public statements about its possible recommendations, the chief areas of interest were evident from the questioning of witnesses during the three days of public hearings conducted in Melbourne, Sydney and Canberra in late February and early March. The following summaries are based on questions and statements from Committee members during the course of those hearings.

Life Insurance Framework Legislation

The LIF received very little attention from the PJC with much of the discussion initiated by a handful of witnesses to which the Committee choose not to respond (see link above). This is not surprising given the make-up of the PJC, with eight of its 10 members coming from the two major parties which supported the passage of the LIF legislation through Parliament. (The other two members – a Green and Independent Senator – were not present at any of the public hearings, according to Hansard.)

The Committee’s terms of reference also exclude any examination of current legislation but do allow consideration of “…the need for further reform and improved oversight of the life insurance industry”.

Commissions and Clawback

Despite the LIF legislation receiving little discussion the flow on affects drew much more interest from the PJC with commissions and claw backs being raised by a number of its members across all three days of hearings.

Encouragingly for advisers a number of questions were asked about what impact the reduction of commissions would have on their ability to service clients and the decrease in cash-flow within the next few years. This included specific questions around the impact on non-aligned advisers compared to salaried and institutionally aligned advisers.

The PJC was also interested in the mechanics of the clawback system. In their questions they highlighted concerns about advisers failing to tell clients about better insurance outcomes out of fear they will have commission income clawed back within the first two years, and whether the clawback model works against the interests of clients.

Churn and Lapse Rates

Questions around commissions and clawbacks were frequently teamed with those around churn and lapse rates with Committee members asking a number of witnesses if they could define the difference between the two and expressing the opinion that it appeared the life insurance industry had not done so.

A number of life insurers were asked to provide their definition of what constitutes a lapsed policy versus a churned policy and how these were recorded and what action was taken when a policy was churned. The PJC allowed the questions to be taken on notice and response submitted by 17 March.

Concerns were raised by a number of committee members around underwriting at claim time and whether consumers were informed of this

Premium increases

Questions around commissions and clawbacks were accompanied by further questions around the suitability of life insurers increasing premiums during the first two years of a policy. A number of witnesses, particularly those from the life insurance sector, were asked whether it would be beneficial to restrict increases to CPI only during that period, and whether recent increases were too high and causing people to cancel their policies.

Underwriting and Direct Insurance

Underwriting was a recurring area of interest across all three days of the hearing, particularly as it related to direct insurance.

Concerns were raised by a number of committee members around underwriting at claim time and whether consumers were informed of this when purchasing insurance and if they understood what that meant.

Further questions were asked about whether direct insurance advertising was misleading in claiming consumers are covered when purchasing these policies while placing the onus on the insured to disclose any pre-existing conditions but without fully informing them of that requirement.

Underwriting and Group Insurance

Group insurance was also a recurring them (see next heading) with the PJC looking at comparisons between the level of underwriting in the retail, direct and group sectors and whether the lack of underwriting was being used in the group sector to deny claims.

Questions around whether members in group life schemes were informed they were not underwritten when joining the scheme were often asked in conjunction with those investigating the level of information provided to members and the adequacy of their cover.

Group Insurance

Apart from underwriting in the group life sector the PJC also questioned why superannuation funds were involved in the assessment of claims made by group life scheme members instead of passing those claims directly to the insurer.

The commercial relationship between superannuation funds and life insurers was also raised on a number of occasions with profit sharing arrangements the subject of questioning to a range of witnesses across all three days of hearings. Questions covered how these schemes operated, what were the end benefits to the insurer, the super fund and the fund members, and if profit sharing created a conflict of interest when claims were approved or denied.

FSC Life Insurance Code of Practice

The Financial Services Council (FSC) Life Insurance Code of Practice was an issue raised not just with the FSC but on a number of occasions with other witnesses. Questions centred around the ability of the Code to enact significant changes among the life insurance members of the Council and what sanctions the Code held, and whether those sanctions provided compensation to consumers.

PJC members were also interested in why the Code did not cover group life and why there was a need for a Code if the Corporations Act, SIS Act, and ASIC’s regulatory work already covered the behaviour of superannuation funds and life insurers.

The Use of Medical Records

The asymmetry of information between life insurers and their clients was raised by the PJC which questioned the usage of medical records following reports that some doctors were passing on complete medical histories instead of specific reports related to an area of claim. The Committee further asked if this type of behaviour by doctors was commonplace and if it was being used to deny claims.

The relationship between life insurers and independent medical examiners was also examined with questions raised around the frequency of usage, how they were paid and if insurers were over reliant on seeking medical opinions when examining a claim.

The Committee also questioned why consumers had little or no access to their own claims data and whether insurers could make that available, particularly for denied claims.

Medical definitions

The currency and appropriateness of medical definitions was raised by the PJC which inquired about the how often definitions should be updated.

