The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) commenced its sixth round of public hearings on 10 September. The focus of this round of hearings, which will run until 21 September, is on the conduct of the life insurance industry and the general insurance industry. Week 1 of the hearings focussed on issues in relation to life insurance. A high level overview of the issues to be explored during the hearings as highlighted by Counsel Assisting Rowena Orr QC in her opening statement to the Commission and of some of the issues arising in relation to the direct sales of life insurance case studies (ClearView, Freedom) as well as an overview of Counsel Assisting’s comments in relation to submissions concerning sale of accidental death policies is below.
Opening statement to the Commission
Focus of week one of hearings: Life Insurance
In her opening statement to the Commission, Counsel Assisting Rowena Orr QC said that the first week of hearings would focus on the following issues in relation to life insurance.
- How life insurance products are designed.
- How they are sold and promoted.
- How life insurance claims are handled.
- The dispute resolution mechanisms that are available in relation to life insurance claims.
In addition, Ms Orr said that the Commission would consider the statements provided by the 10 largest insurers (TAL, AIA, MLC, Westpac, MetLife, Zurich, CommInsure, OnePath, Suncorp and AMP) as to how they design life insurance products, sell and promote life insurance products, handle life insurance claims, and remunerate the personnel involved in selling life insurance products and handling life insurance claims. Ms Orr said that the Commission would also consider issues that arise in relation to life insurance products provided through superannuation funds. She added that the focus of the hearings would of the hearings would be confined to ‘risk policies’ ie ‘policies that provide for a specified benefit to be paid on the death or disability of the insured or if the insured is found to have a specific disease or injury’ as opposed to investment-linked policies.
Focus of week two: General Insurance
Ms Orr said that the second week of the hearings will focus on general insurance including case studies deferred from Round 4 concerning the experiences of people who had made claims under home insurance policies following natural disasters and also case studies in relation to add-on insurance sold through car dealerships and travel insurance.
Key questions to be addressed over the course of this round of hearings
Ms Orr identified the following as ‘key questions’ to be addressed over the course of this round of hearings.
- ‘Is there an appropriate balance between self-regulation and external regulation in the insurance industry. In particular, is it appropriate that the handling of insurance claims is currently largely outside of ASICs jurisdiction’. Ms Orr went on to comment in relation to this: ‘Although most life and general insurance policies are financial products and the selling of those policies is a financial service, it is important to note that the handling and settling of insurance claims is specifically excluded from the definition of a financial service. 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, including the investigation of the claim and the interpretation of policy provisions, to negotiations of settlement amounts, to estimates of loss or damage, value or repair costs, or recommendations on mitigation of loss. This limits ASICs ability to take action against insurance companies where, for example, there are unnecessary or extensive delays in handling claims.’
- Should the ‘unfair contract terms regime that applies to other consumer contracts be extended to insurance contracts’.
- Should the ‘General Insurance Code of Practice and the Life Insurance Code of Practice be enforceable as contractual terms, like the Banking Code of Practice. Or should they be treated like industry codes under the Competition and Consumer Act, which makes a contravention of an applicable industry code a contravention of the Act’.
- ‘Are the changes that have been made to section 29(3) of the Insurance Contracts Act, a provision that deals with the consequences of non-disclosure by an insured person, operating as intended’.
- ‘What changes to the existing regulatory framework are necessary to improve the experiences of people with mental illness in dealing with life insurance companies’.
Context: sale of life insurance
- Sale through financial advisers comprises the majority of sales: The Commission heard that the majority (84%) of life insurance in Australia is sold through financial advisers (via the ‘retail channel’) and that these sales account for more than half the premiums paid. However, Ms Orr said that as issues relating to financial advice were considered in some detail in the second round of hearings, the sale of life insurance through financial advisers would not be the subject of a specific case study in this round. Ms Orr then made some observations about commissions noting that the issue of certain remuneration structures leading to poor financial advice had also been considered in the second round of hearings as had the impact of the Life Insurance Framework reforms (LIF reforms) and use of ‘soft benefits’.
- The majority of life insurance policies are held through superannuation: Ms Orr observed that though less than 1% of life insurance policies are sold through the ‘group channel’ (policies are purchased by a trustee of a superannuation fund or an employer with the fund members or employees having the benefit of the cover under the policy), ‘the overwhelming majority’ (70%) of life insurance policies are held through superannuation funds.
- Direct sales (where insurers sell products directly to the consumer) only account for 15% of sales.
