Report Overview | ASIC Report 633 Holes in the safety net: A review of TPD insurance claims (REP 633)

ASIC's review of total and permanent disability (TPD) insurance identifies 'significant industry-wide problems with the design of total and permanent disability (TPD) insurance and the claims handling process and calls on insurers and superannuation trustees to take 'urgent' action to raise standards.  However, the FSC has queried whether the findings remain current.  According to The FSC, the 2018 data 'tells a very different story'.  

Key Takeouts

  1. Addressing harms in insurance is one of ASIC’s seven strategic regulatory priorities for 2019-2023.
  2. The report identifies 'significant industry-wide problems with the design of total and permanent disability (TPD) insurance and the claims handling process that mean many consumers can’t rely on this cover when they need it most'.
  3. ASIC expects insurers and trustees to take steps to 'implement changes to their claims handling practices and to redesign TPD products so that they offer significantly better value for consumers'.
  4. Table 3 (p17) of the report identifies the four issues ASIC expects insurers and superannuation trustees to address — 1) Poor consumer outcomes from the ADL test and other restrictive definitions; 2) hurdles in the claims handling process leading to withdrawn claims; 3) consumer harm arising from poor data; and 4) higher than predicted declined claim rates. The table also includes specifies the actions ASIC expects insurers/superannuation trustees to take.
  5. ASIC says that it expects insurers and superannuation trustees to take action by 31 March 2020.
  6. In addition, ASIC outlines the action it plans to take to monitor the response to the report recommendations. Among other things, ASIC says that it will 'consider reporting publicly on the appropriateness of the changes made' by industry.
  7. Old data? In a statement, the Financial Services Council (FSC) CEO Sally Loane said that ASIC's report relies on 2016/17 data, and 'fails to highlight the significant positive reforms the industry has initiated since then, including the introduction of the Life Insurance Code of Practice and the world-class FSC/KPMG claims data initiative'.. According to The FSC, the 2018 data 'tells a very different story'.

About the report

The Australian Securities and Investments Commission (ASIC) has released the findings and recommendations of its thematic review of total and permanent (TPD) insurance in Australia, 90% of which is provided through superannuation funds.

Below is an overview of ASIC's findings as well as the actions ASIC expects insurers and superannuation trustees to take to address them. ASIC says that it expects insurers and superannuation trustees to have acted on the recommendations by 31 March 2020.

  • The report reviews: 1) outcomes for consumers; 2) claims handling practices; 3) the role of data in managing the risk of consumer harm; and 4) ASIC's findings on insurers with higher than predicted rates of declined claims.
  • The findings are based on a review of 35,000 TPD claims and on the findings of ASIC commissioned consumer research.
  • ASIC reviewed conduct between 1 January 2016 and 31 December 2017.
  • The review focused on seven insurers — 1) AIA Australia Limited; 2) AMP Life Limited and the National Mutual Life Association of Australasia Limited (part of the AMP Group of companies); 3) Asteron Life & Superannuation Limited (previously Suncorp Life & Superannuation Limited); 4) MetLife Insurance Limited; 5) MLC Limited; 6) TAL Life Limited; 7) Westpac Life Insurance Services Limited — that ASIC says, represent 65–70% of the total number of TPD claims.

Snapshot: What did ASIC find?

Key finding: The report identifies 'significant industry-wide problems with the design of total and permanent disability (TPD) insurance and the claims handling process that mean many consumers can’t rely on this cover when they need it most'.

Broadly speaking, ASIC made four key findings.

  1. Poor consumer outcomes from the activities of daily living (ADL test) and other 'restrictive definitions': Nearly half a million individuals, often working in casual roles or high-risk occupations, are covered by what ASIC describes as 'a very narrow TPD policy definition' (the activities of daily living or ADL test) that only pays out if they are unable to perform several ‘activities of daily living' such as feeding, dressing or washing themselves.
  2. Hurdles in the claims handling process contribute to claim withdrawals: The report identifies a number of factors in the claims handling process that ASIC says, contribute to one in eight or 12% of claims being withdrawn. These include, among others: difficult lodgement processes, 'poor communication practices', multiple requests for medical assessments, and 'excessive' delays in handling claims.
  3. Consumer harm arising from poor data: Insurers were found to lack key claims data which ASIC says is necessary to help manage the risk of consumer harm. For example, insurers were found to lack the data needed to be able to identify the value of products to consumers and key friction points in their claims handling processes.
  4. Higher than predicted declined claim rates: Based on ASIC's own industry-wide statistical modelling, ASIC found that for claims where a decision has been made, certain insurers (named in the report) had higher than predicted decline rates, in one case the declined claim rate was double what was ASIC predicted.

