Efforts to reform the regulatory framework for the Australian life insurance industry show no sign of waning with Australia's Federal Parliament announcing last week that there will be yet another inquiry into the industry. Little regard seems to have been had to the fact that the life insurance industry has been involved in multiple inquiries over recent years, that it has already taken significant steps to reform its commission structures and that a new Code of Practice will commence shortly.
The latest inquiry into life insurance
The Federal Parliament has referred a new inquiry into the Australian life insurance industry to the Parliamentary Joint Committee on Corporations and Financial Services. The committee has been provided with the following terms of reference:
- the need for further reform and improved oversight of the life insurance industry;
- 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;
- whether entities are engaging in unethical practices to avoid meeting claims;
- the sales practices of life insurers and brokers, including the use of Approved Product Lists;
- the effectiveness of internal dispute resolution in life insurance;
- the roles of the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) in reform and oversight of the industry; and
- any related matters.
The latest regulatory salvo comes at a time when ASIC's review of life insurance claims practices has not yet been completed (see our previous update here).
The further inquiry was proposed by Nationals Senator John Williams, who has been a vocal critic of Australia's life insurance industry. In March 2016 Senator Williams was a driving force behind the widening of the "Scrutiny of Financial Advice" inquiry's terms of reference to specifically examine the life insurance industry. The Scrutiny of Financial Advice inquiry lapsed with the recent federal election. The new inquiry will effectively take over, with the focus now being exclusively on the life insurance industry.
As can be seen from the terms of reference, the inquiry will be wide-ranging. Direct insurance, group insurance and retail-advised insurance will all be subject to review. Life insurance policies effected through superannuation funds will also be investigated. Even the role of the regulators, ASIC and APRA, in overseeing the industry will be considered.
Dates for filing of submissions and public hearings will be set shortly. Australian life insurers, financial advisors, life insurance distributors, industry groups and regulators may want to make submissions to the parliamentary inquiry so their views can be taken into account when the inquiry reports back to parliament next year.
Insurers will need to be able demonstrate to the parliamentary inquiry that they have embarked on a customer-focused upgrade of their product offerings, distribution methods and claims support services. In our previous update, we provided some practical advice as to how insurers can look to achieve best practice in claims management (see our previous update here).
The inquiry is to report back to parliament before 30 June 2017. Given the timing of the inquiry in the election cycle, it can be expected that further recommendations made by the inquiry will be translated into further regulatory reform within the current parliamentary term.
The new Life Insurance Industry Code of Practice just around the corner
The initiation of yet another inquiry does not seem to take into account that since ASIC's 2013-14 review into retail life insurance advice, and the further industry-initiated review led by John Trowbridge, the industry has voluntarily taken steps to change remuneration and commission structures and introduce a Code of Conduct.
The new Life Insurance Industry Code of Practice (the Life Code) has been developed by the Financial Services Council (FSC), the representative body for Australian life insurers and is expected to commence in October this year. A transition period will apply until 1 July 2017 when the Life Code will become binding on all FSC members.
The key provisions of the Life Code in its current draft form are as follows:
- Compliance with the Life Code will bind all life insurers who are FSC members and any life insurers who voluntarily subscribe. The Life Code will apply to all products that are subject to regulation under the Life Insurance Act 1995 (i.e. term life, TPD, trauma, disability, funeral insurance, income protection, business expense and consumer credit insurance).
The Life Code places obligations on insurers to increase the standard of customer service in all aspects of the insurer's operations. The Life Code prescribes minimum conduct for insurers in the areas of: policy design and disclosure; sales practices and advertising; policy applications and underwriting; policy updates and changes; claims practices; dealings with third party service providers, and surveillance.
The Life Code requires life insurers to establish an internal complaints resolution process that meets the requirements of the Life Code. For retail policies, the life insurer must give the customer a final decision on the complaint within 45 days. Where the complaint relates to insurance owned by a superannuation trustee, the life insurer must provide the trustee with the assistance the trustee needs to respond to the customer complaint within 90 days.
The Life Code will apply to all of the life insurer's employees and authorised representatives. It will not apply to financial advisers who are not authorised representatives of the life insurer itself, which will be contentious given the sales practices identified for some advisers.The Life Code will also apply to reinsurers who are FSC members.
The obligations imposed by the Life Code will operate alongside, and are subject to, existing laws and regulations. The Life Code does not limit the customer's rights to pursue claims through external dispute resolution and the courts.
A Life Code Compliance Committee (Committee) will be responsible for monitoring and enforcing compliance with the Life Code. The Committee's composition and charter are still under development. The FSC will draft the Committee's charter.
Anyone can report alleged breaches of the Life Code to the Committee. Life insurers must self-report any "significant breach" of the Life Code to the Committee. The Committee must notify insurers of alleged Life Code breaches and the Committee can, at its discretion, investigate breaches.
Where a breach is established, the Committee will attempt to agree "fair and reasonable corrective measures" with the insurer. The Committee can impose sanctions including: requiring the insurer to take remedial action; issuing a warning; requiring the insurer to undertake a compliance audit; requiring the insurer to undertaking corrective advertising; and publication of the non-compliance.
The FSC will be responsible for the ongoing review and development of the Life Code, in consultation with industry regulators and stakeholders.
Life insurers will need to review all aspects of their operations, from product development, distribution, underwriting, through to claims management, to ensure they can achieve the minimum standards prescribed by the Life Code and that they have appropriate systems in place to monitor ongoing compliance.