Category: Life Insurance

NZ Life Insurance Sector Found Wanting

The Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ) have completed their joint review of 16 New Zealand life insurers. This review follows the regulators’ bank review published in November 2018.

The findings appear to mirror the Australian Royal Commission, with a focus on shareholders rather than customers – sounds familiar? In addition commissions are extremely high in New Zealand.

Rob Everett, FMA Chief Executive said: “Overall the report shows the life insurance sector in a poor light. Life insurers have been complacent about considering conduct risk, too slow to make changes following previous FMA reviews and not sufficiently focused on developing a culture that balances the interests of shareholders with those of customers.”

The regulators found extensive weaknesses in life insurers’ systems and controls, with weak governance and management of conduct risks across the sector and a lack of focus on good customer outcomes.

Adrian Orr, Reserve Bank Governor said: “The industry must act urgently and undergo major change to address these weaknesses, as their services are vulnerable to misconduct and the escalation of issues that have been seen in other countries. Public trust in life insurers could be eroded unless boards and senior management transform their approach to conduct risk and achieve a customer-focused culture. Ultimately insurers need to take responsibility for whether customers are experiencing good outcomes from their products, regardless of how they are sold.”

Other key findings:

  • Limited evidence of products being designed and sold with good customer outcomes in mind.
  • Some insurers did little or nothing to assess a product’s ongoing suitability for customers.
  • Sales incentives structures risk sales being prioritised over good customer outcomes.
  • Where sales were through an intermediary, there was a serious lack of insurer oversight and responsibility for the sales and advice, and customer outcomes.
  • Remediation of conduct issues is generally very poor, with insurers slow to respond to issues and in some cases not sufficiently remediating them.

The review did not find widespread cases of misconduct on the part of life insurance companies.  However, there were several instances of poor conduct. There were also a small number of cases of potential misconduct (i.e.: breaches of the law) that are now subject to investigations by the appropriate regulator.

Some of the issues and themes are similar to those highlighted in the Australia Royal Commission, albeit on a smaller scale.  The FMA and RBNZ are not confident that insurers themselves are aware of all the current issues. This creates a serious risk of further conduct issues arising.

Next steps

All 16 life insurers will receive individual feedback. By 30 June 2019, each insurer will need to report back to the regulators. They will need to provide an action plan that the regulators will review, including how they will address incentives based on sales volumes for internal staff and commissions for intermediaries.  Regular reporting on progress and implementation will be required.

Concerns for consumers

Purchasing life insurance is one of the most important financial decisions people will make.  Customers should be able to have confidence their insurance will do what the insurance company or their financial adviser has told them. Many customers do experience the benefits of their insurance policies every year.

A positive finding in the report showed that, in general, frontline claims teams were focused on good outcomes with a strong desire to do the right thing for their customers.

The purpose of the thematic review and the report’s recommendations are to ensure the industry responds with urgency to the issues identified.

Further information and guidance for consumers can be found on the FMA website, here fma.govt.nz/investors/life/

Regulatory issues

Insurer conduct is currently only regulated indirectly through the FMA’s regulation of financial advice, which is generally provided by intermediaries. No one regulator has oversight of insurers’ and intermediaries’ conduct over the entire insurance policy lifecycle.

The report sets out some areas where the regulators recommend that the Government consider addressing regulatory gaps, similar to those put forward in our review of banks. The regulators acknowledge further policy work will be required and that any additional regulation will need to drive better outcomes for customers.

ClearView refunds $1.5 million for poor life insurance sales practices

ASIC says ClearView Life Assurance Limited (Clearview) will refund approximately $1.5 million to 16,000 consumers after ASIC raised concerns about its life insurance sales practices. It has also stopped selling life insurance direct to consumers.

An ASIC review of ClearView’s sales calls found it used unfair and high pressure sales practices when selling consumers life insurance policies by phone. These sales were made directly to consumers, without personal financial advice.