A question of 'fairness' — 'it is apparent that urgent change is required'

In his address to the GRC Conference: Regulatory Panel, Australian Securities and Investments (ASIC) Commissioner Sean Hughes spoke on the topic of fairness, one of Commissioner Hayne's six 'norms' of conduct and the need for industry to raise standards. Mr Hughes cited TPD insurance (and the findings in the report) as one example of where change is required.

Over 12 million Australian workers automatically pay for TPD cover through their superannuation to provide financial protection when they are so sick or injured that they can never work again. ASIC expects industry to make urgent changes to ensure this cover provides real value. Fairness requires as much' Mr Hughes said.

Recalling Commissioner Hayne’s norms – particularly: Be fair. Provide services that are fit for purpose. Deliver services with reasonable care and skill – it is apparent that urgent change is required'.

Further detail: ASIC's findings

'Junk insurance'? Claims assessed under the Activities of Daily Living (ADL) test 'generally result' in poor consumer outcomes

  • TPD cover is designed for people who are totally and permanently disabled, but the definition of the meaning total and permanent disablement varies between the different TPD products distributed by insurers.
  • Though most consumers are assessed under the 'any occupation' or 'own occupation' tests, some consumers including 'economically vulnerable consumers' (eg causal, contract or seasonal employees) may be paying premiums for TPD cover under a more restrictive policy definition, the 'activities of daily living' (ADL) test.
  • ASIC says that this is of concern, for a number of reasons including that the declined rate for TPD claims assessed under the ADL test is five times higher than the average declined rate for all other TPD claims, at 3 in 5 declined (or 60% of claims declined). Further, the declined rates for TPD claims assessed under the ADL test were 'concerningly high' for some group superannuation policies. The 10 highest ADL declined rates at group policy level ranged from 45% to 87%.
  • ASIC Commissioner Sean Hughes said, ‘Alarmingly, we found that three TPD claims a day are assessed under the restrictive "activities of daily living" definition, which has a concerningly high decline rate. People that hold this type of automatic cover through superannuation are typically paying the same premium – for what is essentially junk insurance – as people who can access less restrictive definitions under general TPD cover'.

Economically vulnerable consumers are 'especially disadvantaged' as the eligibility criteria often means that casual, contract or seasonal employees are more likely to be assessed under the ADL definition

  • ASIC found that 'economically vulnerable consumers' are more likely to be assessed under the ADL definition because the eligibility criteria in group TPD cover means that: a) casual, seasonal or part-time employees who work less than a specified number of hours (eg15 hours per week); b) people who have been unemployed or on leave without pay for a stated period before the TPD event (often six months, but for some policies12 months); and/or c) people in specified occupations that the insurer considers are high risk are assessed under the ADL definition. ASIC says that it is concerned that these types of eligibility criteria 'unfairly affect more vulnerable consumers' and that with 'the changing nature of the workforce and the growth of the ‘gig economy’, these types of eligibility criteria will capture an increasingly broad range of consumers' going forward.
  • The fact that 4% of TPD claims are assessed under the ADL test means that at least 4% of the 12 million consumers (480,000) who hold TPD in superannuation are potentially at risk of unusable or inadequate cover.
  • The report observes that low engagement with superannuation heightens risks to consumers as does the complexity of and lack of comparability across insurance offerings (which makes it difficult for consumers to compare policies/understand the cover they have).
  • ASIC says that findings 'endorse the need for greater standardisation of terms, especially within superannuation'.

ASIC found that the ADL test is 'unsuitable for a range of common illnesses and injuries, including mental illness and musculoskeletal disorders'

  • The report compared declined claim rates for certain conditions under the narrower ADL definition with rates under the broader TPD definition and found that: 1) mental health claims were approximately five times more likely to be declined (77% for ADL compared to 15% for the general definition); and b) mental health claims were approximately five times more likely to be declined (77% for ADL compared to 15% for the general definition).
  • ASIC concludes from this 'concerningly high declined claim rate' that 'restrictive TPD cover is unsuitable for many consumers to whom it is being provided or sold' especially given the medical conditions in question may be a common cause of disability for certain groups of workers eg manual workers whose employment arrangements mean they are defaulted into ADL-only TPD cover.
  • ASIC says that superannuation trustees have a 'key role' to play in this context. Trustees 'have a legal obligation to offer insurance benefits for fund members (consumers) that are both appropriate and affordable' the report states.
  • ASIC notes that 'one insurer has removed ADL cover from some TPD policies offered within superannuation' and comments that 'this is a step in the right direction…we expect insurers and trustees to stop providing ‘junk’ insurance products to consumers. Trustees and insurers must ensure that the products they design and/or distribute are suitable for the consumers to whom they are provided or sold'.