Issues arising from public statements
Ms Orr said that as at 7 September, the Commission had received a total of 8769 public submissions of which 681 (8% of the total number of submissions received by the Commission) relate to life insurance. The issues raised most commonly in the public submissions concern were:
- claims handling and delays and difficulties experienced as part of this process
- sales practices, including sale of inappropriate products or issues experienced with premium costs
Mental Health and treatment of pre-existing medical conditions
- Mental health was also an area of concern raised in a number of submissions. Concerns were raised around: denial of coverage or benefit on the basis of mental health exclusions, excessive premiums where mental health issues are disclosed, alleged exacerbation of mental health conditions as a result of claims handling process and concerns over independent medical examinations as part of the claims process. Ms Orr also noted that concerns around the treatment of mental health featured in submissions from The Public Interest Advocacy Centre and beyondblue who each highlighted the difficulties that can be faced by individuals 'who have, or have previously had, or are imputed to have', a mental health condition in securing coverage in relation to both life and general insurance products. More particularly, the submissions raised issues with how insurers design, price, and offer policies and assess claims for people with mental health conditions, and the effect that this has on their access to the insurance market. These problems were raised in relation to travel, income protection, total and permanent disablement (TPD) cover, and life insurance products.
- Treatment of pre-existing medical conditions also emerged as an issue in submissions. A number of submissions related to claims being refused on the basis of an unrelated pre-existing injury or condition, consumers contesting the existence or extent of the pre-existing condition, inappropriate treatment of pre-existing conditions in the claims process leading to a denial of benefit, and consumers being ‘locked into high premiums’ as a result of an inability to change policies because of the existence of a pre-existing condition.
Concerns raised in submissions from consumer organisations
Among the issues raised by consumer organisations were the following.
- Poor claims handling: ‘A significant theme to emerge from consumer and other submissions was the difficulties faced in engaging in claims processes, including appeals, without appropriate legal representation’ Ms Orr said. For example, New South Wales Legal Aid told the Commission about barriers their clients face in obtaining claim forms in the first instance, or in proving their identity to the insurer or superannuation fund. This issue was particularly prevalent in relation to Indigenous consumers.
- Non-compliance with dispute resolution timeframes: Non-compliance with timeframes for resolution of complaints as set out in the Life Insurance Code, was also raised by many of the consumer organisations Ms Orr said. A number of organisations identified claim fatigue as a significant issue which leads to a high number of claims being withdrawn before they are determined.
- Concerns regarding direct selling techniques in relation to the advertising, marketing and sales techniques used to sell life insurance products direct to consumers were also raised in submissions. For example, the Consumer Action Law Centre identified misleading advertising and cold calling as contributing to inappropriate sales, on the basis that ‘customers are subjected to pressure selling and can be misled about pre-existing medical condition exclusions’. The Financial Rights Legal Centre told the Commission that an over-emphasis on cooling-off periods as a time for a consumer to read a product disclosure statement, as well as the ease of obtaining direct debit payments from low income earning consumers lead to poor outcomes for consumers, including significant misunderstandings regarding the nature of the product being sold and the cost of that product.
- A number of consumer organisations also expressed concerns with the ‘state of consumer law in relation to insurance policies.’ For example, the Consumer Action Law Centre identified that a lack of protection ‘in relation to unfair policy terms can cause claim shock for policyholders at traumatic and vulnerable times in their lives’.
- Lack of awareness of insurance held through superannuation was highlighted in submissions.
- Over-insurance eroding superannuation balances: Legal Aid NSW and Financial Rights Legal Centre reported observing a ‘significant amount of over-insurance through superannuation’ leading to erosion of superannuation balances.
- Policies not targeted to meet the needs of members: CHOICE raised concerns in relation to poor policy design for group life insurance, including policies that may not be adequately targeted to meet the needs of the members of a particular superannuation fund.
The Financial Ombudsman Service (FOS) reported receiving 1307 disputes relating to life insurance products in 2016 to 2017 most of which related to decisions to deny claims, often as a result of the application and interpretation of policy decisions based on ‘overly restrictive, ambiguous or outdated definitions’ which in some cases, ‘have not kept pace with current clinical, medical or diagnostic tools’ Ms Orr said. Typically, according to FOS, these matters also ‘involve instances where community expectations about what a policy covers differ from the highly technical definitions in policies and the narrow interpretation applied by the insurer in assessing the claim'.
Direct sales of life insurance case studies: ClearView and Freedom case studies.
The first two case studies concerned the direct sales of life insurance by two financial services licensees, ClearView and Freedom. Issues explored in these case studies included: the sales practices used, the methods used to incentivise sales staff (commissions/incentives), the approach taken to compliance and the effectiveness of oversight/quality assurance mechanisms among other issues.