ASIC’s review raised concerns that between 1 January 2014 and 30 June 2017, when selling over 32,000 life insurance policies direct to consumers, 1,166 of which were to consumers residing in high Indigenous populated areas who were unlikely to have English as their first language, ClearView sales staff:

  • made misleading statements about the cover, the premiums, and the effect of any of the consumer’s pre-existing medical conditions
  • did not clearly obtain consumer consent to purchase the cover before processing the premium payments, and
  • used pressure sales tactics to sell the policies.

In response to ASIC’s concerns, ClearView will:

  • refund full premiums, all bank fees and interest to customers with high initial lapse rates
  • refund 50 per cent of premiums and interest to customers with high ongoing lapse rates
  • offer a sales call review to other eligible consumers and remediate if there is evidence of poor conduct
  • engage an independent expert (EY) to provide independent assurance over the consumer remediation program; and
  • cease selling life insurance directly to consumers (that is, without personal financial advice).

ASIC Deputy Chair Peter Kell said that pressure sales tactics are unacceptable.

‘Purchasing life insurance is a key financial decision for consumers, and all the information provided to them must be clear and balanced. Insurers should properly supervise their sales staff and ensure that no misconduct is occurring’, he said.

ClearView will contact eligible consumers.

 

ASIC is currently conducting an industry review of direct life insurance to identify whether there are concerns with sales practices and product design that may be driving poor consumer outcomes in this market.  Where similar conduct is identified, insurers will need to undertake appropriate remediation. ASIC will publish the findings of this review in mid-2018.

Background

ClearView sales staff were selling ‘direct life insurance’ which is sold to individual consumers without personal advice. It can include cover for events including death, accidental death, specific injuries, serious illness, total and permanent disability, unemployment and funeral cover.

This outcome is the result of work by ASIC’s Indigenous Outreach Program (IOP), which is staffed by lawyers and analysts, the majority of whom are Indigenous.

CommInsure pays $300,000 following ASIC concerns over misleading life insurance advertising

ASIC says CommInsure will pay $300,000 towards a consumer advice service and have its advertising sign-off processes independently reviewed after ASIC raised concerns about certain instances of its life insurance advertising.

ASIC commenced investigating CommInsure in April 2016, which included a review of CommInsure’s advertising of two life insurance policies:

  • Total Care Plan, sold through financial advisers
  • Simple Life Insurance, sold directly to consumers

The review looked at advertising from mid-2013 to March 2016 and found that misleading and deceptive statements are likely to have been made on some of CommInsure’s websites about the extent to which customers would be entitled to cover for trauma if they suffered a heart attack.

The statements may have led a policyholder to believe they would be entitled to a lump sum payment if they suffered a heart attack in general, when in fact only certain types of heart attacks, which met certain medical criteria as defined in the policy, were covered.

In response to ASIC’s concerns, CommInsure will commission an external firm to conduct a compliance review of its advertising sign-off processes and procedures. The review will look at whether CommInsure’s processes and procedures ensure compliance with the ASIC Act, and make recommendations to improve compliance if required.

CommInsure will report to ASIC by 30 June 2018 on the results of the review and the changes implemented.

As previously announced, CommInsure updated the definition of heart attack in its trauma life insurance products in March 2016 and is reassessing past claims under the updated definition back to October 2012. To date, CommInsure has paid additional benefits for 32 claims, totalling approximately $4 million as a result of the reassessed claims.

ASIC has now concluded its investigation into the life insurance business of CommInsure.

Background

CommInsure will make a $300,000 payment to the Financial Rights Legal Centre which will be used for the Insurance Law Service, a national specialist consumer insurance advice service operated for the benefit of vulnerable, low income and disadvantaged consumers.

ASIC released a public report on its investigation in March 2017 [17-076MR]

Following concerns raised by ASIC, CommInsure applied its updated heart attack definition back to October 2012, which was the date at which international cardiology bodies published an updated consensus on the appropriate clinical marker for heart attack.

Forcing insurers to reveal rejected claims a win for consumers

From The Conversation.