Insurers’ claims handling practices were found to contribute to consumers withdrawing claims

Information obtained from insurers together with ASIC-commissioned consumer research identified numerous 'frictions' or pain points for consumers in the claim assessment process that ASIC says, contributed to the withdrawal of approximately one in eight claims.

These include: a) lack of empathy/proactive approach to handling claims on the part of insurers; b) multiple requests for further medical assessments that consumers perceived to be unreasonable/unnecessary; c) potentially threatening behaviour (eg surveillance of claimants and 'questionable allegations of fraud'); d) excessive delay in receiving a claims decision; e) 'fishing' for non-disclosure as a method of avoiding claims; f) the ongoing costs of the claims process (in terms of time, financial cost and physical cost) and; g) changes to claims handling staff (several insurers had a claims staff turnover rate near or above 25%).

Other factors contributing to claims being declined which ASIC considers 'unfairly' affect some consumers

The report identified a number of other factors that contributed to the likelihood that a claim would be declined. These include the following:

  • There was a significant difference between the declined rates for disease-related claims and for claims for other conditions. According to ASIC, mental illness–related claims had the highest declined rate at 16.9% closely followed by injury or fracture conditions at 16.1%. TPD claims for disease-related conditions had a lower declined rate of 9.7%. ASIC says that it expects insurers to 'ensure that their claims handling procedures are not operating unfairly for consumers with mental health, injury or fracture conditions'.
  • The rate of declined claims decreased as the age of the consumer increased, which ASIC says 'could be expected, as it is more difficult for an insurer to determine that a younger person will never be able to work again, than to determine the same for an older person'. However, the report found that two insurers had a noticeably lower rate of declined claims for younger consumers. ASIC says that it 'will be working with the other insurers to understand this difference'.
  • The age of the policy at the time the claim was made and the length of any delay in claim reporting were both found to impact the rate at which claims were likely to be declined. Generally, ASIC found that the longer a policy had been in force, the lower the declined claim rate was likely to be. Claims that were reported more than 1,000 days after the claim event were declined at a higher rate (17..4% vs 12.4% for other claims).
  • ASIC found that there was only a slight difference between the declined rates for claims on group policies (13.6%) and for retail policies (14.5%). ASIC says that it expects all insurers to 'review their claims handling practices in light of this analysis to ensure they are not treating groups of consumers unfairly'.

Insurers were found not to have sufficient understanding of the reasons for withdrawn claims

  • Insurers were found to be 'generally poor at capturing reasons for withdrawn claims'.
  • The two reasons most often given by insurers for withdrawn claims were: lack of response by the consumer to a request for information (over 50% of withdrawn claims); followed by the consumer withdrawing for reasons other than eligibility or return to work (31%). ASIC notes that insurers did not record the actual reason for these active withdrawals.
  • ASIC comments that though it is 'not always possible for an insurer (or superannuation trustee) to know the reasons for withdrawn claims, we expect insurers to improve their understanding of these reasons. When a consumer begins a claim via a trustee for insurance held in superannuation, a superannuation trustee has obligations to pursue insurance claims for members. Therefore, we expect trustees to improve their own understanding of the reasons for withdrawn claims'.

Insurers did not have adequate data to effectively manage the risk of consumer harm

  • ASIC considers that timely, accurate and complete data is necessary to the proactive management of the risk of consumer harm. For example, the report states that good data is necessary to identify and address the value of products to consumers and whether they are meeting consumer needs.
  • The report found that 'no insurer had a holistic, up-to-date picture of the potential consumer harm arising from TPD claims handling and outcomes'. Rather, 'they could only get this information from reactive, post-event quality assurance reviews, audits or analysis—by which time conduct risk and consumer harm had already crystallised'.
  • ASIC Commissioner Sean Hughes commented that ASIC finds 'it inexcusable that insurers did not use, or in some cases even collect, data to enable them to identify the very poor consumer outcomes that are being produced because of these restrictive definitions [the ADL definition]'.

