It could be easy to assume that life insurance commissions are the only area of significant change under the incoming Life Insurance Framework given the attention the issue has attracted in mainstream and trade press.
While it is a significant change for advisers, for life insurers the LIF regime means reworking products and payments systems as well as a new claims and lapse reporting model with ASIC, and compliance with a mandatory industry code of practice.
In this article, riskinfo Senior Journalist, Jason Spits takes a look at what the life insurers have been doing to prepare for these changes and what have been the challenges for them.
Financial advisers may hold little sympathy for life insurers required to make changes as a result of the passing of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 – the legislation more commonly known as the Life Insurance Framework. For advisers still working through what reduced commissions and clawback periods will mean for their practices and their incomes over the next three to five years, the impact of the legislation on life insurers is probably the furthest thing from their mind.
Yet the changes required of life insurers under the LIF go beyond the terms of payment on an advised insurance product and have the potential to bring clarity and transparency to issues advisers and insurers have been struggling with for years.
The most specific of these issues is reporting around the level and types of claims and lapse rates related to adviser initiated churn. The latter of these issues can trace its birth back to Report 413 on commissions and advice, issued by the Australian Securities and Investments Commission (ASIC) in October 2014, while the former is a result of Report 498 on claims handling, released in October 2016. While it is true that claims handling is not covered by the LIF legislation, the focus on it for ASIC, consumers and the mainstream media follows on from the Government’s efforts to introduce Future of Financial Advice style reforms into the life insurance sector. The negative media coverage and ongoing ASIC reviews of the sector since that time have added further impetus for more reporting from life insurers.
All insurers know that it’s the reputation of the industry as a whole that we’re looking to strengthen, and that needs the industry as a whole to respond
What ASIC Requires From Insurers
According to a consultation paper released by ASIC last year, which is likely to form the basis for regulations under LIF, life insurers will be required to report twice a year to ASIC from 1 January 2018. This reporting will cover all life insurance products sold through general and personal advice as well as via direct channels and contain policy and remuneration details.
Policy details would include:
- how many policies are in force;
- when each policy began;
- how many policies are held by people insured for the first time;
- how many are new or altered policies sold to existing clients;
- the type of policies (such as life, total and permanent disability, trauma, income protection and various combinations of these);
- the premiums and sums insured;
- how many policies have been exited and the reasons for the exit.
At the same time, life insurers would also be required to provided remuneration data including:
- historical data on commissions;
- the type of remuneration model adopted (such as upfront commission, hybrid commission, level commission, or no commission);
- the level of upfront and ongoing commissions being paid;
Keep in mind, this set of data only relates to churn and lapse rates, but would also feed into the life insurance sector review of 2021 through which ASIC would determine if the LIF regime was working as intended.
For the collection of claims related data, as suggested in Report 498, ASIC and APRA have stated they will jointly gather data from 30 June 2017 with the aim of establishing a consistent public reporting regime for claims data and outcomes that would include claims handling timeframes and dispute levels across all types of policies.
What this means for insurers is providing policy details, many overlapping with those described above, as well as claims data including those reported, finalised by payment or denial, withdrawn and undetermined during a reporting period, as well as the sums insured, sums paid and the duration of claims.
Disputes will also need to be reported including those lodged, withdrawn, resolved and undetermined within a reporting period and how they were resolved as well as the length of the dispute.
And for good measure, ASIC and APRA will require this for both legacy and open products offered inside superannuation, outside superannuation and through group schemes.
The struggle is with end to end customer management as many life insurers tend to manage different functions as separate divisions
What Insurers Require From Themselves
Added to the laundry list of things life insurers are required to report to ASIC and APRA, life insurance members of the Financial Services Council (FSC) have also agreed to comply with a member-created industry code of practice that is mandatory and binding from 1 July 2017.
While still in its first iteration, the Life Insurance Code of Practice (LICP) has been hailed as a good first effort that could do with more work in latter versions around engaging with advisers, but does place a stake in the ground around the behaviour and practices of life insurers.