Companies offering life insurance will now disclose the outcomes of claims, under a new reporting regime in a bid to increase transparency in the industry. This information won’t only be used by individual customers but also by financial advisers and in the case of many of us, by our superannuation fund, via a group policy.

If super funds consumers and financial planners use this data, it will likely place considerable pressure on insurers who have high rejection rates to improve internal practices, terms of insurance policies and better inform consumers about the scope of the insurance coverage. A history of high rejections would suggest that there is a relatively high risk the insurer would reject future claims. Awareness that an insurer has a high rate of rejections would lead to business being diverted away from them.

Australian Securities and Investments Commission

The new disclosure regime arises from an ASIC review of life insurance claims. As part of the review ASIC looked at the histories of 15 insurers that provide life, total and permanent disability (TPD), trauma and income protection insurance.

The review found the highest rejection of claims rates were for TPD (average declined claim rate of 16%) and trauma cover (14%). The rejections were lowest for life cover (4%) and income protection cover (7%).

Disconcertingly, the rejection rates vary substantially as between insurers. For TPD, three insurers had rejection rates of 37%, 25% and 24% respectively, compared to an industry average of 16%.

ASIC provided a comparison of rejection rates among the insurers it examined, but it kept the insurer names anonymous. For example the reporting on TPD rejections ranged widely.

ASIC’s reluctance to name names in this review is understandable. It found that making comparisons was difficult, partly because the insurance policies have different terms and definitions. Sometimes these differences are subtle, and at other times substantial.

What is heartening is that ASIC proposes reporting on the conduct of individual insurers – that is, it appears ASIC intends naming names. The sooner this is done, the better.

It is in the mutual interests of consumers, superannuation funds managers, financial planners who advise clients on the purchasing of insurance, and the insurance industry itself that there is an improved capacity for purchasers to make informed choices.

Purchasing the right insurance policy is fiendishly difficult. Making anything resembling a rational and informed choice requires knowing which future events are covered by the insurance, and the likelihood of the insurer paying up if a claim is made.

Finding out which events are covered by a policy often requires wading through lengthy and complex product disclosure statements (PDS). In addition, making any reliable assessments about whether the insurer is likely to pay up on a claim is next to impossible. It is somewhat ironic these uncertainties exist as a reason for insuring is to buy peace of mind, and an assurance that if things go wrong we will receive money to compensate for some or all of the insured loss.

The difficulties consumers face in making comparisons when shopping for the right product contribute towards an inadequately competitive marketplace and a lack of consumer trust in insurers. This in turn is fuelling public disquiet that led to ASIC review of the industry.

ASIC found that overall the life insurance industry accepts 90% of claims in the first instance if a decision was made to about whether or not to make a claim. For death claims, an average 96% of claims are paid.

ASIC is concerned, however, that in some cases claims are being rejected on technical or contractual grounds that are not in accordance with the spirit or the intent of the policy. This presents a challenge for insurers to decide how to deal with that small number of claims that may not be covered under the fine print, but under any reasonable consumer or community expectation should be paid.

This sort of information is already published in the United Kingdom where the Association of British Insurers publishes data on claims payouts.

In Australia ASIC proposes working with the Australian Prudential Regulation Authority, the insurance industry and stakeholders to establish a consistent public reporting regime for claims data and claims outcomes. ASIC will report on claims handling timeframes and dispute levels across all policy types.

Enhancing the capacity for consumers to make better informed choices will help build trust in the industry and a more competitive marketplace. It will also help bring greater peace of mind for those purchasing insurance.

Author: Justin Malbon, Professor of Law, Monash University

New life insurance code riddled with loopholes

From The Conversation.

Life insurance has stood out as an industry without a code of practice when others such as general insurers have one. The latest attempt by the Financial Services Council to remedy this may be a last chance for life insurers to reform, before the government forces them to.

protect-pic

The code from the Financial Services Council focuses on the relationship between the insurer and the customer and aims at high standards of consumer service; professional behaviour and industry consistency. It should complement the legislation announced in 2015 to deal the problems of excessive up front premiums, remuneration practices and commissions which were incentives for insurers to churn customers through policies.

