Last week the Australian Securities and Investments Commission (ASIC) initiated a major inquiry into life insurance claims practices. Over recent months, the life insurance industry in Australia has come under sustained media and public attention in respect of selling and claims practices.
This recent inquiry follows on from a series of inquires in the past 18 months in relation to advisor remuneration and quality of service in the life insurance sector including ASIC's Review of Retail Life Insurance Advice in October 2014; the Financial System Inquiry (Murray Report) in December 2014; and the Trowbridge Report in March 2015. These inquiries and reviews culminated in the Association of Financial Advisers, the Financial Planning Association of Australia and the Financial Services Council, on behalf of the retail life insurance industry, presenting its reform package to the Federal Government on 25 June 2015, and the introduction of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 to Federal Parliament in March 2016.
Scope of ASIC inquiry
ASIC's latest inquiry will assess whether there are systemic issues with life insurance claims practices that require further investigation and/or regulatory action. ASIC has written to life insurers asking them to review their claims practices over the past five years and report back to the regulator. Insurers have been asked to demonstrate that their claims management practices are satisfactory and that claims are not being denied inappropriately. ASIC intends to report back to the government with its recommendations in three months' time.
ASIC's review is expected to focus on:
- the integrity of insurer's claims handling systems;
- product design processes;
- suitability and currency of policy wordings;
- review of denied and reviewed claims from the past five years; and
- adequacy of, and compliance with, internal dispute resolution (IDR) regimes.
ASIC will enlist independent third parties to assist in the review, and the regulator has expressed an expectation that insurers will do likewise.
It is expected the ASIC inquiry into life insurance will adopt similar procedures to those adopted in the retail financial planner remediation systems probe (see ASIC Consultation Paper 247 released in December 2015).
Life insurers will need to develop a strategy for conducting an internal review and responding to AISC, including whether the strategy should be prepared with the benefit of legal advice that attracts legal professional privilege. Insurers should also consider whether the ASIC inquiry and current environment constitute a material operational risk within the meaning of APRA Prudential Standard CPS 220 (Risk Management), in which case the insurer's risk management framework will need to be updated accordingly.
The pathway to best practice
There are many challenges facing Australian life insurance participants; a soft insurance market, disruption to traditional sales channels, low rates of investment return, new foreign entrants and spiralling claims costs associated with non-underwritten group policies, have all placed enormous pressure on life insurers to reduce operational and claims costs.
In the current regulatory environment, life insurers who are prepared to deal with these issues and who can adopt claims management best practice are presented with an opportunity to assert their competitive advantage based on good customer service and claims assessment processes.
In our view there are two key aspects to achieving best practice in claims management.
Step 1 - Know the law
Consumers of life insurance already benefit from robust protections under the Insurance Contracts Act 1984 (Cth) (ICA), the common law and the industry codes of practice. Compliance with existing law should render additional regulatory and statutory intervention unnecessary.
The law governing the assessment of life insurance claims has been updated and codified significantly by the common law over the past six years through a series of consumer-favourable court decisions starting with Finch v Telstra Super  HCA 36. Along the judicial reform journey, trial and appeal courts have openly criticised the use of subjective tests in life insurance policies as being unsatisfactory, particularly given that a consumer's entitlement to a life insurance benefit is often their most valuable asset.
Our recent experience shows that the majority of life insurance claim disputes continue to focus around three main issues, which are discussed below.
For retail policies that are underwritten, the most difficult disputes usually centre around the non-disclosure/misrepresentation investigation. Breaches of the duty of disclosure commonly become apparent during a claim assessment, at which time the three-year time period prescribed by section 29 of the ICA has typically expired and the insurer must prove fraud before it can avoid the policy. It is very difficult for a life insurer to prove a fraudulent breach of the duty of disclosure. The stringent test and evidentiary difficulties were well illustrated in the recent decision of Westpac Life Insurance Services Ltd v Guirgis  VSCA 239.
However policy avoidance is by no means impossible in appropriate circumstances. The recent decision of Hitchens v Zurich Australia Ltd  NSWSC 825 is instructive about how an insurer can successfully avoid a policy for fraudulent misrepresentation/non-disclosure. Disclosure investigations after claim lodgment must be fast and targeted. Some insurers take proactive pre-claim steps, for example flagging certain policies for increased medical investigation after inception but before the three-year deadline imposed by section 29 passes.
The second issue, particularly in relation to total and permanent disability (TPD) claims, is how to construe the insuring clause. The second limb of the TPD test in the insuring clause usually requires the insurer to form a view about whether the insured can return to work in the future. Common policy wordings do not expressly state the date of assessment which the insurer is to apply when assessing the insured's work capacity. Consequently the insurer must select a date for assessment that is consistent with the policy terms and fair to the insured. The law on how to select an appropriate date for assessment is not yet settled. The prevailing view is that the date of assessment should be the date the waiting period (specified in the first limb of the test) expires, however courts have not applied this rule strictly and have allowed other assessment dates, particularly where the medical condition has not stabilised. Selecting a correct date remains difficult and of great strategic importance to the insurer where the insured's symptoms are expected to change over time.
The third most common area of dispute is whether the insurer's investigation and assessment of the medical and employment evidence discharges the duties of utmost good faith and fair dealing. The courts have been demanding an increasingly high standard of rigour and fairness during the assessment process. "Show cause" and denial letters are now subject to a high level of judicial scrutiny and should be drafted by experienced lawyers. It is now settled that an insurer must have regard to all available medical and employment information, even when assessing work capacity as at a past date. Also, the courts require insurers to obtain unqualified and unequivocal expert opinions before making a claim decision. The recent decision in TAL Life Ltd v Shuetrim  NSWCA 68 provides clear guidance to insurers on how to assess claims. In the decision the court contrasts the approaches taken by two different life insurers to the assessment of a claim, one of which was approved by the court and the other rejected.
Step 2 - Introduction of process improvements to claims systems
Life, TPD, and income protection insurance policies protect insureds from economic loss caused solely by unforeseen medical problems. However, claims typically involve a unique and complex intersection between the individual insured's health, social and economic environments. Claims teams must have the skills and processes in place to disentangle those factors quickly, fairly and compassionately. Such practices allow the insurer to pay meritorious claims promptly or, in the case of contentious claims, to develop at the outset a clear roadmap for quickly gathering the right evidence and properly assessing the claim.
Life insurers should be considering the following process improvements to ensure their claims procedures are consistent with best practice:
- reviewing and updating claims management and IDR procedures;
- initial claim triage and early creation of assessment plans which include specific timeframes and actions for investigation, assessment and decision-making;
- training claims assessors about insuring clause interpretation and to identify the issues in difficult claims;
- early involvement of medical treatment and occupational rehabilitation;
- review of current difficult claims to ensure they are on track to be decided promptly and fairly;
- review of recently denied claims to ensure accuracy, fairness and consistency;
- review of procedures for obtaining independent medical and employment evidence, including updating expert instruction letters; and
- review of "show cause" and decline letters.