Reviewing ASIC’s review of risk insurance claims

Col Fullagar reviews ASIC’s life insurance industry report and finds there are some serious issues in the claims management protocols of potentially all insurers.

With the spotlight or blowtorch, depending on your perspective, being very much on risk insurance claims of late, the six months in the making October 2016 Australian Securities and Investments Commission (ASIC) report, ‘Life Insurance Claims – An Industry Review’, provided a timely, revealing and valuable addition to the discussion.

This article will consider the findings in the report and provide italic comment. As the report is 120 pages long and this article is under 3,000 words, considerable truncation was necessary.

The purpose of the review was cited on the front cover as (in part) “… to determine if there were any systemic concerns that apply to the industry as a whole or to particular insurers”.

ASIC met with managers and staff of 15 insurers and reviewed:

• Life insurance claims, disputed and otherwise;
• Policy documentation;
• Information about claims staffing, systems and procedures; and
• Insurer’s internal claim and financial condition reports.

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Details of almost 5,500 disputes lodged with various external bodies between 1 January 2013 and 14 March 2016 were also considered (paragraphs 88 to 92).

For the anal amongst us, that is close to seven complaints a day for every working day of the week, and that is only the external complaints!

Comment: Insurer management and staff were interviewed but apparently not advisers and claimants. This is akin to reporting on the Royal Easter Show experience by interviewing stall holders but not those attending the show.

And, whilst the stated purpose was to determine if there were any systemic concerns, some might suggest an external body complaint rate such as that above is a concern in itself, systemic or not.

From paragraphs 149 to 157, the report detailed the life insurance regulatory framework leading into a commentary on the new Life Insurance Code of Practice. It appeared ASIC held out some hope for the code.

Comment: For details of the code go to fsc.org.au/policy/life-insurance/code-of-practice.aspx.

For an alternate opinion of the code, see Money Management 9 September 2016 ‘Shortcomings of traditional wisdom’.

Declined claims

By page 44, the report was warming up. Under the heading ‘Declined Claims’, it was revealed that:

• Some insurers had substantially higher than average declined claim rates and a substantially higher than proportionate share of disputes about claims;
• Declined claim rates were highest for total and permanent disability (TPD) cover (seven per cent to 37 per cent) followed by trauma cover (six per cent to 31 per cent); and
• Declined claim rates were highest for policies distributed on a no-advice basis (paragraph 166).

Decline claim rates by distribution channel were:

• Non-advised at 12 per cent;
• Retail at seven per cent; and
• Group at eight per cent (paragraph 184).

Comment:

• A valid point picked up by ASIC later in the report was that statistics are less-than-meaningful when, as was the case for decline rates, a consistent basis for recording is not used;
• No surprises in the lower “decline” rates for retail claims where an adviser is involved; and
• Unfortunately, no investigation was made of decline rate by benefit amount, which may have provided an interesting albeit indicative insight.

A natural follow-on from decline rates was disputes. Of the almost 5,500 reviewed, 63 per cent related to claims, with income protection (35 per cent) being the most common, followed by TPD (29 per cent), life (16 per cent) and trauma (six per cent) (paragraph 200 and 201).

Claim disputes

In regard to claim disputes:

• 25 per cent related to the evidence requested; 
• 22 per cent to delays; 
• 16 per cent to underpayments; and
• 12 per cent to definitions (paragraph 202)

A solid five per cent of claim disputes related to the insurer alleging that all relevant information had not been disclosed to the insurer prior to the policy being entered into. 

Comment: Arguably, there is a systemic problem when the main issues leading to disputes infer a training and/or competence issue evidenced by an inability to request reasonable claim requirements and/or sell the need for that which is requested and/or to calculate the benefit amount correctly.

From an adviser perspective, the five per cent of claims disputes related to the duty of disclosure highlights the importance of adviser assistance and vigilance at the time of initial advice.

Mental health claims

Mental health claims were next put under the microscope.

The report found that the proportion of disputes about evidence required for mental health claims was substantially higher than for all claims; 51 per cent v. 25 per cent, with other common disputes for mental health claims being:

• Delays;
• Pre-existing conditions definitions; and 
• General declined claims (paragraph 208).

“From our review of the disputed data, it is clear that policyholders with a mental health condition face a challenging burden to establish that their condition entitles them to make a valid claim. The evidence for this includes the need for policyholders to attend psychiatric assessments, complete activity diaries, submit regular progress claim forms, provide medical reports and attend interviews with private investigators, as well as being the subject of surveillance.” (Paragraph 210)

Comment: For additional comment about issues associated with mental health claims, see Money Management articles ‘Taking on claims management bullies’, 6 June 2013, and ‘Handling claims management bullies’, 17 July 2013.

Further, the higher rate of mental health claim disputes indicatively highlights a training problem; either insufficient or ineffective and/or a failure of the FSC’s [Financial Services Council’s] Standard 21 initiative.