ClearView case study
In her opening statement to the Commission, Ms Orr said that the ClearView case study would centre on the conduct the subject of an ASIC enforcement action in February which found that ClearView had engaged in unfair and high pressure sales tactics in selling life insurance products directly to customers. Issues explored included (among others): the direct sale of low-value, ‘non-competitive’ life insurance products to lower socio-economic groups, concerns around sales practices (eg the use of high pressure sales techniques based on an ‘emotional pitch’ to these customers); and admitted breaches of ‘anti-hawking provisions’ (s992A(3) under the Corporations Act 2001 (Cth)) an estimated 300 and 303 thousand times over a three year period. The adequacy of oversight of compliance within the organisation, the approach taken by ClearView to reporting issues to ASIC and the effectiveness of the way in which ClearView addressed issues internally was also questioned. In the course of his evidence, Mr Gregory Martin agreed that in the ‘pressure sales that it made between 2013 and 2016, its [ClearView’s] representatives breached the prohibition on unconscionable conduct on occasion’; that they ‘breached the prohibition on misleading or deceptive conduct’; ‘breached ClearView’s duty of utmost good faith to its policyholders’; and that ‘its processes for pressuring customers to sign up to policies immediately, and its processes for aggressive objection handling, were unfair to its customers and led to customer detriment and that as a result of those contraventions and those unfair processes…[ClearView] contravened its obligation to do all things necessary to ensure that the financial services covered by its AFSL were provided efficiently, honestly and fairly’. Mr Martin also agreed that ClearView ‘failed ‘to ensure that…[sales] representatives were adequately trained’; failed to ‘take reasonable steps to ensure that…representatives complied with the financial services laws’; and that ‘remuneration and incentive structures that it had in place encouraged sales agents to make as many sales as possible, sometimes at the expense of the customers’ best interests’. In addition he agreed that ClearView did not have in place ‘adequate arrangements for the management of the conflict that ClearView created between the interests of its employees and the interests of its customers’. Asked whether in his view it ‘is possible to sell life insurance in outbound sales calls in a way that is both financially viable and legally compliant?’ Mr Martin said ‘I find it difficult to understand how you can reconcile those things’.
Ms Orr put to Martin that that there were three causes of the ‘systemic compliance issues’ at the organisation: the remuneration structure for sales agents, ‘a culture that tolerated aggressive sales tactics at the cost of compliance’ and deficiencies in ClearView’s compliance program.
- ‘A culture that tolerated aggressive sales tactics at the cost of compliance’ and deficiencies in ClearView’s compliance program: Among other examples, Counsel Assisting questioned the use of unauthorised scripts, the ‘objection handling processes’ used by the sales teams and the attempt by a sales manager to circumvent Future of Financial Advice restrictions on conflicted remuneration by attempting to pass off trip offered as an incentive to high performing sales staff as a training trip. In relation to the use of unauthorised scripts, the Commission heard that on two occasions, ClearView identified that unauthorised scripts were in use by sales teams which advocated use of ‘classic cornering techniques’ to achieve sales. Though the scripts were identified as inappropriate, the Commission heard that the manager responsible for circulating them, and for subsequently defending the ‘[sales] process’ used by his team, received only a warning. Counsel Assisting questioned whether this was an appropriate response and went on to suggest it was indicative of a ‘genuine tension between what ClearView’s sales team – direct sales team regarded as appropriate and compliant behaviour and what the compliance team regarded as compliant and appropriate behaviour’.
- ‘Deficiencies in ClearView’s compliance program’. The Commission heard that the quality assurance methodology at ClearView was flawed because it was not picking up the ‘sorts of conduct’ outlined above due to: insufficient separation between sales staff and compliance staff ie compliance staff were not sufficiently independent from sales staff; because the quality assurance team ‘lacked qualifications…lacked experience…lacked supervision, and they lacked resources’ and; because they lacked direct business experience to identify some issues. In addition, the Commission heard that there were issues with the escalation of reporting quality assurance issues. The Commission heard that following ASIC’s review of 42 sales calls by ClearView, Clearview determined that the issues identified by the regulator were ‘endemic beyond those 42 calls’.
- Remuneration: In relation to remuneration, the Commission heard that payment of volume based commissions (30% of sales representative remuneration) was regarded by ClearView as driving a ‘high performing sales culture’ and acted to ‘incentivis[e] aggressive sales tactics’.