Insurers 'must invest more time, resources and funds to strengthen data resources to effectively reduce the risk of consumer harm'

  • ASIC notes that though insurers are already improving their data capability (largely to meet the requirements of APRA and ASIC’s data collection initiatives) ASIC expects insurers to do more to address the issues identified. More particularly, ASIC expects:
    • Boards and owners of all insurers to 'ensure there is sufficient investment in the business to appropriately manage the risk posed by inadequate data resources'. ASIC states that this will 'require additional investment and the active engagement of boards and senior management'.
    • Superannuation trustees to 'ensure that they receive adequate data from insurers to manage the risk of harm to their members (consumers)'.
  • ASIC observes that recent and anticipated changes to life insurer ownership 'create an opportunity for these issues to be resolved. We are aware of at least one new owner investing in data and systems since buying a life company from an Australian bank, and we encourage other owners to do the same'.

TPD declined claim rates varied significantly between individual insurers and actual declined rates were higher than predicted for some insurers.

  • The declined rate was found to vary between individual insurers from a low of 9% to a high of 29%.
  • According to the report, for claims where a decision had been made, some insurers (named in the report) had declined claim rates higher than predicted (based on ASIC's statistical modelling), with one insurer's declined rate 'almost double what our analysis predicted'.

[Note: Figure 2 at p14 of the report is a table naming the insurers. This can be accessed on the ASIC website here.]

  • ASIC says that it 'may undertake targeted surveillance work to examine the reasons for the substantially higher declined claim rates and consider appropriate regulatory action if required'.

ASIC's expectations and planned actions

By 31 March 2020, ASIC expects insurers and superannuation trustees to have acted on the recommendations of the report. The actions insurers/trustees are expected to take are outlined briefly below.

[Note: Table 3 of the executive summary (p17) summarises ASIC's expectations of insurers and superannuation trustees, and ASIC's planned actions. It can be accessed on ASIC's website here.]

Poor consumer outcomes from the ADL test and other restrictive definitions

To address poor consumer outcomes from the ADL test and other restrictive definitions, ASIC expects insurers and superannuation trustees to:

  1. review TPD policies with a view to removing definitions in group policies that are 'so restrictive as to make the policy unlikely to benefit the consumers to whom the policy is sold or provided, or appropriately redesign the product'
  2. develop measures to assess the value of the product offered or provided to consumers
  3. improve data collection on outcomes for different types of TPD cover, including ADL or other restrictive definitions; and improve communications with consumers about the type of TPD cover they will be eligible for under various circumstances
  4. ASIC also says that it expect trustees to consider the reporting findings when negotiating future group insurance arrangements with insurers

ASIC's will consider naming and shaming? Among other things, ASIC says that it will 'ask certain insurers selected at our discretion to report to us on the changes made to their claims handling practices, using our compulsory notice powers under financial services laws if necessary' and consider reporting publicly on the appropriateness of the changes made.

Addressing frictions in claims handling leading to withdrawn claims

ASIC expects all insurers and trustees to 'work constructively towards a consistent set of binding standards for life insurance that covers both insurers and trustees and contains robust standards for all third-party providers. The next iteration of the Life Code and the Insurance in Superannuation Code should incorporate additional or enhanced obligations including for proactive communication with consumers during their claim, appropriate use of desktop surveillance, and documented guidelines on training and competency requirements for claims handling staff'.

ASIC adds that it expects immediate steps to be taken to implement the recommended changes to claims handling practices, reinsurer arrangements and claims staff remuneration scorecards.

ASIC's planned actions

  • Possible intervention (if ASIC remains concerned)? ASIC says that it will monitor changes made and 'if we remain concerned' will 'use our current and proposed powers including under the Corporations Act 2001 to intervene'.
  • Consider naming and shaming? ASIC will ask some insurers to report on the changes made, using compulsory notice powers under financial services laws if necessary. ASIC says that 'it will consider reporting publicly on the appropriateness of the changes made by insurers during 2020 and 2021'.
  • Engage with trustees: Noting ASIC has previously highlighted the need for trustees to improve their claims handling processes, ASIC says that it will engage with trustees to review 'what progress has been made'.

Consumer harm arising from poor data

ASIC expects all insurers to: a) invest in data resources and improve the quality of their data; b) develop plans and timeframes for further developing their data capabilities to capture, store and retrieve data and information that is necessary to adequately manage conduct risk and consumer harm; c) collect more data including on withdrawn claims, product value, consumer satisfaction, claim assessment practices, and involvement of third parties such as legal representatives; d) collect data that enables analysis of each individual policy offered (including where there are multiple covers in one policy), not merely data aggregated at an insurer level; and e) continue to work with APRA and ASIC on the industry-wide collection of life insurance claims data.

