It’s been a tough two weeks for insurers.
It was just hours into the royal commission’s round of hearing on insurance when ClearView Wealth’s chief actuary and risk officer, Greg Martin, let slip one of the industry’s sales secrets.
“I would struggle to explain it, but it would be a mild level of disturbance to engage a customer in a âŠ discussion,” he said, looking more than a little uncomfortable.
“It’s like people doing their wills … People know they should do it but it’s not something that they willingly run off and do without usually a bit of motivation.”
Martin isÂ right, of course. The process of buying insurance is partly logical, but also naturally emotional â it is, after all, protection against bad events that may or may not happen.
Rowena Orr and Kenneth Hayne have exposed the ugly underbelly of insurance.
But after two torrid weeks in which the ugly underbelly of this industry has been brutally disclosed, the community is likely to have a very different sort of “disturbance” when it comes to insurance.
And it’s not likely to be mild.
Many Australians will be left wondering whether or not the thousands of dollars they are spending on products such as life insurance, income protection insurance, accidental death and injury cover, travel insurance and even home insurance are really worth it.
They will fear they may fall foul of the tricky tactics that the commission has exposed â outdated medical definitions, misleading advertising, boiler rooms pushing insurance products that are next door to worthless. They will fear the insurer will go to war against them at a time they most need support.
Chances of claim being paid
Senior counsel assisting Rowena Orr spent most of this two-week round on her feet grilling insurers. Internet
Of course, an actuary would likely say the numbers suggest these concerns are unfounded.
Just as insurance advertising plays up the risks that consumers face, the impression left by the royal commission might overstate the likelihood of having your claim denied.
Data provided by insurers suggested that just 1.7 per cent life insurance claims are declined, while aboutÂ 3 per cent of income protection claims are turned down. Decline rates for total and permanent disability claims sit somewhere between 2 per cent and 10 per cent, with just over one in 10 trauma claims knocked back.
Travel insurance has the highest decline rate, but even then, just under 90 per cent of claims get paid. Motor vehicle claims are declined in just 0.27 per cent of cases, while the decline rate in home insurance is 5.8 per cent.
Greg Martin, chief risk officer for Clearview, says insurers create a ‘mild disturbance’ in the minds of consumers. Fairfax
So consumers probably have, on average, a 90 per cent chance of getting the claim paid.
But unfortunately for the insurance sector, these statistics will mean little right now.
Examples of misconduct
What will remain with the public is the examples of misconduct in a sector, where an incentive-fuelled hunt for profits took priority over compliance and risk management, and where customers were too often fighting cultures designed to thwart, rather than support.
Grant Stewart’s disabled son was sold insurance from a call centre. AAP Image
ASX-listed insurer Freedom Insurance created the first real shocking moment of the hearings when Grant Stewart, a Baptist minister,Â took to the witness box to explain how his son, who has Down syndrome and problems with numeracy and literacy, was sold funeral protection insurance.
Senior counsel assisting the commission, Rowena Orr â who spentÂ 90 per cent of this round of hearing on her feet, in white-hot form â then took the commission inside Freedom’s boiler room of a call centre, where trips to Bali and other incentives drove its sales agents to try to sell to anything that moved.
The problems at Commonwealth Bank’s insurer CommInsure were well known before the royal commission started, but the case of a heart attack victim whose claim was denied after the bank relied on outdated and tricky medical definitions was shocking nonetheless. CommInsure was forced to pay the man after he took his complaint to the Financial Ombudsman Services,Â but the bank fought the Ombudsman at every turn, including by misleading it.
The case of a CommInsure policy holder whose breast cancer surgery wasn’t deemed radical enough â for the unbelievable reason that she only had part of her breast removed, not all of itÂ â underlined further problems with medical definitions that the industry still isn’t on top of.
Loraine van Eeden of TAL refused to accept the insurer had exacerbated the condition of a nurse with depression. Eddie Jim
Themes that have echoed through the royal commission’s examinations of banking, wealth and superannuation were reprised in the insurance sector.
At IAG, the use of commissions to drive sales of mainly worthless add-on insurance to car and motorcycle buyersÂ provided a reminder of how incentives almost always ensure the customer isÂ placed second.
At Allianz, another story of chronic underinvestment in compliance unfolded; the company struggled to identify serious examples of misconduct, let alone report them to the corporate regulator
YouiÂ and Suncorp’s mistreatment of two customers caught up in natural disasters showed again how insurers struggle to live up to the big promises of their marketing and codes of conduct, and can saddle policy holders with contract terms that are impossible to meet.
Perhaps the case study that brought the major themes of the hearing together concerned insurer TAL, which is owned by Japanese giant Dai-Ichi Life
The eight-year battle of a nurse who tried to claim on her income protection insurance after being diagnosed with depression reinforced many of the stereotypes about insurers as tricky, mean-spirited and ready to go to war with their customers.