The code is also a result of the Trowbridge Report on retail life insurance which gave the life insurance industry a final opportunity to shape its future through a co-regulatory approach, rather than being reformed by the government alone.

Hopefully this latest attempt at reform does not go the same way as the earlier 1995 code of practice for the industry, which lapsed in 2001. This covered similar territory to the Financial Services Council code, but made little difference to the way the industry behaved. A positive sign is this new code was developed in consultation with industry, while the last one wasn’t.

What’s in the code?

This latest code will again try to address problems with selling practices and the quality of advice, high lapse rates, increases in premiums and their affordability as individuals age, and the redesign and repricing of products. The CommInsure scandal revealed further problems with outdated definitions and problems with making claims.

ASIC can approve these codes of practice for industry but rarely does so. This latest code is yet to be approved as well.

Some sectors have agreed to codes to forestall unwanted legislative change. Other codes establish higher standards of behaviour than required by law.

Codes are legally binding between an enterprise and a customer. This is because when an enterprise agrees to abide by a code it forms a kind of contract on the basis of this promise.

The very first part of the latest code of practice states that the code is binding and commits the entity to the standards in the code. The framework of the code looks at types of business rather than types of product.

One big omission in the code, is that it does not cover superannuation fund trustees or financial advisers, unless they explicitly adopt the code. This means it doesn’t cover a group policy where it is the employer or the superannuation fund trustee who has taken out the policy. As a result many Australians with life insurance within their super funds do not benefit at all from the code.

It does however apply to life products such as death, total and permanent disability, critical illness, disability, funeral, income protection, business expense and consumer credit insurance. But it does not cover products issued by a general insurer or a health insurer. This could create some confusion, for example it means that consumer credit insurance is covered by the code if provided by a life insurer, but not if provided by a general insurer.

Compliance with the code will be monitored by a Life Code Compliance committee. This is similar to the banking codes. The Financial Services Council and the insurers both have obligations to make consumers aware of the code.

Consumers can make a complaint using the code to the insurer, the Financial Ombudsman Service or Superannuation Complaints Tribunal. But if a complainant goes to a court, tribunal or other external dispute resolution body, the code no longer applies.

This code has an interesting take on the issue of designing life insurance products, as discussed in the 2014 Financial Systems Inquiry. It clearly states that when new policies are designed, “we will define suitable customers for the product”. This may stop the sale of products to those who don’t need them.

This is good but it still falls short of an obligation to sell a product that is suitable for the particular person, rather than a product that is generic for a class of targeted people. For example tailoring a policy to suit a person’s particular set of circumstances.

It’s a shame that the code has to set out that there will be rules to prevent sales to someone who is, “unlikely ever to be eligible to claim the benefits under a policy”. This really should be a part of the system already.

The obligation to review and update medical definitions is a good sign. But this applies only to policies that are currently being sold and won’t help those who are tied to policies with older definitions, that are no longer being sold.

The code also doesn’t have an obligation for insurers to disclose the exclusions in the policy, in plain language, to a customer before they sign a contract. This is something that really should be taken up by the industry.

Funeral insurance is the only life insurance product that requires a pre contract key fact sheet for offers. This type of disclosure shortcut is mandatory for home building and contents general insurance. Although there are difficulties inherent in simplification for key fact sheets this should be reconsidered for other life insurance products.

There are provisions for pre-sale disclosure for consumer credit insurance. Insurers are required to offer an alternative form of payment, when there is an offer of an initial loan to pay for insurance. In addition to this, insurers have an obligation to disclose the cost of loan repayments without and with the premiums and the interest payable on them. It may prevent some of the practices revealed in the reports on the problems of add-on insurance.

The code is a step towards a better relationship between the industry and consumers, particularly through the provisions to assist the vulnerable and helping customers make claims. It is not perfect.

The industry should continue to listen and take on board the virtues of the code. It can easily be changed to guide even better standards of conduct and meet newly identified problems.

