That policy had a much higher hurdle on TPD claims for people in certain occupations dubbed high-risk, which included Chapman’s. Chapman says he was unaware of the classification.
About 12 million Australians hold life insurance through their superannuation, paying a collective $9 billion a year in premiums. These products provide for lump-sum payouts on death or TPD, and sometimes income protection insurance as well, and super fund members are passively channelled into them, unless they choose to opt out.
Paul Chapman says he was unaware his insurance classification was “high risk”.
Photo: Ben Searcy
It is a sector under significant commercial pressure and undergoing widespread regulatory change that it has met by increasing premiums and enforcing much tougher claim conditions. Insurance will be the focus of the next round of hearings at the Hayne royal commissionÂ into banking, super and the financial services industry, starting on Monday.
Chapman’s lawyer, John Berrill, of Berrill & Watson, says the new hurdles are so tough that most people would never qualify. He calls it junk insurance.
âThese much harsher definitions are insidiously creeping into some policies without members being aware, [such as] by being classified as in âspecial riskâ occupations,â he says. âThese policies are often completely opaque.â
Shine Lawyers employment law expert Will Barsby says there are major issues in life insurance.
Photo: Toby Crockford
Two years ago, a landmark investigation by Fairfax Media uncovered how life insurers were muscling up in negotiations with super funds, leading to premium rises, lower coverage amounts and a slew of âhidden nastiesâ being inflicted on members in a bid to keep payouts under control.
Insurance sold through superannuation â also known as âgroupâ insurance â works on a simple principle: spread the risk. It ensures that millions of Australians have life insurance when they otherwise would not.
But it is a sector blighted by, in the words of the Productivity Commission, âegregious problemsâ. Its attempts at self-reform have been panned by the government, consumer advocates and the Productivity Commission.
It is insurance that you pay for but can never claim on.
Kim Shaw from Maurice Blackburn
âThis model has worked so well over the years to deliver affordable life insurance to millions of Australians,â says Berrill. âBut it has been undermined recently by some poor and frankly illegal practices.â
The sector is now facing a growing outcry as total premiums paid by Australians rose 35 per cent in three years, the Productivity Commission found.
The sector is also racing to implement changes unveiled in the May budget which experts, including the Australian Prudential Regulation Authority, warn could push premiums even higher.
The superannuation industry â especially its for-profit retail funds â is already reeling after the last round of Hayne commission hearings heard evidence suggesting multiple fund trustees had failed to serve membersâ best interests.
It remains to be seen whether super fund trustees will be considered further in the hearings, given their role in negotiating insurance contracts for members, and advocating on their behalf in claims.
Shine Lawyersâ Will Barsby believes fund trustees are âfailing completelyâ on this count.
âThere is a clear conflict between the member goals in super funds and those of insurers,â he says.
Then there are the regulators. During the last round of hearings, APRA was portrayed as a âbehind closed doorsâ regulator that was reluctant to pull the trigger on enforcement.
Its record in group insurance is also being panned amid questions about why it has not intervened to stop super fund members being passively channelled into questionable insurance policies.
âThe lack of surveillance of the industry by APRA has come at the expense of hardworking Australians,â Barsby says. âWe are now seeing the human carnage of ill thought out and inappropriate group policies.â
The Productivity Commission has pointed to the problem of ââzombieâ policiesâ, which members pay for but cannot claim on.
Then there are the hidden ânastiesâ now in force in some policies â including the much higher TPD hurdles â which require members to meet stringent âactivities of daily livingâ (ADL) tests before they can receive a payout.
Such members have to prove they canât do two or three tasks such as showering, dressing, eating, toileting and moving in and out of a chair without assistance â a stark contrast to the standard TPD definition that a person cannot work again in a job to which they are suited.
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Employees in a long list of occupations are now finding themselves subject to these ADL tests. BT Superâs policy, for example, lists freelance journalists, actors, golf instructors and musicians as âspecial risk occupationsâ who must meet the ADL definition to get a payout.
AIA says it believed Chapman’s case under an ADL definition was assessed in a âdiligent, fair and correct way”, but it would review his claim if “new medical evidence is providedâ.
The ADL test, it says, is applied only in a âminority of casesâ, and was brought in to ensure that all workers could receive TPD cover, regardless of their job.
BT Super similarly argues the ADL definitions benefit âmembers who may not otherwise be eligible for cover or not able to receive coverâ. It says claims for members in high-risk occupations have been paid out under the ADL test.
BT says its policy structure is designed to make cover accessible and affordable, including for members in high-risk occupations.
Insurance will be the focus of the next round of hearings at the royal commission led by Kenneth Hayne.
Maurice Blackburnâs Kim Shaw believes that policies that place âundue relianceâ on ADL definitions are junk insurance â “it is insurance that you pay for but can never claim onâ.
âThere are very few cases in our experience where claimants meet that very tough definition.â
Shaw suspects that ADL tests are being used as a blunt instrument to reduce risks for insurers.
The current situation has its roots in a massive crunch in group insurance five years ago when insurers were hit with a big spike in TPD claims which they had failed to foresee.
Insurers reacted by pushing aggressively for higher premiums, clamping down on benefits, or both.
Under the laws governing super, insurance premiums must not âunreasonably erodeâ the growth of fund members’ nest eggs, which is why some fund trustees may have felt pressure to give ground on other negotiables such as hurdles for TPD payouts.
But some believe funds have sacrificed far too much, and question whether fund trustees fully understood the likely impact of these deals when they agreed to them.
In an April draft report, the Productivity Commission criticised the industry for its âextremely complex and incomparable policiesâ, and for member difficulties in interacting with funds.
A review by the Australian Securities and Investments Commission released on Friday highlighted poor complaints-handling timeframes and practices in group life insurance, finding that almost a third of trustees in the review took more than 90 days to resolve complaints.
This is a major bugbear of lawyer Will Barsbyâs, who says delays of years on claims are common and members may face frequent changes in case managers, and additional unnecessary requests for medical records and exams.
A new code of practice, produced by an industry working group and in place from July 1, has promised to improve the situation.
But concerns have been raised by the government, consumer advocates and the Productivity Commission that the code is voluntary, unenforceable and well short of what is needed.
Jim Minto, former chief executive of insurer TAL.
Photo: Natalie Boog
Working group chair Jim Minto, former chief executive of insurer TAL, says the industry itself could not have made the code mandatory. âCodes like this, however, can still be very valuable as industry voluntary codes.â
Life insurance in super also faces the challenge of imminent government reforms.
The measures, which have not yet passed Parliament, include a requirement for under-25s to âopt inâ if they want life insurance, and a bar on insurance being automatically attached to accounts less than $6000, or inactive for 13 months or more.
Their July 1, 2019,Â implementation deadline is decried by industry, regulators and consumer advocates alike, who all warn they could force up premiums further as fund trustees rush to lock in new arrangements with insurers.
âThere is little doubt that changes like this will mean an increase in premiums for super funds as they scramble to get new policies in place by July next year,â says Paul Chapmanâs lawyer, John Berrill, who believes the changes should be pushed back to July 2020.
Treasurer Josh Frydenberg’s spokespersonÂ says a parliamentary committee had considered the deadline when it reviewed the draft bill earlier this year, and recommended it not be changed.
Meanwhile, the curtain will raise on another explosive round of hearings before the Hayne commission today. For the life insurance sector, the next two weeks may be the most painful of all.
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