Life insurers have been given an ominous taste of what to expect as the Hayne Commission turns its attention to insurance, with senior counsel assisting Rowena Orr opening with an hour-long list of misconduct from the nation’s biggest insurance companies.
Opening Round 6 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Orr went through a long list of misconduct to which insurers themselves had admitted, in response to a callout from Commissioner Kenneth Hayne in the early days of the royal commission.
The list included exploitative direct sales methods, overcharging of premiums, underpaying of claims, misleading advertising, outdated medical terminology and response times that fell below industry standards.
The beginning of the insurance round follows an ASIC report released on Friday on the provision of insurance cover through superannuation. The regulator’s review of 47 superannuation trustees found a range of problems, including that some trustees were automatically defaulting members as ‘smokers’, leading to higher insurance premiums.
It also found almost a third of the reviewed trustees took more than 90 days, on average, to resolve complaints about insurance in 2017-18.
Orr began her opening comments by pointing to holes in the regulatory framework around insurance. While life and general insurance policies are financial products and selling these policies is a financial service, the handling and settling of the claims is excluded from the ‘financial service’ definition – and therefore the regulation surrounding it.
“This means that the obligations…including 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,” Orr said.
This made it hard for ASIC to take action against insurance companies for things such as unnecessary or extensive delays in handling claims, she said. ASIC is also unable to bring proceedings against an insurer to recover a penalty if it believes it has breached its duty of “utmost good faith” in the Insurance Contracts Act, as there is no penalty imposed for breaching this duty.
Life insurers in Australia earned $18.3 billion in direct premiums from customers in the year ending March on March 31, and held a total of $230.1 billion in assets.
The top life insurers were heavily represented in Orr’s laundry list of industry confessions.
AIA – the country’s largest group life insurer by market share – said it had failed to provide notices to up to 1000 customers whose life insurance had been cancelled for non-payment of premiums. It also named incidents involving overpayment of premiums and underpayment of claims, along with pressure-selling of consumer credit insurance policies through call centres in 2011 and 2012.
Allianz had a range of overcharging problems of its own, and also said it had failed to respond to about 6000 travel insurance claims within the general insurance code-established timeframe of 10 business days.
AMP acknowledged it had churned customers from one life insurance policy to another between 2010 and 2014, reeling in upfront commissions along the way. It also stated that the bulk of the complaints it receives from life insurance customers are about delays in assessing insurance claims, particularly for total and permanent disability.
CBA and its related entities identified over 60 specific matters of misconduct over the last five years relating to insurance, including out-of-date medical definitions, misleading and deceptive statements on some of CommInsure’s websites about the extent of cover, and selling credit-card insurance to customers who weren’t eligible to claim some of its benefits.
TAL, in 2010, identified more than 10,000 instances where it did not meet the unsolicited call requirements of the Corporations Act, and in 2011 identified about 17,000 “leads” that may have involved breaching anti-hawking provisions by failing to obtain appropriate customer consent.
TAL also admitted to misleading sales calls that involved selling to vulnerable or potentially vulnerable people – one involved selling a policy to a customer who indicated they had a guardian or were under the guardianship of the Public Trustee.
The list went on, from the likes of ANZ OnePath, IAG, Freedom Insurance, NAB’s MLC, Westpac, Suncorp and Zurich.
While QBE did not admit any misconduct, it acknowledged its business had some issues, including over-collecting fees due to an administrative error and failing to communicate with customers within timeframes set out in ASIC’s regulatory guide.
The Hayne royal commission also sought witness statements from the largest 10 life insurers covering the way they design and sell products and the way they handle claims. These will be tendered through the week.
Orr noted the exploitation of various exceptions to the ban on conflicted remuneration in place since July 2013. Up until January 1 this year, commissions paid for life insurance products outside superannuation funds were exempt from the ban, and the 10 biggest insurers collectively paid out more than $6 billion in commissions to financial advisers over five years.
Submissions from consumer bodies, including Legal Aid New South Wales and the Financial Rights Legal Centre observed “a significant amount of over-insurance through superannuation amongst their clients, which leads to an erosion of superannuation balances”.
And Beyond Blue pointed to the difficulties people with mental health conditions or a history of them, face in securing coverage.
This week, the inquiry will focus on life insurance; next week, it will move on to general insurance.