Author: Gail Pearson, Professor, Business School, University of Sydney

More scrutiny needed on commissions paid to life insurance advisers

From The Conversation.

The proposed changes to commissions for selling life insurance may just tip the system back in favour of the customer. For years paying life insurance advisers by commission was not seen as a conflict of interest, even when it incentivised bad advice and continuous changing of policies.

Life-Insurance-graphicThe changes will reduce the incentives for upfront commissions and allow better monitoring of the cost of the policy relative to the commission, however there is still no legislative cap on total commissions payable.

Problems with the current system

Life insurance covers death, illness, injury and disability. The consumer pays the insurer for their policy and then the insurer pays the adviser who gets a proportion of the premium as a commission.

Up-front commissions can be up to 130% of the first year’s premium followed by 10% of subsequent premiums. “Hybrid” commissions (which sit between upfront and “level” commissions) usually amount to 80% of the first year premium and 20% of subsequent premiums. Level commissions are about 30% of each year’s premium.

The upfront commission is an incentive for advisers to switch clients from one life insurance policy to another in order to keep collecting the high commission. They may churn clients from a suitable life insurance policy, to one that may let them down when they most need it.

Sometimes the policy life insurers recommend is not in the best interests of the client. Some advisers act outside the law.

ASIC has found a high correlation between high commissions and lapsed life insurance policies.

People are holding the same life insurance policy for fewer years and ASIC also found more than a third of life insurance advice didn’t comply with the law ensuring its quality.

Advocates arguethat commissions are about preserving the value of the business, not guarding against under-insurance and the risk to the client.

There are rules to protect consumers from conflicts of interest and conflicted remuneration. However the life insurance industry was successful in securing exemptions from the conflicted remuneration rules in the Future of Financial Advice reforms.

The exception to the exemption from the ban, is a group life policy for a superannuation fund or an individual policy for a member of a default superannuation fund.

How the government plans to fix this

At the time of these reforms the parliament recommended monitoring life insurance and subsequent ASIC studies identified problems. This led to an industry commissioned report.pdf) which put forward concrete measures to minimise conflicts of interest such as a fee for service model and competitive approved product lists.

The (Murray) Financial System Inquiry recommended level commissions, that is, the same commissions on each year’s premium, arguing that the upfront style commission should not be greater than an ongoing commission. In its response to the Murray Inquiry, the Government said it would address this by the end of 2015.

The current bill, which was before parliament prior to the election, removes the exemption of life insurance commissions from the definition of conflicted remuneration, effectively banning these commissions. But it then reinstates these commissions in two circumstances.

Commissions can be paid if the benefit and the cost of the policy is the same for each year, that is, level. It changes the timing of the commission, putting a cap on upfront commissions and evening out payments over the life of the product.

In another circumstance, if the first year plus subsequent years commissions are less than an ASIC determined fair ratio between the commission and the cost of the policy, more commissions can be paid. In fact there is an obligation to repay it if the policy is cancelled or if the cost of the policy is reduced.

The claw back applies only if the insurer gives the adviser an upfront commission. It’s designed to prevent the incentive for switching or churning through policies.

ASIC will have the power to determine an acceptable fair ratio and extra commission, effectively setting the allowed amount of commissions.

The Trowbridge Report.pdf) proposed an initial capped payment for advice that could be paid, only once every five years, plus level commissions capped at 20% of premiums.

There is ongoing debate about fee for service payment for product advice and whether consumers are prepared to pay. The problem is how much does it really cost to prepare advice and how much is it really worth?

The proposed bill gives the life insurance industry further time to reform itself. However the industry has been on notice from at least 2012 that it needs to change and the question is whether it has now been given too much time.

The ASIC review in 2018 could recommend banning all life insurance commissions.

