Progress Of Significant Retail Life Insurance Reforms In Australia.
Legal News & Analysis - Asia Pacific - Australia - Insurance & Reinsurance
12 December, 2016
What you need to know
The Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 (Bill) was previously introduced into the Parliament on 11 February 2016. However, the Bill lapsed at prorogation on 15 April 2016. On 12 October 2016, the Bill was reintroduced to parliament in its original form and is now at the second reading speech stage. If the Bill is passed into law, it will take effect in 1 January 2018.
In early October 2016, the Financial Services Commission (FSC) launched the Life Insurance Code of Practice (Code). The Code is mandatory for all FSC members and any other industry participants who elect to be formally bound by the Code. Under the Code, insurers will be required to improve disclosure to customers, provide greater transparency in communications, decide claims within set timeframes, limit the use of surveillance, and provide additional support for vulnerable consumers.
ASIC Report 498 - Life insurance claims: An industry review was released on 12 October
2016. This report found that insurers are paying the majority of claims, but there were higher claim denial rates and claims handling for TPD and trauma cover, and for those policies sold direct to consumers with no financial advice.
On 19 October 2016, the Government released the revised draft Corporations Amendment (Life Insurance Remuneration Arrangements) Regulation 2016 to support the Government’s life insurance reform package.
It still remains uncertain whether the Bill in its current form will progress through the Senate at all or unchanged as the Government does not have a majority in the Senate.
As discussed in Issue 4 - August 2016, a significant reform package was announced by the Federal Government on behalf of the retail life insurance industry in Australia in 2015. The package has been progressed since the Australian Liberal Party was re-elected to Government in July 2016.
Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 (Bill)
As discussed in our update in August this year, the Bill was previously introduced into the Parliament on 11 February 2016. However, the Bill lapsed at prorogation on 15 April 2016.
On 12 October 2016, the Bill was reintroduced to parliament in its original form. By way of refresher, the purpose of the Bill is to amend the Corporations Act 2001 (Cth) (Act) to:
- remove the exemption from the conflicted remuneration ban on benefits paid in relation to certain life risk insurance products;
- enable regulations to prescribe other circumstances where a benefit paid in relation to life insurance is conflicted remuneration even where no advice is provided;
- enable ASIC to permit benefits in relation to life risk insurance products when certain requirements are met; and
- ban volume based payments in life risk products.
The Bill is at the second reading stage in the House of representatives and will take weeks or months to pass through parliament, hence, it is possible the Bill will not be made law until 2017.
Implementation and Effect
Should the Bill be passed into law, the reforms will commence on 1 January 2018, and will be a joint effort between the insurance industry, ASIC and the Government. The Government is amending the Act to give ASIC the power to create a legislative instrument to set caps on commissions and implement clawback arrangements. Consequently, the final form of ASIC’s instrument will be a matter for ASIC, as the independent regulator.
Corporations Amendment (Life Insurance Remuneration Arrangements) Regulation 2016
On 19 October 2016, the Government released the revised draft Corporations Amendment (Life Insurance Remuneration Arrangements) Regulation 2016 (Regulation) to support the Government’s life insurance reform package. The Regulation supports the reform package introduced by the Bill by:
- prescribing circumstances where benefits paid in relation to life risk insurance products are considered to be conflicted remuneration, such as where information is given in relation to these products;
- prescribing circumstances where “clawback” does not apply, such as in situations where a policy is cancelled automatically due to the age of the insured or where a premium rebate is offered to encourage customers to take up a policy; and
- grandfathering benefits paid in relation to life risk insurance products issued after the commencement of the reforms, in circumstances where those products are substantially related to products issued prior to the commencement of the reforms.
Under the draft Regulation, a benefit can be conflicted remuneration if it could be reasonably expected to influence the financial product advice. A benefit is conflicted remuneration if it is given to an AFSL licensee or its representative in relation to:
- a dealing with a life insurance product with a retail client;
- financial product advice provided to a retail client in relation to a life insurance product; or
- information given to a retail client in relation to a life insurance product.
- As exemplified above, the Regulation is broad, and will apply in addition to any ban of volume based commissions.
Life Insurance Code of Practice
In early October 2016, the Financial Services Commission (FSC) launched the Life Insurance Code of Practice (Code). The purpose of the Code is to ensure that insurer practices and obligations are raised significantly to better meet consumer needs and expectations. To achieve this objective, insurers will be required to improve disclosure to customers, provide greater transparency in communications, decide claims within set timeframes, limit the use of surveillance, and provide additional support for vulnerable consumers. Case studies provided by the FSC on how the Code operates are useful in illustrating the practical implications of the Code.
Who does the Code apply to?
