Rowena Orr, counsel assisting, sheds light on the life insurance industry at the Hayne commission.
As soon as commissioner Kenneth Hayne decided to investigate life insurance he should have ordered a pair of gumboots for counsel assisting Rowena Orr, QC, to protect her from the disgusting mess inside the Augean stables.
The filth has been piling up for decades. The ugly situation is a result of a combination of factors unique to Australia.
The industry finds itself friendless and horribly exposed by the Hayne inquiry because of commission-based incentives that created a misalignment between the interests of consumers and the people selling the policies.
The commissions were happily underwritten by life insurers and reinsurers who were in on the “joke” being played on consumers.
Standing behind the systemic rip-offs were industry bodies preaching about the under-insurance in the Australian economy while remaining powerless to push through much-needed reforms, including an industry-wide code of practice.
Throw in a ready supply of unethical people keen to get rich quick and a high level of financial illiteracy and you have a recipe for financial disaster.
Overseeing this mess is a weak regulator moving ever so slowly to pull the industry into line. The Australian Securities and Investments Commission has been trying to fix life insurance for about five years. In recent months it seems to have been moving a little faster.
The icing on top is a succession of federal governments of both political persuasions unwilling to shoehorn a recalcitrant industry into an ethical business model.
This week’s evidence at the Hayne inquiry about the manifest rip-offs in direct selling of life insurance brings back memories of the early days of life insurance in Australia.
A new employee of a life insurance company was handed a copy of the phone book and told to get out and sell. It has become a little bit more sophisticated now, but not by much.
Instead of wearing out shoe leather the people working for ClearView and Freedom Insurance were selling life policies directly over the phone with high-pressure sales tactics.
Soft targets such as disabled people or those with little or no knowledge of finance, or with no need of life cover, or with no ability to claim against policies, were inevitably caught up in the hard sell.
We can probably thank Orr’s forensic cross-examination of staff from ClearView and Freedom Insurance for the death of direct insurance, which amounts to $500 million in annual premiums.
This type of life insurance is surely dead and buried given that no board of directors would want to tolerate the risks involved. How can a board be sure that people selling direct life insurance are adhering to company protocols? How can they be sure that they are not ignoring the industry’s code of practice?
Of course, the Freedom Insurance evidence showed that many of the allegedly illegal direct life sale practices at the company were condoned by the company or simply ignored.
Freedom Insurance and ClearView have already pulled out of the segment. Anyone else left standing should probably exit with haste even if their sales practices are squeaky clean.
The life industry has clung desperately to commissions for fear that Australians would never take up life insurance if forced to pay an upfront fee. But the wise heads in the industry recognise that the sooner commissions go the better.
The industry was forced into implementing a gradual reduction in commissions and an extension of commission claw-back periods from January this year.
Commissions clearly lead to bad behaviour. But they can also lead to solvency problems.
Chanticleer remembers well the life insurance agency wars of the 1990s. AMP and National Mutual Life paid multi-million-dollar “agency development loans” to their top selling life insurance salesmen. The two companies spent about $300 million in “loans” to agents as part of their efforts to out-bid each other for supremacy of the life insurance market.
It backfired badly on them because the sale of capital-guaranteed products ate away at capital and reserves when financial markets moved the wrong way.
It was during the peak of the agency wars that ANZ Banking Group, under chief executive Will Bailey, tried to buy National Mutual Life under chief executive Eric Mayer.
Fortunately, then federal treasurer Paul Keating stopped the deal going ahead. The combination would have been a financial disaster given the later solvency issues in National Mutual and the weaknesses in ANZ’s balance sheet exposed by the 1991 recession.
One of worst practices in life insurance was the deliberate churning of customers from one company to another every 13 months to generate upfront commissions of 140 per cent of the premium. It is not as if life insurers and reinsurers were not aware of the practices.
Chanticleer has spoken to a financial adviser who attended a series of meetings in 2010 where life insurers talked about “black flagging” about 50 life insurance advisers who had mastered the churn strategy.
The discussion about forcing the bad apples out of the industry ended when a life insurer owned by one of the big four banks said it could not participate for fear of cartel behaviour.
Reform of commissions only got serious in 2015 after the publication of the Trowbridge report. It recommended a series of reforms to restore consumer trust in an industry “through eliminating misaligned financial incentives offered to advisers and licensees, and encouraging competition through a wider choice of products so Australians are adequately insured for their life cycle needs”.
The Financial Services Council followed this up with a life insurance code of practice which included these commitments: “We will be honest, fair, respectful, transparent, timely, and where possible we will use plain language in our communications with you; we will monitor sales by our staff and our authorised representatives to ensure sales are appropriate; and if we discover that an inappropriate sale has occurred, we will discuss a remedy with you, such as a refund or a replacement policy.”
The code of practice became compulsory for retail life insurance from October 1, 2016. But it remained voluntary for group life insurance sold through superannuation funds or under the auspices of trustees. In other words, the single largest segment, group life cover, was not compulsorily covered.
Some in the industry urged ASIC to make the code RG183 compliant and applicable to all forms of life cover, but that failed.
That was a serious mistake. After all, some of the rorts found in group life cover are just as bad as the practices uncovered in direct life sales, if not worse.
This showed a weak and insipid application of policy reform by the Financial Services Council.
It is hoped the Hayne inquiry will explore the exclusions that have been added to group life policies. At least with a retail life product it is not possible to change terms and conditions.
But a group life policy can be changed. One of the less than subtle changes to group life cover inside superannuation funds includes adjusting the total and permanent disability policy to exclude payment where the person “can be re-trained into any other type of work”.
Another well-known change to group life TPD policies has beenÂ to adjust the definitionÂ of the ability to work.
Life insurance companies are overflowing with compassionate stories about the times they have served customers in times of their greatest need.
But until the industry drags its sales practices into the 21st century and weeds out the bad behaviour, it will be as trusted as the banks.