Author: Gail Pearson, Professor, Business School, University of Sydney

Life Insurance Industry In Review – APRA

APRA has released a submission made to the Senate Economics Committee relating to the life insurance industry. They highlight significant issues relating to risk assessment, pricing and profitability. Reinsurance is also a significant focus, as these entities took a number of hits. Legacy products are a significant problem. Here is a summary of the submission, with content reordered to make the information more digestible.

The most common products provided by life insurers are death cover, total permanent disability (TPD), trauma, and income protection.  Annuities are also provided by some insurers.

  • Life Insurance Death Cover pays a lump sum to the policy owner. If the policy owner and the life insured are one and the same then often beneficiaries would be a partner or child upon the death of the life insured. In some cases, a terminal illness benefit may be available and is an advancement of the death cover paid if the insured is medically certified as being terminally ill within a defined period (usually 12 or 24 months).
  • Total Permanent Disability – known as TPD – pays a lump sum if the insured becomes totally and permanently disabled.
  • Trauma provides payment if the insured person is diagnosed with a specified illness or injury. These policies include the major illnesses or injuries that will make a significant impact on a person’s life, such as cancer or a stroke.
  • Income Protection replaces the income lost due to a person’s temporary inability to work due to injury or sickness. Sometimes also referred to as disability income insurance or salary continuance insurance.
  • Annuity: An investment product providing a guaranteed income for either a fixed term or the lifetime of the policy holder.

Life insurance business can be divided into three groups according to the type of policyholder.

  • Individual risk insurance: This insurance is sold to the final consumer directly or via a financial advisor. Individual consumers can choose whether to hold one or a range of life products listed above. The Life Insurance Act contains specific restrictions that significantly limit the ability of the life company to re-price the policy or change its terms and conditions.  The policy holder is entitled to a guaranteed renewal of their policy.
  • Group risk insurance: This insurance is sold to superannuation funds to provide cover to their members. Group insurers provide a default level of automatic cover, usually including TPD and death cover and sometimes income protection cover, to the trustee. The policyholder is the trustee of the fund who contracts the insurance on behalf of the membership. The terms, conditions and pricing of the policy are typically periodically re-negotiated periodically between the insurer and the trustee.
  • Reinsurance: is insurance that is purchased by an insurance company (the cedant) from one or more other insurance companies (the “reinsurer”) as a means of risk management. The cedant and the reinsurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company in exchange for a premium.

As at 20 August 2015, there were 28 authorised life insurance companies.  Insurers are comprised of a number of distinct groups: 8 large diversified insurers, 4 insurance risk or annuity specialists, 9 relatively small or niche market players and 7 reinsurers. The number of life insurers has reduced in the past decade in a continuation of a steady trend that began around 1990, when the number of licences peaked at 61. Since that time, mutually-owned insurers – which were once the largest life insurers in the market – have largely disappeared, while the banking industry has developed a prominent role in the ownership of life insurance and wealth management businesses more generally.

Life-Insurance-NumbersSome reinsurers both reinsure and sell life insurance directly. Many large insurers that provide individual life policies also provide group insurance to superannuation fund trustees but there are a number of insurers that largely specialise in servicing the group insurance market.  Most insurers offer both life lump sum (TPD and Death) and income protection policies.

Although the life insurance industry continues to operate with an adequate excess of capital above minimum regulatory requirements, the profitability of the life insurance sector has been under strain in recent years. Weak profitability has been driven by, in particular, the mispricing of risk which resulted in losses for insurers during 2013-14:

  • group risk insurers experienced higher-than-expected lump sum disablement (TPD) claims payouts which generated substantial losses in 2013, with some reinsurers being particularly affected; and
  • individual disability income business was the most significant source of losses in 2014.

In addition to the issues above, the industry has had to deal with a challenging external environment, including ongoing financial market volatility, persistently low interest rates, and pressures on overall industry operating efficiency. Some insurers have managed these challenges better than others. In particular, those insurers with a strong risk management framework, an effective risk appetite statement and a robust approach to capital management have proven best able to manage and adapt to operating conditions.