It also queried if an industry standard for definitions could be created and what the impact would be on market competition and consumer outcomes.

Questions also looked at how far back should insurers review outdated definitions and any denied claims that resulted from those definitions.

the LIF legislation as it stands is likely to be the environment financial advisers will have to live under for the foreseeable future

Mental Health and Illnesses

Mental health and mental illness was an area that was consistently visited over the three days of hearing with the PJC seeking information on what impediments existed in preventing claims being paid, and treatment provided, in this area. This included whether past claims or pre-existing conditions for unrelated issues were being used to deny claims.

Related to this were questions around whether consumers were not disclosing previous mental health issues because of blanket exclusions or poorly defined definitions which may exclude them from making a claim sometime in the future on a separate matter.

What does this mean for advisers?

Firstly, the LIF legislation as it stands is likely to be the environment financial advisers will have to live under for the foreseeable future.

Aspects of it may change, such as clawback and commission rates, but wholesale changes are unlikely to be recommended by this Committee. Out of the three days of hearings, less than five minutes were spent discussing the legislation, equating to less than half a page of discussion in the 233 pages of Hansard transcripts.

Secondly, financial advisers may do well out of this inquiry. The level of interest around commissions and clawback, and churn/lapse rates was notable as was the issue of underwriting in the direct insurance sector.

Advisers and advice groups also feature strongly in the list of submissions and witnesses to the hearing and no witnesses spoke against the role of financial advice in the life insurance market. In fact, a number of PJC members praised the role of advisers in securing cover for clients and expediting claims.

Thirdly, sadly there is no guarantee that any of these issues will be either recommended for further action or whether the Federal Government will act on any recommendations made. While the first of those is unlikely, and it seems the PJC will make statements on the issues it examined, Governments are often slow to act or unwilling to act against their own best interests or policies.

The easiest response would be to park the Inquiry and its recommendations to the side until the LIF regime was in place and await the ASIC review of 2021. Nevertheless, if this Inquiry does make positive recommendations for improving the viability and credibility of the life insurance sector it would make little sense to ignore them for three years if meaningful change could be enacted sooner.

  • Jimmy

    I’m sure that both ASIC and the FSC will again target a specific group of advisers identified by the insurers as their “representative sample”. They’ll look at another 202 files and determine that things are still bad in insurance land and that commissions will need to be hacked away further. Cynical? No, just realistic.

    On the positive side, i have been writing to my local Federal MPs to try and highlight the differences between advised, group and direct insurance. Fortunately it appears that one of my local MPs has a former adviser as an assistant. They are over the issues with the proposed LIF and will be speaking against it. Hopefully that will be enough to stop the Minister for Increased Bank Profits, Ms O’Dwyer, from implementing this policy in its current form.

    • Kelly Roche

      well said Jimmy.

    • Jeremy Wright

      I have also had an hour with my local Federal MP and he was amazed at what has occurred.

      He is going to have a word with Bert Van Manen, the member for Forde ( who stood up for advisers and objected to the LIF as patently unfair ) and having had experiance as a Planner, he knows what the real world of advice is about and is a man with integrity.

      My Federal member asked very intelligent questions and has a genuine concern that this could be a case of the big end of town trying to screw small Business for their own means, to massively increase their profits at the expense of all Australians.

      It is very easy to contact your local Federal member and from what I have heard, most of them are willing to listen and are interested to learn, so please contact them now before this unworkable LIF is hurriedly pushed through and becomes legislation.

  • Robert Coyte

    I saw that some advisers were recently banned from advising by ASIC for these very practices because they did not act in their clients interests. This is the current law (FOFA) and if applied thoroughly to all advice it would remove churn as it doesnt meet the current legislation requirements.

    LIF will not result in less churn or anything else for that matter its simply a redistribution of wealth from financial advisers who provide advice to the vast majority of ordinary Aussie who don’t or wont pay fees for financial advice. This statement will be vindicated in a few years time the same way it was when the UK did the same thing in 2013.

  • Jeremy Wright

    There seems to be a, “let us try it and see” mentality, caused in large by some Life Companies, Banks and the FSC pushing their barrows in this direction, which will obviously benefit them, at the expense of everyone else, as there has been no pressure exerted by the Government, to force the Life Companies to re-invest their extra new found profits, back into efficiency gains in the New Business and ongoing administration area’s that will free up advisers to see more people.

    It does not help when the likes of Sue Viskovic continue espousing the virtues of the big and of town’s argument, which simply is to put 100% responsibility onto advisers and no care or responsibility back onto themselves.

    It is all very well to make statements. It is entirely different to actually live with it.

    The only way a 60% / 20% model will work, is when the Life Insurance Industry and regulators make it much quicker and more efficient for advisers to place and manage the Life Insurance needs of Australians.

