Australians are abandoning life insurance in droves, and it’ll be difficult for insurers to win back trust, writes Josh Mennen.
The Hayne Royal Commission exposed a deeply flawed industry; one that was prepared to avoid paying genuine claims by applying outdated policy terms, misleading the Financial Ombudsman Service and ‘dirt digging’ to discredit claimants. This was not disputed by the industry, whose witnesses took their Royal Commission public lashings without argument.
Since then, APRA statistics show a whopping one in five income protection policies were cancelled in the 2018 financial year. The industry has lost $2.5 billion through income protection over the past five years, prompting calls from APRA to urgently deliver a remediation plan.
Yet if consumers are suspicious of insurers then they are petrified of financial advisers, who are often compromised by conflicts of interest to product manufacturers who pay them trailing commissions. That’s a big problem for insurers, who traditionally sell most of their policies through adviser networks.
It’ll be difficult for life insurers to win back trust. But the answers have been staring insurers in the face for years, starting with implementing an enforceable code of practice with teeth that does not, as is the case with the current code, fall below legal standards, including providing procedural fairness to consumers.
That recovery process, if it occurs, will take years. In the meantime though, as policies are cancelled, Australia’s underinsurance problem worsens.
It is a mistake to assume that workers compensation schemes can adequately protect an underinsured public - the majority of income protection and total and permanent disability (TPD) claimants are not disabled as a result of their work.
We also know that for those who have sustained their injures at work that workers compensation schemes vary greatly from state to state, and many are inadequate in their long term support for injured workers.
That’s why the importance of affordable automatic death and TPD insurance, provided through superannuation, has never been greater.
But as the Royal Commission showed, super fund members don’t always get fair terms at a fair price, particularly where retail or bank owned super funds have engaged with their own ‘in house’ insurer without any real tender process.
Some super funds’ default insurance products have wandered so far from the traditional TPD lump sum design that they are unrecognisable. Take for example the SunSuper TPD Assist product, which requires a claimant to reapply and reprove they are TPD annually over six years in order to receive reduced instalments, rather than a one-off lump sum. These disabled members are made to run this harsh gauntlet during their time of greatest need, being drip fed benefits when what is patently needed is the financial support of a lump sum to allow them to have choice and dignity in their medical retirement.
Other products have been almost impossible to satisfy. Under a CommInsure policy fund, members were excluded from a TPD insurance claim if they were eligible to claim their account balance from another fund on incapacity grounds – an insurmountable challenge for many claimants given around 40% of workers hold more than one super account.
These sub-par products can be traced back to the unbudgeted spike in TPD claims following the GFC, where injured workers, especially those on workers’ compensation, were pushed out of the employment market. That, coupled with a steady increase in mental health claims and greater public awareness of their legitimate right to claim insurance through super, left the industry with a net loss for its group lump sum business.
What ensued was rushed group life insurance policy renegotiations, which swiftly returned the industry to profit, but diminished product quality and value as insurers attempted to claw back losses.
This became a focal point for the Productivity Commission and the Royal Commission, with Treasury now considering whether to mandate universal terms for insurance within default super accounts.
That review should lead to a ban on the types of outlier products mentioned above.
However it is also important to recognise that fund trustees need to retain some flexibility to tailor insurance arrangements to the needs of members. Mine workers for example have different insurance needs and risks to hospitality workers, and ensuring products can be tailored to those specific needs has been one of the great strengths of industry super funds. Of course, stringent regulatory oversight and guidance is also a crucial ingredient to achieving this balance, and regulators will need all of their additional resources and powers to meet this challenge.
With the election now over, Treasury can turn back to these important issues that must be dealt with following the Hayne Royal Commission.
The stakes are high, with millions of Australian super fund members needing fair and affordable cover.
Hopefully these reforms will be the catalyst for life insurers to at last walk the long road back toward public trust. But if they are to restore faith, they must prove their value to a skeptical and apathetic public fast.
Josh Mennen is a Principal in Superannuation and Insurance Law at Maurice Blackburn Lawyers.