The Code will be an FSC standard, which means it is mandatory for all FSC members. The Code also applies to:
- registered life insurance companies issuing life insurance policies that are covered under membership of the FSC; and
- any other industry participant, including a non-FSC member, which adopts the Code by entering into a formal agreement with the FSC and the Life Code Compliance Committee (Life CCC) to be bound by the Code.
The Code does not apply to:
- superannuation fund trustees;
- financial advice companies or financial advisers; or
- other industry participants,
- unless they have adopted the Code by entering a formal agreement as discussed above.
Effect, Monitoring and Enforcing compliance
The Code commenced on 1 October 2016, and insurers will have a transition period until 30 June 2017 to comply with the Code. The Code operates alongside, and is subject to, laws and regulations. The Life CCC is the body responsible for monitoring and enforcing compliance with the Code. The Life CCC will determine whether a breach of the Code has occurred and will monitor the implementation of any corrective measures. Where an insurer fails to implement corrective measures, the CEO of the insurer will be notified prior to a final determination being made. In the event that there is a failure to correct a significant breach, the Life CCC may at its discretion impose one or more of the following binding sanctions:
- a requirement that particular rectification steps be taken by the insurer within a specified timeframe, taking into account any rectification related to the breach imposed on the insurer by any regulatory body;
- a formal warning;
- a requirement that a Code compliance audit be undertaken;
- a requirement that the insurer undertake corrective advertising or write directly to the customers impacted by the breach; and or
- publication of the insurers non-compliance on their website and on the FSC website.
Where an insurer does not comply with a sanction imposed on them, this will be regarded as a breach of FSC standard and the FSC board has the power to undertake disciplinary action.
ASIC Report 498 – Life insurance claims: An industry review
On 12 October 2016, ASIC released Report 498 - Life insurance claims: An industry review (Report 498). Report 498 found that while life insurers are paying the majority of claims, there are significant issues regarding claims handling. ASIC found that there is a need for public reporting on life insurance claim outcomes, at an industry and individual insurer level.
Report 498 identified the following issues of concern in relation to higher claims denial rates and claims handling procedures associated with:
TPD and trauma cover: The rates of declined claims were highest for TPD cover (average declined claim rate of 16%) and trauma cover (average declined claim rate of 14%).
A considerable variation in declined claims among insurers, with TPD denial rates being as high as 37% and trauma (up to 25%) for some types of cover.
The most common types of life insurance disputes were about the evidence insurers require when assessing claims (including surveillance), and delays in claims handling.
Report 498 also reported that there were higher claims denial rates in relation to insurance policies sold direct to consumers with no financial advice (compared to policies sold through advisers and group insurance policies).
In light of the Report 498, ASIC has proposed the following actions to raise claims handling standards.
New public reporting requirement with APRA
ASIC and APRA are to work with insurers and other stakeholders over 2017 to establish a consistent public reporting regime for claims data and claims outcomes, including claims handling timeframes and dispute levels across all policy types. Data will be made available on an industry and individual insurer basis.
The Government to strengthen legal framework covering claims handling
At present, “insurance claims handling” is explicitly exempted from the financial services conduct provisions of the Act. ASIC is recommending that this exemption be removed by the Government and that more significant penalties for misconduct in relation to insurance claims handling are included in the current review of ASIC’s penalty powers.
The consumer dispute resolution framework for claims handling be strengthened
ASIC has highlighted the need to ensure better and more effective consideration of issues of fairness to supplement the existing jurisdiction; and give better access to consumers with complaints about delays in claims handling, to ensure better remedies when these complaints are found in favour of the consumer.
Follow up ASIC surveillances and reviews
ASIC will target the areas of concern identified in Report 498, applying targeted surveillances of particular insurers that have the highest decline rates and highest proportional dispute numbers, and examining TPD claims procedures and timeframes. ASIC will also conduct a major review of the life insurance sold without personal advice (also known as “direct” life insurance).
Strengthen industry standards and practices
ASIC has recommended a number of initiatives for the insurance sector to undertake including:
- immediately reviewing the currency and appropriateness of policy definitions (the FSC is already undertaking this with adoption of the Code by FSC and non-FSC members as discussed above);
- examining and ensuring advertising and representations about the cover align with the definitions and the policy, and reporting any discrepancies to ASIC;
- ensuring that claims timeframes are consistent with industry standards and expected claims timeframes are adequately communicated to policyholders; and
- ensuring that incentives and performance measurements for claims handling staff and management do not conflict with the obligation to assess each claim on its merit.
These recommendations are intended to supplement the Code in order to improve claims handling standards.
ASIC will conduct a review in 2021 to consider whether the new industry arrangements for life insurance advice have better aligned the interests of firms and consumers. ASIC has consulted with the industry to ensure appropriate and reliable data will be available to support this review. If the review does not identify significant improvement, the Government will move to mandate level commissions, as was recommended by the Financial Services Inquiry.
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