It included targeting people in remote Indigenous communities with near-worthless policies. Freedom Insurance was exposed using hard-sell techniques over the phone, including to a 26-year-old man with Down syndrome who was unable to understand the cover he was buying.
Freedomâs sales agents were offered a trip Bali to encourage sales. âGet on the phone and sell, sell sell with one thing in mind. Get to Bali. At 4pm we will break out the Bintang beers and ciders.â
Life insurance polices sold over the phone are often worthless
Photo: Robert Rough
Thornhill says a “lot of the selling was that you dealt with their objections until, with exhaustion, they signed”. Much of the sales training is in how to overcome those objections and that was evident on the calls played at the commission
For those who have financial dependents, life insurance can be a very valuable financial product. But it is a question of how it is sold and whether the consumer is fully informed about what they are buying, Thornhill says.
That’s assuming that the policy is actually worth something. A recent review by the Australian Securities and Investments Commission (ASIC) of direct selling of life insurance over the phone found much of what was sold was worthless.
Life insurance sold directly by phone was much more likely to be rejected when a claim was made. For accidental death insurance, the regulator said it offered little benefit to consumers. The payout on claims during the 2015â17 financial year was 16 cents for every $1 paid by consumers in premium to insurers.
Senior counsel assisting the commission, Rowena Orr QC, listed statistics the commission had received from 10-big insurers on accidental death cover that confirmed ASIC’s conclusions.
The Commonwealth Bankâs insurance arm, CommInsure, through its Colonial Mutual Life Assurance Society business, denied 88 per cent of claims.
NAB-owned MLC denied 61 per cent of claims and Westpac denied 49 per cent of claims.
Senior Counsel assisting the commission Rowena Orr.
Mark Kachor, the managing director of life insurance and superannuation researcher DEXX&R, says one of the reasons for the particularly poor claims experiences of policies sold directly is that they tend to have a lot of exclusions.
That’s because the sales person does not want to have to ask the consumer too many questions, as that makes the sale harder to close, he says.
Evidence before the commission painted a picture of insurers doing everything they could to deny claims.
The chief medical officer of CommInsure warned in 2012 that it was rejecting trauma claims based on a heart attack definition that was up to five years out of date, and out of step with medical opinion, but the bank has admitted failing to act and update the definition in order to protect its bottom line.
Fairfax Media and the ABC first broke the story in March 2016 when it aired the concerns of the whistleblower, Benjamin Koh, who was the chief medical officer at CommInsure from 2013 until he was sacked in 2015.
The commission heard how CommInsure also used an outdated definition to deny an insurance claim from a woman with breast cancer because her surgery was not considered radical.
The nurse’s story began in 2010. After being diagnosed with work-related depression, she lodged a claim against her TAL income protection policy. In 2011, TAL was sold to Japan-based global life insurance giant Dai-ichi Life Group and other Australian owners have since sold, or are selling, their life insurance business to foreign insurers.
Life insurance is a “get-rich-slow” business, Kachor says, asÂ owners of life insurers expect rates of return on their life insurance that are too high by international standards.
Our big banks are among the most profitable in the world and have expected to get the same high returns on their life insurance businesses as they are able to achieve on their other products, Kachor says.
Those unrealistically high expectations have contributed to the aggressive sales practises and the efforts put into minimising claims payments. But the banks are getting out of the game and soon almost of all Australia’s life insurance policies will be with foreign-based insurers.
NAB has sold MLC Life to Nippon Life, with NAB retaining 20 per cent ownership. The Commonwealth Bank is in the process of selling CommInsure to AIA Group, which is headquartered in Hong Kong and owns one of the biggest insurers in Australia, AIA Australia.
ANZ is in the process of selling its OnePath life insurance operations to Zurich.
Insurance through super
Much more life insurance is accessed by consumers through superannuation funds than through an adviser or from high-pressure selling over the phone.
Figures from actuaries Rice Warner show life insurance provided through super funds makes up about 70 per cent of all cover. On joining a super fund, the fund member will receive a small amount of some death cover as well as total and permanent disability cover without the fund member asking for it.
Many super funds offer automatic acceptance on this “default” cover, at least up to a certain level of cover, without the need to provide medical history or undergo a medical exam.
Kachor says default cover of $50,000 or $100,000 or $150,000 will help pay off some debt if the unthinkable should happen, but is not nearly enough to look after the surviving parent and children.
Rice Warner estimates that a 40-year-old with a partner and children needs death cover equal to just over 5 times household income.
Rice Warner estimatesÂ that of those who have death cover, the median cover is about $143,500, which is only twice the median household income.
Rice Warner estimates that a 40-year-old with a partner and children needs death cover equal to just over five times household income and total and permanent disability cover of just over seven times household income.
While the revelations before the royal commission on life insurance are shocking, there are reasons to believe the experiences of consumers are improving even before the inquiry’s completion. Most insurers have stopped selling directly to consumers – some on the eve of testifying at the commission – and they are moving to update their medical definitions.
At the start of this year, new laws came into effect which, while they do not ban life insurers paying commissions to advisers to sell their insurance, cap the commissions that can be paid.
Advisers are paid an upfront commission of about 140 per cent of the first yearâs premium, on average, by life companies on each policy sold and about 5 per cent a year in ongoing commission.
Under the reforms, commission caps will be phased in, so that advisers will eventually be limited to receiving upfront commissions of 60 per cent and ongoing commissions of 20 per cent.
That should discourage âchurningâ – where an adviser flips a client even couple of years to another policy to generate another upfront commission – and encourage the provision of ongoing advice.
Kachor expects the ownership of Australian life insurers by foreign insurers to be good for Australian consumers.
âThatâs because the new international owners like Zurich and Nippon Life have been in the life insurance business for a very long time and understand they are there to pay claims.â
Writes about personal finance for Fairfax Media, Sydney, Australia.
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