Will regulation blunt the ‘direct’ approach?

ASIC is taking a close look at the sale of life insurance direct to consumers and Mike Taylor writes that the regulator’s findings may significantly alter the commercial rationale for such an approach.

The sale of life/risk products direct to consumers has represented an important additional revenue stream for Australia’s major life insurance companies over the past five years, but regulatory scrutiny may be about to deliver a significant blow to the commercial underpinnings of the ‘direct’ model.

When the Australian Securities and Investments Commission (ASIC) last year reviewed claims handling procedures and practices in the life/risk sector it noted an important fact – declined claims rates for direct insurance are significantly higher than those applying for insurance products sold via a financial adviser.

This ASIC finding seems to confirm the frequent claims of life/risk advisers about the flaws in the ‘direct’ insurance model and may ultimately validate the claims of both the Association of Financial Advisers (AFA) and the Financial Planning Association (FPA) that the problem is owed in large part to an insurer model based on underwriting at time of claim.

ASIC deputy chairman, Peter Kell made no secret of the regulator’s concerns when he last month addressed Money Management’s Life Insurance Claims Handling breakfast in Sydney and confirmed that ASIC had not only identified the higher incidence of declined claims with respect to direct insurance but had begun specifically investigating the issue.

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He said the ASIC review would be focused on ‘direct’ life policies and would be considering sales practices and design features, “to identify poor conduct and risks to consumers, as well as identifying ‘better practice’ where it is observed”.

“This will be a targeted review of a cross-section of the market, however where appropriate we will make broader recommendations to help improve practices and reduce the risk of poor consumer outcomes,” Kell said. “If we identify breaches of the law during the course of our review, we will take further action as appropriate.”

“This stage of our work will examine insurers’ practices in more detail, which may identify further issues that could be addressed through law reform.”

The ASIC deputy chairman outlined examples of the areas  ASIC might review as including:

• The relationship between sales practices and product design, and adverse claims outcomes;
• Whether current sales practices and product design align with consumer expectations; and
• Aspects of insurers’ culture, and how this may contribute to good or poor conduct and risks to consumers.

Kell said ASIC planned to report its findings around the middle of 2018.

An examination of the findings from ASIC’s review of life insurance claims handling clearly demonstrate why the regulator has embarked on its closer examination of the manner in which insurers are pursuing the ‘direct’ insurance channel.

The review found that:

• The rates of declined claims were highest for TPD cover (16 per cent average) and trauma cover (14 per cent average);
• Across distribution channels, there were higher claims decline rates for life policies sold direct to consumers with no financial advice (compared to policies sold through financial advisers and group channels). Non-advised policies had a 12 per cent average decline rate, compared with group, at eight per cent, and advised, at seven per cent; and
• Some insurers had substantially higher declined claims rates than others for TPD and trauma covers, and for non-advised and group distribution channels.

ASIC also found that:

• The most common types of disputes about life insurance were about the evidence insurers required when assessing claims, and delays in claims handling; and
• A substantially higher than average number of disputes about evidence, delay and policy definitions involved only a small number of insurers.

Kell said the review had also identified areas of potential law reform to enable ASIC to better regulate claims handling. These included:

• Extending ASIC’s jurisdiction to regulate claims handling;
• Enabling the unfair contract terms provisions in the Australian Consumer Law to apply to insurance contracts; and
• Changes to the duty of utmost good faith.

It is early days, but the question which will be focusing the minds of many life insurance executives is to what degree will the likely regulatory changes alter the commercial rationale which has so successfully underpinned the ‘direct’ insurance strategies?