The importance of the LICP was stated at this year’s FSC Life Conference where FSC Chief Executive, Sally Loane described the Code as the best opportunity for the life insurance sector to demonstrate it could self-regulate and respond to consumer and Government concerns.
The LICP will not require life insurers to report to the FSC on a regular basis but it does commit them to set timeframes around handling claims and disputes, and requests for information from consumers, and sets out best practice standards in underwriting, claims, sales practices and advertising.
…there was no change in our philosophy of how we deal with customers or pay claims…
The Progress So Far: LIF
Given that LIF has been on the industry radar since November 2015, and its start date has been moved from the middle of 2016 to the beginning of 2017 most life insurers should be well placed in their preparations for the change.
MLC Life Insurance Chief Customer Officer – Retail Advised Insurance, Melissa Heyhoe said this timeframe meant the bulk of the work had previously been done in the expectation of a mid-2016 start date.
“We had placed our previous plans on the shelf while awaiting the revised start date and we have dusted off that previous preparation and put it back in place,” Heyhoe said.
“From a technology point of view, we are ready to go and have benefitted from Nippon Life’s investment in processes and people which has gone across 24 different systems in the business,” she added.
BT Financial Group was also in a good position, according to Head of Life Operations, Scott Moffitt, who said the insurer would be able to continue upon the release of further regulations.
“BT is well-prepared for the introduction of LIF on 1 January 2018,” Moffitt said, adding “Our preparations will be further informed by the legislative instrument supporting the LIF reforms, which we hope will be finalised soon.”
Moffitt said the release of the legislative instrument – designed by ASIC but requiring approval by the Federal Government would further define the detail of the obligations on life insurers and give direction to further changes BT may need to make.
Asteron Life Head of Wealth and Life Intermediaries, Steven Degetto said preparing for LIF has been a significant investment for Asteron as “…the goal posts have moved considerably from the original Trowbridge Report to where the final legislation landed”.
“Asteron Life’s mantra has always been to help partners think through potential scenarios and provide options so they can take control of their business’ future,” Degetto said, adding the insurer had released a range of commission options and fee models to help advisers prepare for the start of the new regime.
“In terms of our ‘business readiness’ for 1 January 2018, we’re really beholden to the final piece of the puzzle – the ASIC instrument. We eagerly await what final requirements and detail we need to consider to support, prepare and transition our advisers to LIF,” Degetto said.
Heyhoe said MLC Life was also keeping an eye out for any further updates to work required and recognised this type of change was significant for the insurer and advisers who used its products.
“We like to look above and beyond LIF where we can, to supporting advisers in the best way we can,” Heyhoe said.
“For us, Nippon Life has given us opportunities to make investments and add resources so the biggest challenge has been in how we talk to advisers and show our support. We are having less conversations around the ‘why’ of LIF and now looking at how we work within it,” she said.
AIA Australia Chief Retail Insurance Officer, Pina Sciarrone said adviser support has been an important part of LIF preparations leading to AIA Australia releasing a range of services and product updates, including its recent Term Level product, during the lead up to 1 January 2018.
“AIA is always working towards helping advisers create efficiency gains and growth in their business. We’re committed to making a positive difference in people’s lives, and this includes us continuously looking for areas to improve our services and make our processes more efficient,” Sciarrone said.
The Progress So Far: LICP
Does this confidence in preparations for the LIF regime extend to preparations for compliance with the FSC’s LICP, which is six weeks away at time of publishing?
From her interactions with life insurance member firms FSC Chief Executive, Sally Loane believes they will be ready for the 1 July start date, due to hard work, high level engagement and a desire to lift the reputation of the sector.
“All insurers know that it’s the reputation of the industry as a whole that we’re looking to strengthen, and that needs the industry as a whole to respond – and that’s what’s happening,” Loane said, adding that FSC members had taken their responsibilities to meet the Code requirements very seriously.
We hold ourselves accountable to try and deliver the best outcome possible, and view the Code as a minimum standard
This has challenged the FSC at times, Loane said, as different insurers came to the table with a range of issues and concerns that could not be easily addressed in the Code document.