ASIC's planned actions

  1. Possible legislative reform? Among other things, ASIC says that its ability to intervene on issues of data resources and conduct risk management is limited by the exemptions in s912A(4) and 912A(5) of the Corporations Act. On this basis, ASIC will 'recommend strengthening the regulatory framework for data resources and the management of conduct risk to the government'.
  2. Expanding public reporting: ASIC says that it will 'continue to work with APRA to improve the public reporting regime for claims data and outcomes including considering expanding its existing scope beyond claims into underwriting and other non-claims areas'.

Insurers with higher than predicted declined claim rates

ASIC expects all insurers to review their claims handling practices in light of the report to 'ensure they are not treating certain groups of consumers unfairly. They should also review a statistically significant sample of declined claims between 1 January 2016 and 31 December with the claims characteristics set out in Table 23 in this report'.

[Note: The claims characteristics referred to are: claims that were reported more than 1,000 days after the claim event; claims made on group policies that the insurer no longer underwrites (ie legacy policies where the superannuation trustee has since changed insurer); and mental illness claims made by consumers under the age of 30 at the time of the claim event. Table 23 is at p96 of the report and can be accessed on the ASIC website here.]

ASIC's planned actions

  1. ASIC may ask certain insurers to report on the outcomes of their reviews, using our compulsory notice powers if necessary as well as any steps taken by insurers to address the findings of We may also examine any steps taken by insurers to address the findings of their reviews.
  2. Naming and shaming? ASIC says it will consider reporting publicly on insurers’ response to these expectations.

[Sources: ASIC media release 17/10/2019; ASIC report 633: holes in the safety net: A review of of insurance claims; ASIC Executive summary to report 633; ASIC Commissioner Sean Hughes' speech to the GRC Conference 17/10/2019]

Industry Response?

AIST response: No place for 'junk insurance' in superannuation

In a statement welcoming the report, Australian Institute of Superannuation Trustees (AIST) CEO Eva Scheerlinck said the evidence contained in the report was essential reading for all super trustees.

'Insurance is an integral part of our compulsory super system which provides the vast majority of members with value for money life insurance. It is incumbent on all superannuation trustees to review this report and ensure that their fund’s TPD offering provides good value and delivers appropriate outcome for members. There is no role for junk insurance in superannuation and we need to weed out such products' she said.

Ms Scheerlinck also noted that many AIST member funds had already made changes to their TPD insurance to further improve their offerings to members. Ms Scheerlinck said that 'As signatories to the Insurance in Super Code of Practice, AIST member funds are committed to reducing claims handling times and ensuring that policy definitions are accurate and appropriate. In addition, the newly legislated and soon-to-be-implemented Members’ Outcome test explicitly requires trustees to determine whether their insurance offerings are appropriate, good value and in members’ financial interests'.

[Source: AIST media release 18/10/2019]

FSC response: ASIC's report is based on out of date data?

In a statement responding to the release of the report, the Financial Services Council (FSC) said that the report does not represent the current state of the industry. CEO Sally Loane said that ASIC's report relies on 2016/17 data, and 'fails to highlight the significant positive reforms the industry has initiated since then, including the introduction of the Life Insurance Code of Practice and the world-class FSC/KPMG claims data initiative'.

According to The FSC, the 2018 data 'tells a very different story'. For example: the FSC says that data to the end of 2018 shows that 88% of TPD claims are paid in the first instance, rising to 91% for mental health TPD claims. This, Ms Loane said includes claims against all definitions including the ADL definition. Further, only 3.6% of claims were assessed using either the non-occupational or ADL definition. As such, Ms Loane says that ASIC's report highlights the progress the life insurance industry has made in the last couple of years.

With respect to claims handling issues, the FSC says that since ASIC's review, additional consumer protections at claim interviews and for surveillance have commenced under the Life Insurance Code of Practice which are intended to ensure claims are not withdrawn for inappropriate reasons. The statement notes that the Hayne Commission found that the introduction of the Code had 'significantly improved' outcomes for consumers, including with respect to claims handling. Further, the statement says that work is also underway to further improve the Code.

Ms Loane said that the FSC (with KPMG) will continue to gather an analysis 'even more granular and up to date data' to help inform better products and services for life insurers and also policy development.

Ms Loane concluded by saying that group life insurance through superannuation continues to offer 'better value for money than any other type of insurance offered anywhere else in the world. With more than 80 cents paid out in the claims for every dollar paid in premiums.'