Poor risk management over time led to claims payouts exceeded the premiums collected for group total disability and group income protection, lines of insurance during 2013 and individual total disability and life in 2014. Reinsurers provided reinsurance on generous terms to these insurers, in effect allowing poor underwriting and risk management practices. As a result, reinsurers bore most of the losses during this period.

This outcome is not sustainable in the long term. Consumers of long-term products such as life insurance are ultimately best served if insurers are financially sustainable, thereby enabling firms to deliver on their long-term promises. There were various reasons for losses including :

  • underwriting and pricing practices in both the life insurance and reinsurance industry left both the direct and reinsurance market exposed to adverse movement in market conditions. In particular, thin margins were exposed by pricing that did not properly align with the policy benefits. A notable example was a trend whereby default coverage increased in group life schemes, but the underlying premium rates did not increase, and in many case fell, despite the increased exposure;
  • decreases in global interest rates reduced investment returns;
  • competitive tension in group life market tendering saw the process often weighted toward acquisition and retention of business rather than sustainability; and
  • increased plaintiff solicitor involvement drove an increase in lump sum total permanent disability (TPD) claims. The resulting increase in claims has been seen, in part, as a correction of a rate of claims which may not have accurately reflected the industry’s underlying exposure. For instance, prior to targeted marketing by plaintiffs’ firms, individual members may not have been aware of their available cover. An increase in the number of TPD claims related to mental illness and other complicated injuries, and changing community standards as to what conditions give rise to claims, has also resulted in more claims payments and requires greater claims management and resourcing.

The reinsurers seem to have carried a disproportionate share of the losses.  Reinsurers incurred more than half of the total group death and TPD losses in 2013.  Followed by significant losses in 2014 for individual disability income. This raises the question about the nature of the reinsurance arrangement in place and the role reinsurers may have played in the poor overall performance. Reinsurance-1

Reinsurance-2 Reinsurers sought to mitigate the adverse impact of the poor experience on their financial position by significantly reducing or even ceasing to write or tender for new business. This in turn lead to an increase in prices for policyholders and/or a tightening of coverage, where permitted, which has inevitably been passed on to policyholders. Changes made by insurers include:

  • no longer making ‘opt-in’ offers that allow members to take or increase cover with little or no evidence of health status;
  • increasing the length of the ‘at work’ period for members to become eligible for cover (e.g. from one day to one month);
  • tightening the definition of TPD (for example, from ‘unlikely to work’ to ‘unable to work’);
  • introducing severity-based TPD benefits;
  • introducing TPD benefits payable via instalments rather than as a lump sum;
  • reducing default TPD benefits and increasing default GSC benefits;
  • reducing automatic acceptance limits;
  • making greater use of health questions for optional cover; and
  • making greater use of exclusions for pre-existing conditions, hazardous occupations, suicides and pandemics.

APRA has observed that many insurers chose to increase premiums to improve profitability. While some premium increase may be needed to ensure pricing is sustainable following a period in which premiums were insufficient to reflect risk, in APRA’s view, these increases do not by themselves address the structural reasons that led to the underlying problems and have produced an unexpected increase in the cost of insurance for superannuation fund members.

One area of potential change identified by APRA relevant to this Inquiry is the introduction of a mechanism to allow the rationalisation of legacy products to occur more easily. Legacy products arise particularly in life insurance and superannuation, where the financial products often last a lifetime, but the financial, legal and social environment continually changes.  In addition, the life insurance sector has undergone a significant consolidation over the past 20 years, leading to many duplicated and outdated products. The industry is still grappling with the challenge of addressing those issues.

Life insurers regularly introduce new products to better reflect consumer demand and changed market conditions; while the previous products (legacy products) are typically no longer made available for new business. However, these legacy policies must continue to be administered in accordance with the original contract terms.

Over time, legacy products become more complex and expensive to administer and may no longer meet the requirements of the beneficiaries. Industry estimates suggest that approximately 25 per cent of all funds under management are in legacy products.  The cost of these legacy products is ultimately borne by the policyholders.

