Recent update on retail life insurance reforms and developments in Australia

Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017

On 9 February 2017, the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2016 (the Act) was finally passed through both houses of Parliament and on 22 February 2017, received Royal Assent and became law.

The introduction of the Act was partially resultant from the 2014 ASIC Review of retail life insurance which found unacceptably high instances of poor quality life insurance advice being provided to consumers, largely due to high upfront commissions. The Act is intended to address this issue by reducing the monetary incentive for financial advisors to solicit consumers into new life insurance policies where there is no consumer benefit. Accordingly, it is anticipated that the interests of consumers and those providing advice will be better aligned.

By way of refresher, the purpose of the Act is to amend the Corporations Act 2001 (Cth) (Corporations Act) to:

1. remove the broad exemption from the conflicted remuneration ban on benefits paid in relation to certain life risk insurance products under s 963B(1)(b) of the Corporations Act;
2. enable regulations to prescribe other circumstances where a benefit paid in relation to life insurance is conflicted remuneration, even where no advice is provided;
3. enable ASIC to permit benefits in relation to life risk insurance products when certain requirements are met; and
4. ban volume based payments in life risk products and include grandfathering (ie transitional) arrangements in the Corporations Act.

The purpose of the Act will be effected through:

1. phasing down the upfront commissions paid to advisers to a maximum of 60% from 1 January 2020, as well as a maximum rate of 20% for ongoing commissions; and
2. introducing a two year commission 'clawback' period from 1 January 2018 which will claw back 100% of an upfront commission in the first year, and 60% of an upfront commission in the second year, in instances of policy lapse.

The reforms will apply to both personal and general financial advice, as well as to direct sales. Although conflicted remuneration is already prohibited for investment products, advice in relation to life insurance is currently exempted from this prohibition. 

Implementation and effect of the Act

The reforms under the Act will commence on 1 January 2018 and will be a joint effort between the insurance industry, ASIC and the Government. ASIC will have responsibility for implementing the commission cap and clawback arrangements through the use of a legislative instrument, as well as reviewing the effect of the reforms in 2021. 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 (the Regulation) to support the Government’s life insurance reform package. The Regulation supports the reform package introduced by the Act by:

1. 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;
2. prescribing circumstances where "clawback" does not apply, such as in situations where a policy is cancelled automatically due to the age of the insured, the insured dies or commits an act of self- harm, or where a premium rebate is offered to encourage customers to take up a policy; and
3. 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.

Submissions closed on 4 November 2016 and no further revisions have been reported. The Regulation commences immediately after the commencement of Schedule 1 to the Act, on 1 January 2018.

Effect of the Regulation

Under section 963A of the Corporations Act, a benefit can be conflicted remuneration if it could be reasonably expected to influence the financial product advice. The Regulation extends the meaning of conflicted remuneration by including a 'benefit'  given to an AFSL licensee or its representative in relation to:

1. a dealing with a life insurance product with a retail client; or
2. financial product advice provided to a retail client in relation to a life insurance product; or
3. 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 industry's first-ever industry-led consumer 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, insurers will be required to improve disclosure to customers, provide greater transparency in communications, decide claims within set timeframes, monitor inappropriate sales and discuss respective remedies for consumers, 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 which centre around greater intimacy and information transparency between the insurer and the insured in both pre-contractual negotiation and claims handling.

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:

1. registered life insurance companies issuing life insurance policies that are covered under membership of the FSC; and
2. 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:

1. superannuation fund trustees;
2. financial advice companies or financial advisers; or
3. other industry participants,

unless they have adopted the Code by entering a formal agreement as discussed above.

A list of the FSC life insurance and reinsurance members which will be required to be compliant with the Code effective 1 July 2017, can be viewed on the FSC website.

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 and will be comprised of a representative from the industry, a consumer representative, and an independent chair. 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 of a failure to correct a significant breach, the Life CCC may at its discretion impose one or more of the following binding sanctions:

1. 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;
2. a formal warning;
3. a requirement that a Code compliance audit be undertaken;
4. a requirement that the insurer undertake corrective advertising or write directly to the customers impacted by the breach; and/or
5. publication of the insurer's 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:

1. 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%).
2. 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.
3. 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 throughout 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 Corporations 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 examine 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:

1. 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);
2. examining and ensuring advertising and representations about the cover align with the definitions and the policy, and reporting any discrepancies to ASIC;
3. ensuring that claims timeframes are consistent with industry standards and expected claims timeframes are adequately communicated to policyholders; and
4. 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.

Future Review

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.

Treasury Laws Amendment (Innovative Superannuation Income Streams) Regulations 2017

In March 2017, the Minister for Revenue and Financial Services released draft superannuation income stream regulations (New Superannuation Regulations), accompanied by an explanatory statement for public comment.

The New Superannuation Regulations introduce a new income stream standard into the existing Superannuation Industry (Supervision) Act 1993 (Cth) and Superannuation Industry (Supervision) Regulations 1994 (Cth). Income streams that meet this standard will be considered pensions, for superannuation law purposes; and superannuation, for income streams for tax purposes. As such, superannuation funds, and life insurance companies providing these products, may be eligible for a tax exemptions on income from assets that help to support these streams. Recipients of payments from these streams may also be entitled to tax concessions on their superannuation payments. The Explanatory Memorandum to the New Superannuation Regulations explains that four key elements must be satisfied before the new standard can be met:

1. a requirement that benefit payments not commence until a primary beneficiary has retired, has a terminal medical condition, is permanently incapacitated, or has attained the age of 65;
2. a requirement that benefit payments, of at least annual frequency, be made throughout a beneficiary's lifetime following the cessation of any payment deferral period;
3. a rule ensuring that, after benefit payments start, there is no unreasonable deferral of payments from the income stream;
4. restrictions on amounts that can be commuted to a lump sum, or for rollover purposes, based on a declining capital access schedule commencing from the retirement phase.