The nurse had her original claim rejected on the basis of non-disclosure; after invasive examination of her medical records, the insurer claimed â despite the evidence of several doctors to the contrary â the nurse had not told TAL of previous bouts of depression.
Commissioner Kenneth Hayne asked why life insurers should be treated in a different way to other financial service providers. David Geraghty
After a long fight to have that decision reversed by an industry regulator, TAL would later place the nurse under close surveillance as part of what Orr described as “plan, at any point possible, to find a way to stop paying this insured benefits”. A TAL case worker accused the nurse of fraud; another forced her to keep a daily diary of her activities, despite medical evidence it was exacerbating her condition.
A psychiatrist who was asked to interview the nurse at TAL’s request detailed the pain the nurse had suffered since making her claim in 2010.
“The levels of suspiciousness, feelings of oppression, loss of trust and social withdrawal have all worsened considerably,” he reported.
And yet TAL would only admit it had caused the nurse stress; its witness, the horribly under-prepared general manager of claims, Loraine van Eeden, refused to accept TAL’s actions had made the nurse’s condition worse.Â
It was a perfect example of insurance at its worst. Misuse of disclosure rules; a highly adversarial approach to a customer; disregard for a regulator; a lack of adequate systems; and a clear breach of the duty of utmost good faith that underpins insurance contracts.
TAL’s penalty? Other than a royal commission drubbing, there was nothing.
And that is ultimately the problem that Hayne must confront.
Few real sanctions
Despite the insurance sector’s love of financial incentives to drive business â life insurers paid about $6 billion in commissions over the past five years, while general insurers have paid more than $4 billionÂ â there are relatively few disincentives to prevent bad behaviour.
Indeed, the sector’s lobbying has ensured it is excluded from laws and regulatory regimes that apply to other parts of the financial services sector.
Perhaps the biggest exemption is that the handling and settling of insurance claims have been specifically excluded from the definition of a financial service.
This means, Orr said, that “the obligation for an insurance company to do all things necessary to ensure that it provides financial services efficiently, honestly and fairly, do not apply to the process leading to making a decision about a claim”.
On Friday, Orr quizzed Sally Loane, the chief executive of the Financial Services Council, which represents Australia’s life insurers, on whether this carve-out should be removed or even narrowed byÂ making it a statutory requirement for claims handlers to receive proper training.
Loane, who struggled with her grasp of key details in the witness box, defended the carve-out, pointing to a range of obligations around claim handling in life insurance sector’s voluntary code of practice.
But this opens Pandora’s box. While both life and general insurance are governed by voluntary codes of practice, neither code contains financial sanctions or compensation mechanisms. The biggest threat a signatory faces is being forced to publish corrective advertising.
Orr revealed on Friday that the governance committee that oversees the general insurance code had not imposed a single sanction on an insurer since July 1, 2014,Â despite having determined 33 cases where an insurer breached the code, and another 689 cases where an insurer admitted to a breach.
Rob Whelan, the chief executive of the Insurance Council of Australia, which represents general insurers, said the governance on the code had been on fixing issues.
“I’m not necessarily convinced just bringing in sanctions for the sake of it will necessarily have a major impact on the breaches,” Whelan said.
The compliance committee that sits behind the life insurance code is also yet to sanction an insurerÂ in its first few years of operation.
The general insurance sector also has a carve-out from laws preventing the use of unfair contract terms laws, which were first introduced in 2010.
The government is now examining this carve-out, and Orr took several executives to terms within their own contracts that would appear on the surface to be unfair.
A prime example came from Suncorp, which has clauses in its home and building insurance that permit it to pay a claim based on what it would cost the insurer to repair or replace a building â even if the policy holder was unlikely to be able to get the work done at a similar price.
The chief executive of Suncorp’s insurance division, Gary Dransfield, denied such terms are unfair, and repeated the industry’s well-worn line that exposing insurers to unfair contract terms lawsÂ could force a wholesale re-write of policies andÂ increase the risk borne by insurers.
Duty to act in good faith
But in what many would read as a window to his thinking on this matter, Commissioner Kenneth Hayne challenged this position in questions to Rob Whelan. All financial service providers are, in some way, assessing risk when they sell a product, he said. Why should life insurers be treated in a different way?
Whelan said the industry was not against extending the unfair contract terms regime to insurance contracts, but only in a limited way.
“We are not adverse to unfair contract terms being incorporated into insurance contract, provided that those termsÂ that are essential to defining the risk that the insurer is taking on âŠ are actually protected form being challenged.”
There is a regulatoryÂ catch-all for the insurance sector contained in the Insurance Contracts Act. This is the duty to act in the utmost good faith.
Several executives pointed to this as being the key principal underpinning the sector, implying this is the reason the sector does not need further regulation.
The duty is certainly symbolicÂ â Â but so is the sanction attached to it.Â
While a breach of the duty does constitute a breach of financial services laws,Â there is currently no penalty, financial or otherwise, for such a breach.
Talk about risk management.Â