“There have been many examples of unusual circumstances that hadn’t been thought about when the Code was written. The working group meets every week or two to consider these issues to help all firms transition to the Code,” Loane said.
AJ Horne, Insurance Relationships Manager with DST, a technology services supplier to the financial services sector, said most life insurers his firm had dealt with were capable of meeting the practices and procedures outlined in the LICP in business units but found it harder to connect them across an entire company.
“The struggle is with end to end customer management as many life insurers tend to manage different functions as separate divisions and so there is a disconnect between the information sources, which makes it harder to put in place something like the FSC’s Code,” Horne said.
“It is a matter of linking occurrences of correct behaviour to the Code and creating a report that shows a firm is compliant or requires action in a specific area,” Horne added.
Like a number of insurers, Heyhoe said MLC Life formed a team but split the Code into 12 parts and set about addressing those parts across the business and found that in some cases minimal work was required while in others it was more substantial.
“Much of the change was in processes and documentation for consumers and did not involve widespread change in our business. There was no change in our philosophy of how we deal with customers or pay claims but we became even more aware of the need to educate and inform them,” Heyhoe said.
For Asteron, preparing for the LICP meant the involvement of more than one hundred staff from product development, sales, underwriting, claims, and complaints and disputes, according to Degetto, with the staff identifying levels of adoption of the Code using a purpose-built analysis tool.
He said Asteron, and parent company Suncorp, found the insurer’s operating model was primarily complete in the areas of underwriting, policy design, disclosure, and sales and advertising practices with the remainder of the work handed over to working groups for completion.
Degetto said while the preparation was intense and required much collaboration across the business, the Code went beyond compliance and into fabric of how an insurer operated.
“The code certainly focuses on setting mandatory customer service standards, however, it also has a level of tonality to it in terms of ‘The way we do things,’ Degetto said.
“The code sets a clear framework on how this should look, which presents any organisation a challenge when you try to apply a procedure to ‘The way we do things around here’,” he added.
Moffitt also regards the FSC Code requirements as deep-dive into the workings of the BT insurance business beyond the regular improvements and enhancements periodically offered by life insurers.
“We are always looking at ways to continually enhance our product and service offering to improve customers’ experience,” Moffitt said.
“The code has implications for life insurers’ entire operations, and we’ve undertaken an assessment of the impact on our business. BT is confident our service levels are within the requirements of the Code of Practice,” he added.
This was also Sciarrone’s view of AIA Australia at the time it began work on implementing the Code within the business, which required a review of each of the Code requirements against the processes, people and tools within AIA Australia.
Sciarrone said the insurer had established a project delivery team and had spread its preparation evenly across those three areas “… checking on existing processes and procedures and implementing changes which require compliance with the Code, and ensuring that all staff are trained on the expectations and requirements of the Code.”
“We hold ourselves accountable to try and deliver the best outcome possible, and view the Code as a minimum standard. While we found there are some minor changes required, a large number of our processes were already within the requirements of the Code,” Sciarrone said.
Until ASIC hands down its review in 2021 there will be some who continue to question whether the efforts described above have made any long-term difference to the nature of life insurance in Australia.
Horne said there was a need to comply with codes and legislation but it also removed some of the impetus the life insurance sector once had and taken its focus away from improving what it could offer consumers.
“It can become hard to see change at this level as complying with another round of regulation, and while many agree what’s taking place is good, it is also another overhead for business,” Horne said.
“It should have occurred as a natural progression within the industry but instead has been accelerated because of recent events and has bitten into efforts to create new products and carry out the transformative work the sector requires,” he said.
For Heyhoe the changes have begun to open debates around the future of life insurance products, including legacy products, opened more adviser feedback with insurers on client retention and efficiencies and set a benchmark for the future.
“Where we are at now is a good baseline. These efforts can’t change management or culture and will not address all the needs and wants of all stakeholders but we now have create a baseline and benchmark for the future,” Heyhoe said.