A copy of the New Superannuation Regulations can be viewed on the Treasury website.

Continued regulatory and customer dissatisfaction of life insurers

Parliamentary Joint Committee on Corporations and Financial Services - Life Insurance Inquiry

In September 2016, the Senate referred an Inquiry into the life insurance industry to the Joint Parliamentary Committee on Corporations and Financial Services (the Committee). The reporting date is currently scheduled for 31 October 2017.

Six specific matters concerning life insurance were referred to the Committee for review:

1. the need for further reform and improved oversight of the life insurance industry;
2. assessment of relative benefits and risks to consumers of the different elements of the life insurance market, being direct insurance, group insurance, and retail advised insurance;
3. whether entities are engaging in unethical practices to avoid meeting claims;
4. the sales practices of life insurers and brokers, including the use of Approved Product Lists;
5. the effectiveness of internal dispute resolution in life insurance; and
6. the roles of ASIC and APRA in reform and oversight of the industry.

2017 Roy Morgan Research Report

A report released by Roy Morgan Research in February 2017 (the Roy Morgan Report) found that satisfaction with life and risk insurance remains the lowest of all major insurance types. A 12 month 2016 survey of over 50,000 customers, including 9,000 risk and life insurance policy holders, found only 68.7% of the life insurance customers reported satisfaction with their policy.

Interestingly, the Roy Morgan Report findings suggest that the method of purchasing life insurance will often be strongly indicative of the level of satisfaction with the policy. For example, customers who purchased life insurance in person had a satisfaction rate of 76.4%, closely followed by 74.9% for those who purchased life insurance online. The lower satisfaction rates included purchase through an insurance broker, financial planner, employer and, least of all, an independent advisor/planner at just 58.4% satisfaction.

The Roy Morgan Report also breaks satisfaction rates down to include individual insurers and lists the top 13 performing risk and life companies. The star performer of 2016 was Allianz at 75.7% satisfaction, followed closely by Insuranceline at 75.2% and Asteron at 74.4%. 

ASIC Investigation into CommInsure

In March 2017, ASIC released a public report on its investigation into the life insurance business of CommInsure. As part of the investigation, ASIC reviewed over 60,000 documents, interviewed staff, obtained files from dispute resolution schemes, spoke to consumer advocacy organisations, and obtained independent medical and legal advice.

ASIC found that CommInsure had trauma policies with medical definitions that were out of date with prevailing medical practice, specifically for heart attack and severe rheumatoid arthritis. Since the finding, CommInsure has updated its medical definitions and has commenced the process of identifying and compensating affected consumers. Incidentally, the Code which applies to all FSC members and voluntary subscribers, now prescribes insurers to include up-to-date medical definitions in their policies.

ASIC also identified a number of areas where CommInsure needs to make improvements to its claims handling processes, including better and more timely communications with consumers and enhanced training and assistance for claims managers. ASIC has undertaken to work with CommInsure to effect these improvements and has requested CommInsure undergo a further review in mid-2018 to test whether the changes have been implemented, and are effecting change.

ASIC is continuing to investigate concerns that CommInsure's advertising and promotion of life insurance policies contained misleading or deceptive conduct in March 2016.

ASIC's investigation into CommInsure follows a current regulatory scrutiny of Australian life insurers. Current and planned work by ASIC in this space include:

1. follow up work on the findings of Report 498 Life Insurance Claims released in October 2016;
2. a major review of life insurance sold direct to consumers without personal advice;
3. a review of TPD insurance claims handling;
4. a review of the surveillance practices used by insurers; and
5. working with APRA to introduce regular collection of standardised data on life insurance claims across the industry.

Materials consulted for this update

The following documents have been considered for this update.

• Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2016 (the Act).
• Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2016 – Explanatory memorandum (Explanatory Memorandum).
• Corporations Amendment (Life Insurance Remuneration Arrangements) Regulation 2016 (the Regulation).
• Australian Government and Treasury consultation for the Revised life insurance remuneration reform regulations (Exposure Draft) dated 19 October 2016.
• The Financial Services Council Life Insurance Code of Practice (Code).
• The Financial Services Council Case Studies – 1, 2 and 3.
• Explanatory Statement for the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2016.
• ASIC Report 498 - Life insurance claims: An industry review (Report 498).
• ASIC Media Release 16-347MR - ASIC issues industry review of life insurance claims.
• ASIC Media Release 16-348MR - Update on ASIC's investigation into CommInsure.
• Financial Conduct Authority – Thematic Review TR16/7 – Review of annuity sales practices.
• Treasury Laws Amendment (Innovative Superannuation Income Streams) Regulations 2017 (New Superannuation Regulations).
• Treasury Laws Amendment (Innovative Superannuation Income Streams) Regulations 2017 – Explanatory Memorandum.
• Corporations Act 2001 (Cth) (Corporations Act).
• Parliamentary Joint Committee on Corporations and Financial Services – Life Insurance Inquiry (Parliament of Australia website).
• ASIC Media Release 17-076MR ASIC releases findings of CommInsure investigation.
• Roy Morgan Research – Satisfaction with risk and life insurance remains the lowest of all major insurance types- 20 February 2017.

Authors: Rehana Box, Partner; Marie Vlassis, Lawyer. Also with thanks to Josh Sukkar (Graduate) for his contribution to this article.