Life Insurance Examination Leads to Critical Questions

The Financial Services Royal Commission recently released its interim report covering the first four rounds of hearings – including financial advice, and it was unreserved in its view of the reasons for the misconduct it heard during many weeks of testimony.

The interim report, however, did not cover the life insurance hearings which took place in the two weeks preceding the release of the report.

That does not mean that life insurers and financial advisers have been left without an impression of what the Royal Commission thinks about life insurance and related advice, and below we present a review of the major issues and concerns raised during those recent hearings.

Preliminary Matters

Prior to the start of the hearings the Commission indicated it would only hear from six life insurance providers – AMP, ClearView, CommInsure and TAL, as well as superannuation fund REST and direct insurance provider, Freedom Insurance (see: Royal Commission to Call on Insurers to Provide Evidence).

In doing so, the Commission stated it would consider issues associated with:

• the sale and design of life insurance and general insurance products
• the handling of claims under life insurance and general insurance policies
• the administration of life insurance by superannuation trustees

As the hearings unfolded only ClearView, CommInsure and TAL provided evidence on products available through their retail advised channel, and AMP only provided evidence on its group life cover (see: Royal Commission Will Not Examine Life Insurance Advice)

On the opening day of the hearings, Counsel Assisting the Commission, Rowena Orr, QC said life insurance-related financial advice would not be examined as it had been covered during the second round of hearings in April.

Orr did, however, detail the level of commission paid by ten major life insurers whose activities and possible misconduct were provided to the Commission at the request of Commissioner, Kenneth Hayne.

The Big Picture Emerges

As noted above, only a select number of life insurers and cases studies were examined but it appears the Commission was not short on information relating to possible misconduct by life insurers.

Orr presented a sample list as part of her opening remarks telling the Commission the actions were likely to be considered misconduct or conduct falling below community standards and expectations and had been furnished by the life insurers themselves (see: Commission Details Potential Life Insurer Misconduct).

The list included the following:

• AIA Australia – failed to notify customers their cover had been cancelled because of non-payment of premiums, and overcharged premium payments due to system errors
• AMP Life – advisers rewrote insurance policies with AMP to collect the maximum upfront commission payable, claims were subject to excessive delay
• ClearView – mis-sold life insurance via direct call sales agents leading to possible breaches of the anti-hawking requirements for unsolicited sales of the Corporations Act
• CommInsure – trauma policies contained medical definitions related to heart attack and rheumatoid arthritis that were out of date
• MLC – correct policy terms or exclusions were not properly applied or interpreted, claims management processes were not efficient, honest and fair
• OnePath – delayed processing and allocating the proceeds of a class action against OnePath Life to policy holders
• TAL Life – made misleading television and online advertisements, made sales calls that may have breached unsolicited call requirements and anti-hawking provisions, overcharged or underpayed policyholders on a number of occasions
• Westpac – incorrectly applied premium loadings to a small group customers with life insurance policies for nine years, up to 2015
• Zurich Australia – errors in communications with customers, including renewal statements, claims resolution letters, and product disclosure statements

Orr also questioned why ASIC had oversight over the sale and provision of advice related to life insurance policies but did not have any oversight over claims made against those policies, noting such oversight was specifically excluded from the definition of a financial service.

“This means that the obligations that we’ve just referred to [to provide financial services efficiently, honestly and fairly]…do not apply to the process leading to making a decision about a claim, including the investigation of the claim and the interpretation of policy provisions, to negotiations of settlement amounts…or recommendations on mitigation of loss,” Orr added (see: Questions Raised Over Gap in Claims Regulations)

The Case Studies

While the case studies involving ClearView, CommInsure, TAL, and AMP only examined a few specific areas of behaviour with each insurer, they were not short on detail, reflecting the deep level of research that has come to mark the questioning of Orr and her colleagues.

One of the questions that was repeated throughout the hearings was whether the behaviour of the life insurers could considered as misconduct under law or ‘falling below community standards and expectations’.

This was made examined in the testimony of ClearView Chief Risk Officer and Actuary, Gregory Martin who conceded the insurer’s direct life insurance channel had adopted aggressive cold-calling phone sales tactics and had likely breached anti-hawking provisions thousands of time (see: ClearView Admits to 300,000 Breaches of Anti-Hawking Regulations).

The matter was also raised during the testimony of CommInsure Managing Director, Helen Troup who addressed the issue of the insurer’s use of outdated heart attack definitions, which was the subject of media coverage in 2016.

The Commission heard that while CommInsure had updated its definitions in March 2016, and back-dated them to 2014, claims made before that date continued to be rejected even where they met the new definition.

Troup told the Commission that CommInsure was aware its definitions were out of date as far back as early 2012 and conceded that some direct-to-consumer advertising may have been misleading by stating that heart attacks were covered under its trauma policy when only severe heart attacks would have been covered due to the outdated definition in use.