As life insurance products involve a contract between the life insurer and the policyholder, terms cannot be unilaterally modified by either party to the contract. Consequently, it is very difficult to rationalise legacy products in the absence of a legislative mechanism, as each policyholder would need to consent to any changes. In the case of individual risk business, a policyholder may not be able switch to a newer product or provider readily, as their health status may have changed in the interim meaning that they either cannot obtain replacement insurance or can only do so at significantly increased cost.

There is a range of very complex legal, consumer and tax issues that arise if a life insurer seeks to move policyholders from a legacy product to a new product, restricting the ability of insurers to close legacy products. The benefits of a simpler, though still robust, mechanism to rationalise legacy financial products has been recognised for some time. The issue was, for example, a recommendation of the Report of the Taskforce on Reducing Regulatory Burdens on Business in 2006. As noted in the Financial System Inquiry Final Report, between 2007 and 2010 Government worked with industry to develop a mechanism to facilitate product rationalisation. However, such a mechanism was not finalised or implemented.

The mechanism would have facilitated rationalisation of genuine legacy products — that is, not simply those that are performing poorly — subject to a ‘no disadvantage test’ for relevant consumers. It would also have provided tax relief to ensure consumers were not disadvantaged as a result of triggering an early capital gains tax event.

Life Insurance Remuneration Reform Regulations

The Government has released draft regulations that will support the Government’s life insurance reform package to better align the interests of financial firms with consumers.

Remuneration relating to life insurance advice provided outside of superannuation was excluded from the ban on conflicted remuneration (remuneration likely to influence advice) introduced under the Future of Financial Advice (FOFA) laws.

A series of reports, including a review the Australian Securities and Investments Commission (ASIC), the industry-commissioned Trowbridge Report and the Financial System Inquiry (FSI), identified the need to better align the interests of providers of financial advice in the life insurance sector with consumer outcomes. As part of its response to the FSI, the Government announced that it would support a reform package put forward by industry.

The reform package introduced by the Life Act removes the exemption from the ban on conflicted remuneration, and introduces caps under which commissions will be permitted to be paid, as well as arrangements to ‘clawback’ commissions where policies lapse in the first two years. The reforms will commence on 1 July 2016.

The Regulation supports the reform package introduced by the Life Act by:

  1. allowing the temporary inclusion of stamp duty relating to death benefits to be included in commission calculations while industry update its information technology systems;
  2. prescribing circumstances where ‘clawback’ does not apply, such as in situations where a policy is cancelled automatically due to the age of the insured or where a premium rebate is offered to encourage customers to take up a policy; and
  3. ensuring that existing life insurance remuneration arrangements are grandfathered in a manner broadly consistent with FOFA by ensuring that remuneration arrangements not effectively grandfathered by the Life Act
    (i.e. employee-employer remuneration arrangements) are explicitly grandfathered in the Regulation. Grandfathering means that the existing rules continue to apply to existing arrangements, while new rules apply to new arrangements.

Closing date for submissions: Thursday, 28 April 2016

Life Insurance Companies Net Profit Up 29.7% In 2015 – APRA

The Australian Prudential Regulation Authority (APRA) today released the Quarterly Life Insurance Performance Statistics publication for the March 2015 reference period.

The Quarterly Life Insurance Performance Statistics publication provides industry aggregate summaries of financial performance, financial position, capital adequacy and key ratios in a time series.

Net premium for the industry in the year ended 31 March 2015 was $61.8 billion, up from $50.0 billion in the previous year. Net policy payments for the industry for the same period were $60.8 billion, up from the previous year’s $45.6 billion.

Net profit after tax was $2.6 billion for the year ending 31 March 2015, up from $2.0 billion in the previous year. The March 2015 quarter profit was $830 million compared with the December 2014 quarter profit of $644 million.

The total assets for the industry were $306.5 billion as at 31 March 2015, up from $276.5 billion a year earlier.

The prescribed capital amount coverage ratio for the industry was 1.71 times the prescribed capital amount as at 31 March 2015, down from 1.88 times in the previous year.