    As to a flat 20% commission model, or fee only service model, this is the stuff of fantasy, based on theoretical mumbo jumbo, as no full advice, best interest duty Life Insurance practice will survive trying that approach.

    I would suggest all those people who consider a $2,200 fee, for full advice and implementation as a viable proposition, you might need to get some professional advice before you proceed down that path, as my crystal ball sees dark clouds, storms, no profit and unsustainable losses ahead for you.

    I am yet to see one risk only practice that has succeeded with a level or fee for service model and not one holistic multi advice practice that has properly calculated the true cost of providing comprehensive, best Interest duty advice and implementation, that will pay sufficient profits for the risk and ongoing compliance hurdles around Retail Life Insurance advice.

    What I have seen is cross subsidisation which puts a choke on the long term profits of Adviser practices and creates an artificial knowledge, that allows Life Companies to believe that they are efficient and do not need to make the necessary changes NOW to be competitive in the near future.

  • Margaret Marks

    So lets get back to basics. Firstly there is absolutely no evidence that supports the implementation of the LIF legislation. There is likewise absolutely no evidence of one single benefit for consumers. The LIF is an FSC sponsored initiative which will only have one measureable outcome and that is to magnify the banks’ and insurance companies’ already record profits. I believe in the hybrid model of 80/20 and a one year clawback (Which Zurich and Clearview have given an agreeing nod to). But everything other than this is just an attempt to put non-bank advisers out of business. It is as simple as that and the Government is backing this all the way. In fact the Minister’s latest press release said it was due to the efforts of the AFA and FPA that she felt confident to bring in the LIF. Of course the AFA and FPA are financially dependant on the banks and insurance companies, they are clearly conflicted, and this is why we have the LIF. NO OTHER REASON. If the AFA and the FPA had done the HONEST thing and put the LIF to a vote of their members, there would not be wholesale support for the LIF as the Minister has claimed.

    It is time that we had a new Risk Adviser Association, without any conflict that has sufficient numbers to lobby Government on behalf of advisers and consumers. If you would like to form such an association email with your thoughts.

  • Paul Underwood

    Firstly, not sure why the article refers to Phil Thompson as a fee-only adviser when he clearly states that he takes commissions for risk insurance? No wonder the politicians and the general public are confused as the media can’t even get it right. If he takes commissions on insurance he is not fee for service only.

    Secondly, if an adviser is getting friction about the sums insured recommended versus how much they get paid then in my opinion there is something wrong with their insurance recommendation process and the value the client perceives they are receiving, and taking level commissions does nothing to reduce that conflict. So while the client may “feel that they are not being pushed in a certain direction because of the commissions for the adviser” the reality is the adviser will actually get paid more over the long term for that advice which I would think has the potential to increase the conflict not reduce it.

  • Alleycat

    What gutless outcome!!
    What was the point of the PJC enquiry ,if not to point out the stupid and fallacious premise, as the basis of the LIF legislation.
    The legislation now sounds the death knell of the independent life adviser, the destruction of public confidence in the life insurance industry,… and for what ?
    Just to satisfy left wing flawed ideology coupled with increased profits for members of the FSC.
    Where was any of this in the public interest ?
    This is just a metaphor for how spineless our politicians are, with Malcolm in Middle and all his hand maidens together with those in the Labour party plus the fringe tree hugging dwellers, have gone about destroying a vibrant nation with debt, deficit and utter contempt for the majority of the people of this country!!!

  • Paul

    It sounds like the mental health focus was purely on how to make insurers pay more mental health claims. Where do these politicians think the money will come? The mythical unlimited profit reserves of the evil insurers? No, it comes from increased premiums.

    There has already been an explosion in mental health claims in recent years, with a flow on effect of major premium increases, which is generating a flow on effect of increased lapse rates, which will generate a flow on effect of many more uninsured people suffering from financial hardship to a much wider range of illnesses.

    There needs to be a complete overhaul of mental health claims in disability insurance. The current trend of paying claims based on appeasing the political correctness lobby is killing off the system for everyone. Perhaps it’s time that mental health was removed from private sector disability insurance altogether, and more fully covered by DSP and NDIS instead.

    That way the politicians and taxpayers can decide what is reasonable evidence of disability and a reasonable level of funding, rather placing the burden on an ever diminishing group of privately insured consumers to carry the mental health funding burden via their with constantly increasing premiums.

  • Old Risky

    Jason-I may have missed the reference, but I could not see any acknowledgement by ASIC, FSC or any insurer to the absolute necessity to have a common detailed definition as to what constitutes a lapse.
    Until that is achieved to enable true reporting of “churn “( also requiring a definition ) , all the effort will be in vain

  • Loch Slòigh

    The Banks and AMP win no matter what because the vast majority of non-aligned advisers will not be able to survive the 3 years leading up to the 2021 review. Hence less competition and the winners will be able to exert even more control over the industry.