Insurance Claims Rejected More Often When Sold Without Financial Advice

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The latest ASIC report into claims handling practices in the life insurance industry has found no evidence of “systemic misconduct” in handling claims, but identified several areas of “significant shortcomings”. The review also found that claims were rejected at a higher rate when the insurance was sold directly to consumers without financial advice*.

It’s been a big week in the world of life insurance with the release of an Australian Securities and Investments Commission (ASIC) report on claims handling practices in the life insurance industry and the Financial Services Council (FSC) releasing a code outlining how their members – including registered life insurers, behave in their direct dealings with consumers.

These developments, which follow hot on the heels of last week’s appearance in front of the parliamentary committee by the bank CEO’s, are part of the ongoing responses taken by both government and industry in tackling problems that gained headlines after industry malpractices with regards to handling claims’ were revealed, in particular in relation to the Comminsure scandal earlier this year.

The FSC code outlines minimum standards for the life insurance industry and covers issues including policy design, sales practices, cancellation rights, claims management and complaints and disputes. Although the code has been critisised for only covering around 30% of the industry, being vague and full of loopholes, it was welcomed by the Minister for Revenue and Financial Services, Kelly O’Dwyer, who said it was a “significant achievement…but importantly only marks the beginning of an ongoing process, as the code is further refined and developed”. One area in particular where the code needs to go further is addressing response times as part of the claims process. A loved one passing can be one of the most stressful times in a person’s life and this should not be compounded by lax response times for insurance claims.

The government has also just tabled a bill that will cap upfront and ongoing commissions for life insurance sales at 60% for the first year and 20% payable from year 2 onwards, with a two-year claw-back provision to discourage product churn. Till now, financial advisers selling this “product” may receive an upfront commission of up to 120% of the premium for the life insurance policy. Ostensibly, this high rate of commission was to “encourage” the take up of life insurance policies and to reimburse the financial adviser for all of the costs associated with the work required in that first year to get the policy into force. Life insurance traditionally is one area where Australians are chronically under-insured. But the conflict it has presented, along with continued instances of malpractice in the industry has proven too much for the government to allow to continue as it faces continued pressure for a Royal Commission into the finance industry.

It is important to note that lowering commissions for policy sellers such as advisers will benefit the insurers bottom line. What we must see, in line with reduced commission, is an alignment of benefits to the consumer, such as lower premiums and better service in terms of claims handling, an investment in product and rehabilitation innovation and enhancements to policy maintenance and service. This in turn will make it easier for advisers to recommend good insurers and hopefully increase volume of life insurance sales in the industry.

In investigating claims and dispute processes, ASIC looked at 15 different insurers, covering around 90% of the market. ASIC said that while it found no evidence of systemic misconduct and that 90% of claims were paid in the first instance, it did identify a number of areas of concern. Across the industry ASIC found claims were declined for 4% of life insurance cases; 7% of income protection; 14% of trauma and 16% of TPD (Total and Permanent Disability) cases. More worryingly, ASIC identified 3 insurers that had significantly higher denial rates of TPD claims with one in particular denying 37% of all TPD claims. The investigation also found that a massive conflict of interest was apparent with some insurance companies linking staff bonuses with claim denial rates.

Significantly, ASIC found that there were higher rates of rejected claims when insurance was sold directly to consumers, without financial advice. Insurance is marketed and sold directly to consumers by insurance providers and online sites. Joel Edelman, a senior adviser at The Principal Edge alluded to this fact earlier in the year in one of our “Ask an Adviser” articles relating to the Comminsure scandal, when he said:

“The situation with CommInsure also provides a timely reminder as to one of the benefits of working with an advisor. As advisors, we regularly consult with the insurance providers to obtain a deeper understanding of how they are advancing definitions and their decision process when upgrading policies. At every client review we consider the appropriateness of the insurer, their definitions and how the insurer’s claims management process is administered and resourced.”

At this stage ASIC has refused to name these companies, or the insurers with higher denial rates saying the data was “not entirely reliable”. However, it has said it will work with another government regulator, the Australian Prudential Regulatory Authority (APRA), to establish a new public reporting framework for life insurance claims and outcomes.

For the life insurance sector, further scrutiny and public reporting of claim denial rates means that the industry is now on notice. Those companies that have problems with their processes will soon be outed and a better outcome for consumers is the hopeful result.

We believe some of the denied claims may in fact be valid. We find when we assist our clients in lodging claims that insurers tend to deny the claim on first instance and that we need to provide proof around how we believe the claim is valid. For this reason we encourage all our clients (and even those who aren’t clients) to contact us to assist them in lodging their claim.

If you or someone you know needs to make a claim on insurance please contact us.

*From Appendix 2, page 107, ASIC Report 498 Life insurance claims: An industry review

Source: Rodney Lester, Adviser Ratings