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reference, were spurred on by claims in mainstream media in early 2016 that some insurers were denying claims based on outdated medical definitions or delaying payments on claims.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