Non-disclosure for mental health claims came in for attention, with the report citing:

“An insurer may investigate a lengthy period of the policyholder’s mental health history, as part of assessing whether there was a pre-existing condition. The complaints we reviewed revealed that insurers had examined policyholders’ medical history as far back as… 20 years. In addition, we saw an example where an insurer considered a ‘pre-existing condition’ to include a matter as simple as a comment to a general practitioner (e.g. the ‘baby blues’ after childbirth) or a visit to a counsellor (in the absence of any diagnosis), which then resulted in an unrelated mental health related claim being declined many years later.” (Paragraph 213)

“Media reports and discussion with industry experts referred to an alleged practice of insurers obtaining access to policyholders’ personal Medicare billing data dating back to the early 1980s to identify pre-existing conditions that the individual failed to disclose, enabling insurers to deny claims.” (Paragraph 286)

Comment: It would appear that a mandatory claim requirement is now a Medicare ‘blank cheque’ authority with pre-completion indicating a start date of 1984 for the report. Forgive the claimant/adviser for believing this may involve a ‘fishing expedition’ being mounted.  

Indirectly mentioned in the report, but also, it would seem, a common claim requirement, is obtaining a copy of the treating doctor’s clinical notes rather than requesting a report responding to specific questions. Clinical notes are often shorthand summaries so there is little wonder that innocuous comments might be considered out of context.

Policy definitions

Moving away from mental health claims to policy definitions inevitably brought the focus to bear on the definitions of TPD and trauma insured events.

“We also found that …. definitions are often complex and likely to be difficult, or impossible, for policyholders to understand what they are covered for (or more crucially, what they are not covered for.”

Comment: The issues associated with complex definitions have been identified and hopefully will be addressed but some definitions that might appear straightforward are rendered complex because the manner of their interpretation changes coming out of court judgements e.g. TPD definitions and the effective date of payment and the treatment of part-time work and retraining. 

Insurers no doubt keep claims assessors updated, so would it not help the making of informed decisions if policyholders and advisers were similarly informed when something impacts on the policy cover?

“…  our review also highlighted examples where insurers paid claims ‘in good faith’ or in the ‘spirit’ of the policy despite the technical definition not being satisfied. We are concerned that this approach presents a high degree of uncertainty for policyholders in a situation where the success or otherwise of a claim will have a significant impact on the policyholder’s financial situation. Policyholders should not have to rely on insurers’ purported ‘good faith’ or ‘good will’ to have their claim paid.” (Paragraphs 221 to 224; 235 to 267)

Comment: ‘Good faith’ is a duty of the insured and the insurer and the ‘spirit’ of the contract is a necessary fallback in extreme circumstances but neither should be used as a replacement for diligent policy drafting. Those involved with risk insurance for long enough will recall the battles had and won to enshrine a policy with a contractual right to claim rather than a touchy-feely promise by the insurer that “we’ll do the right thing”.

Claims handling

Detailed findings on claims handling found:

• Typically, claims are initiated by the policyholder or family member contacting the insurer, or a superannuation fund member contacting the fund trustee; and
• Media reports and some of the industry experts we spoke to referred to an alleged practice of insurers ‘cherry picking’ doctors’ reports, so that where there are conflicting medical opinions about a claim, an insurer may choose the opinion more favourable to them. The dispute data we reviewed indicated some examples of this, although we did not find evidence that it was systemic or widespread. (Paragraphs 297 and 298)

Comments: An unfortunate omission in regard to who typically contacts the insurer was the financial adviser. ASIC’s confirmation that “some examples of (cherry picking) was found” will come as no surprise to some. Irrespective of whether it is systemic or not will be immaterial to the affected policyholders.

The report continued “in relation to claims processes, we also noted that not all insurers appear to have documented controls to monitor claim trends and individual claims outcomes on an ongoing basis. Even for insurers that do have these processes, we are aware of at least one insurer who is unable to comply with them due to staff resourcing issues”. (Paragraph 295)

Comment: Is an insurer that is unable to comply with reasonable claims protocols “due to staff resourcing issues” similar in kind to a company that trades whilst insolvent and, irrespective, should such an insurer be required to suspend selling new policies until it has sufficiently trained staff to appropriately administer its existing book of business?

“As outlined in paragraphs 287-295, there are many steps in the claims assessment process, which vary depending on the complexity of the claim and the evidence required… we found that insurers are also unlikely to communicate to policyholders the expected timeframe for the assessment of claims.” (Paragraph 312)

Comment: Not only are insurers “unlikely to communicate… the expected timeframe for the assessment of claims”, the insurer also appears unlikely to indicate a timeframe for anything with the use of words such as “in due course” and “as soon as possible” being all but the norm.

“… there may be a significant length of time between a policyholder lodging a claim and the claim being determined. In some cases, lengthy claim timeframes may have a significant impact on policyholders, particularly those who were dependent on income that is no longer available due to the insured event.” (Paragraph 314)

Comment: Surely if a lengthy timeframe between claim lodgement and determination did not have a significant impact on policyholders, the adviser may not have undertaken sound initial or review advice in so far that the insurance was not required!!