Orr also questioned TAL General Manager of Claims, Loraine van Eeden about a series of claims related issues including the treatment of a claimant who suffered from anxiety but whose claim was rejected by TAL citing non-disclosure of a history of work-related stress

Even after the Financial Ombudsman Service ruled in favour of the claimant, TAL hired a private investigator to conduct surveillance of the claimant, accused the claimant of fraud and indicated it would seek recovery of any benefits already paid.

Under questioning from Orr, van Eeden conceded the behaviour of claims managers was not appropriate (see:

“It was – in terms of those case managers, it was really not appropriate,” van Eeden replied, adding the behaviour was of concern “… and that’s why we’re doing a lot of changes” (see: Insurer Conduct In Commission Crosshairs)

The Commission also heard that AMP deducted life insurance premiums from the superannuation accounts of people who had died, even when it had been notified of the person’s death, and choose to repay the premiums from the death benefit.

AMP Group Executive – Customer and Wealth, Paul Sainsbury said the issue affected 4,645 members of the AMP Superannuation fund where the life insurance was provided by AMP Life, and collected $1.3 million in premiums. Despite AMP being aware of the matter in 2016 it was not addressed until 2018 when it was also reported to ASIC and APRA as a breach (see: AMP Deducted Premiums From Deceased Policy Holders).

Picking up on the issue of medical definitions as raised in the CommInsure testimony, Orr told the Commission that four of the ten insurers who provided evidence to the Commission did not have a regular, formal review process for medical definitions in place until 2016, and four others introduced such a process only in 2017.

Orr told the Commission that ASIC had taken the view that relying on an outdated medical definition was not a breach of the law, provided the definition was clearly disclosed.

“However, ASIC considers, and we agree, that reliance on outdated definitions is clearly out of step with community expectations. The community expects that medical definitions in life insurance policies will appropriately reflect the community’s understanding of what constitutes a particular medical definition,” Orr said. (see: Major Insurers Lacked Definition Review Processes).

The Open Findings

As has been the pattern throughout the rounds of hearings, the Commission was presented with a range of open findings on the closing day of proceedings.

Prior to that the Commission heard from Financial Services Council Chief Executive, Sally Loane who struggled to clearly articulate the relationship between financial advisers and life insurers as well as the role of commissions in the purchase of life insurance products.

Loane was unable to explain if the cost of commissions was paid by consumers in the form of increased premiums, and said any calls to reduce commissions to zero were dependent on pending reviews (see: FSC Head Unclear on Breakdown of Adviser Commissions).

Presenting the open findings, Orr said the three life insurers who provided testimony were likely to have breached the Corporations Act multiple times (see: Royal Commission Finds Insurers Open to Multiple Breaches).

The Commission was told that on the evidence, it was open to find that ClearView:

• Breached the anti-hawking provisions of the Corporations Act
• Breached the prohibition on unconscionable conduct by pressuring individuals to purchase policies
• Breached the prohibition on misleading or deceptive by misrepresenting matters such as whether customers were committing to purchase an insurance policy

The Commission was told that on the evidence, it was open to find that CommInsure:

• May have breached its statutory obligations by engaging in misleading and deceptive conduct in advertising and promotional material for trauma policies
• May have breached its statutory obligations to act towards the insured with the utmost good faith in relation to a breast cancer claim
• May have engaged in conduct that fell below community standards and expectations
• by failing to update its heart attack definition in its trauma policies in 2012 and 2014

The Commission was told that on the evidence, it was open to find that TAL may have engaged in conduct that fell below community standards and expectations:

• By failing to ensure that it had adequate systems to train its case managers and to oversee the actions of its case managers
• By failing to have in place robust systems to avoid potential conflicts of interest
• By failing to accord procedural fairness to policyholders prior to avoiding their policies
• By failing to have adequate systems in place to avoid serious administrative errors

The Policy Issues That May Impact All Advisers

Anyone watching the Commission hearings will have observed that most witnesses providing testimony and those seeking the information – the Commissioner and the Counsels Assisting, have played the issues with a very straight bat offering few clues as to the possible outcomes of the hearings.

That view changed five days later when the Commission released a short document listing the ‘policy related issue’ arising from the insurance hearings, which may be the most important statement from the Commission to date.

The document questioned why life insurance commissions should remain as a carve-out to the conflicted remuneration provisions of the Corporations Act and not be removed all together.

Specifically, the document stated, “Should monetary benefits given in relation to life risk insurance products remain exempt from the ban on conflicted remuneration…?” and “Why shouldn’t the cap on such benefits continue to reduce to zero?”

It also questioned if the ban on conflicted remuneration ensured that ‘sales representatives’ did not use inappropriate sales tactics when selling financial products, and if further restrictions on remuneration or incentive structures were necessary? (see: Royal Commission Questions Ongoing Use of Life Insurance Commissions)

The paper did not provide any recommendations, and advisers will have to wait for the final report in February 2019 to read those, but they have been given until 25 October to make a submission regarding the policy issues in the document.

Full details for advisers wishing to make a submission can be found on the Royal Commission’s website.