“These policyholders may find themselves in a position of hardship, and may need to rely on savings or social security payments until the claim is approved. This could lead to significant stress for the policyholder, at a time of existing distress from the claim event.”

Comment: Add “and they may have to resort to selling assets including, in some instances, the family home …” Yet, these are contracts put in place to bring the insured peace of mind.

“The dispute data indicated various reasons for delay, including… poor claims management practices e.g. lost documents and change in claims personnel.” (Paragraph 316)

“The dispute data shows that some insurers have substantially more disputes about claims timeframes than others … These same insurers also had the highest rates of disputes about evidence …. This points to potential deficiencies across their whole claims processes.” (Paragraph 317)

Comment: It all but beggars belief that organisations that have as one of their primary reasons for being the management of claims in a professional and prudent manner, can have criticism levelled at them in such technologically challenging areas as losing documents and staff, and yet it is the case. For how long would a licensee hold a license if it perpetuated the financial advice equivalent of practices which indicated “potential deficiencies across their whole advice process?”

“Our review suggests that insurers will have to significantly improve their claims handling to meet these timeframes, especially for TPD. It also remains to be seen when and how often ‘unexpected circumstances’ will apply.” (Paragraph 319)

Comment: The timeframes being referenced are those within the Life Insurance Code of Practice:

• Two months for income protection claims or within 12 months if unexpected circumstances apply; and
• Six months for life and TPD cover or no timeframe if unexpected circumstances apply.

It is noted that no timeframe has been suggested for terminal illness claims. The above hardly represents blistering efficiency and bears no resemblance to the ‘service standards’ touted by business development managers (BDMs) to advisers in order to woo business support. Yet ASIC reports that significant improvement has to happen if insurers (implying “all”) are to meet the code’s standards, let alone the ones touted.

“Our review of insurer’s claims systems, including staffing… found that… conflicts of interest in remuneration could be an issue for insurers with incentives and performance measures for staff based on declined claim rates.” (Paragraph 325)

Comment: To reduce the potential for conflicted remuneration, financial advisers are required to declare, in part, the basis of their remuneration. Would it not be appropriate for insurers to similarly declare the basis of remuneration for claims assessors such that an adviser and/or intending insured can take this into consideration when making a recommendation or purchase decision?

“Some insurers stated that their investment in systems and processes had fallen behind the requirements of the business. For example, the following issues were reported to us:

• Manual, antiquated process that do not readily allow reporting;
• Systems too highly dependent on key staff;
• Paper-based files;
• Policy administration systems that do not support customer service; and
• Poor data quality.” (Paragraph 326)

Comment: Does the reference to “poor administration systems that do not support customer service” include enabling staff to work fewer than five days a week – i.e. whilst this is great for staff, does having an assessor that works three days a week condemn the claimant to a claims management process that is 40 per cent slower than the equivalent claimant who has a fulltime assessor?

“Consistent with ASIC and APRA [Australian Prudential Regulation Authority] licensing requirements, life insurers are required to have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the license, and also to carry out supervisory arrangement.” (Paragraph 329)

“As part of this obligation, insurers should ensure that they have an adequate number of suitably trained staff along with suitable workflow systems and databases, to enable staff to deliver timely and accurate claims decisions.” (Paragraph 330)

Comment: If there exists confirmation that having adequate resources is a licensing requirement, and statements from some insurers that they do not meet this requirement (paragraph 326), surely advisers need to be made aware of which insurers are implicated so that, again, informed recommendations can be made.

Super trustees

The report moved on to super trustees.

“We are aware of situations where trustees are not as involved as they should be in the claims process, with fund members instead corresponding directly with the insurer. However, some trustees appear to be aware of issues in claims handling and the reputational risk this presents. For example, one trustee we have spoken with made a decision to have insurance matters handled in the trustee office rather than by the fund administrator.” (Paragraph 339)

Comment: It would have been assumed that the responsibilities of trustees were sufficiently clear such that trustees would be, as a matter of course, as involved as they should be. Not only involved but also performing diligently their role as a member representative. Unfortunately, there is a perception that the trustee decision is too often a rubber stamp of the insurer decision. The maintaining of meaningful statistics and open reporting of same, would assist in either confirming or otherwise the perception.

Summary

This article opened by citing that considerable truncation was necessary in order to reduce a report of 120 pages to fewer than 3,000 words.

Despite spatial censorship, the message appears clear; whether or not there are systemic concerns or not is hardly the point. The fact appears to be that there are some serious issues that exist in the claims management protocols of some, and potentially all, insurers.

Every day these issues continue, they are apparently impacting on the lives of claimants such that around seven a day feel compelled to lodge external complaints. How many more are simply too worn down by the process to not have the energy to complain is unknown.

Further, every day advisers are recommending to clients that new insurance is put in place with the recommendation based on factors such as price, relationship or a rating of policy terms; yet, these issues may be of lesser consequence when these same clients are subjected to the claims management process.

Rapid and radical change appears warranted if the reputation and reality of the industry is to be revitalised.

Col Fullagar is principal at Integrity Resolutions.