Resolution of the breaches with the regulator (the Australian Securities and Investments Commission (ASIC))
The Commission heard that after ClearView ceased its direct sales business, ASIC and ClearView negotiated terms to resolve ASIC’s allegations arising from its investigation, including ‘contraventions of the anti-hawking provisions, contraventions of the general obligations of financial services licensees imposed by the Corporations Act and contraventions of the consumer protection provisions of the ASIC Act.’ Clearview agreed to resolve the breaches by agreeing to eight conditions imposed by ASIC including that it engage ‘Ernst & Young to do a piece of work and to implement recommendations that came from that piece of work, to implement and finalise a consumer remediation program’ to prioritise, resource and report on that program and to implement it in a timely manner. Asked what action ASIC would be taking in relation to the breaches of anti-hawking provisions, Mr Martin said that though it would be open for the regulator to take action, there has been no further discussion or indication from ASIC that intends to do so. Ms Orr then questioned whether ASIC had indicated whether it intends to take action in relation to other breaches referenced above, and in each case, Mr Martin answered that no indication had been given that it intends to do so.
Suncorp Life and Superannuation Limited
Counsel Assisting tendered a witness statement concerning the sale of direct life insurance from Suncorp Life and Superannuation Limited (Suncorp Life) about the processes and controls in place to ensure that the sale of its life insurance policies by phone complied with regulatory requirements. Suncorp Life told the Commission that in December 2017, the Financial Ombudsman Service (FOS) identified a possible ‘systemic issue’ relating to the distribution of life insurance policies over the phone. FOS identified that: ‘representatives of Suncorp Financial Services were providing personal advice, or opinions to consumers’ and ‘were not making all relevant health and lifestyle questions. And they were not capturing all relevant answers accurately’. In addition, in the period from 2014 to June 2017, the quality assurance system used to monitor the sale of those policies by phone did not mark calls as non-compliant in circumstances ‘where a medium or high risk operational requirement’ (eg noncompliance with the Suncorp Code of Conduct) was not met. Ms Orr said that the statement accepted that ‘there was misconduct and conduct that fell below community standards and expectations where representatives of Suncorp Financial Services who distributed Suncorp Life policies by phone under a general advice model provided personal financial product advice to customers’ and that the ‘failure by a representative to ask or record responses to relevant health and lifestyle questions, or to observe medium or high risk operational requirements could also give rise to misconduct or conduct that fell below community standards and expectations’.
Freedom Case Study
The focus of this case study was also issues arising from the sale of direct sale of life insurance. The Commission heard that Freedom Insurance Proprietary Limited (which holds an Australian Financial Services Licence AFSL) markets and distributes six types of life insurance products (funeral insurance; life insurance; trauma cover; loan protection cover; accidental death cover; and accidental injury cover) solely through telephone sales. Issues explored in this case study included issues in relation to sales practices (eg the sale of products to vulnerable customers and the practice of ‘downgrading’ customers ineligible for life insurance products to accidental death and/or injury products) and sales culture, retention policies/cancellation handling; the role of remuneration structures and more particularly incentives and commissions in driving customer outcomes; and the adequacy of compliance oversight/compliance processes. The value of accidental death insurance and the company’s continued sale of the product was also the subject of questions. Some of these issues are outlined in more detail below.
The Commission heard from witness Mr Grant Stewart concerning the sale of insurance (a funeral policy, an accidental death policy and an accidental injury policy) over the phone to his 26 year old son who he said has Down Syndrome and a moderate intellectual disability. The Commission heard that Mr Stewart’s son was unable to understand the purpose of the sales call, what he was committing to, or why he was providing payment details. Mr Stewart also said that from his son’s minimal responses during the calls, that this would have been apparent (on Mr Stewart’s subsequent review of the calls) to sales representatives. Mr Stewart then described the difficulties he encountered in trying to cancel the policy (staff attempted to persuade him to keep the policy despite his son not understanding and not needing the policy) and the approach taken by Freedom to handling his complaint (which Mr Stewart also referred to ASIC). Asked for his view of Freedom’s cancellation process, Mr Stewart said ‘I thought it was a difficult process to go through, and I especially felt for our son having to – to add distress to his situation’. Asked for his view on the way in which Freedom resolved his compliant Mr Stewart said that he ‘felt disturbed at the – some of the communication that was involved and that you referenced before, some of the internal communication. I thought that it was a long time coming, an apology for what had happened, and I – I guess I was more disturbed at the potential for this kind of experience to happen to – to other people in similar circumstances to our son’.
Subsequently Freedom Chief Operating Officer Mr Orton was asked a number of questions in relation to this case study and other similar incidents involving vulnerable customers. He attributed the poor conduct in the incidents to insufficiently strong quality assurance processes that did not pick up the issues, and outlined the changes that have since been made including changes to remuneration structures and stronger quality assurance processes eg more robust marking guides for use in review of calls. The Commission heard that Freedom has recently submitted a breach report to ASIC reporting the conduct of the sales agents in these cases as a ‘potential breach’ of the provisions of the Corporations Act that require holders of AFSL licences ‘to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly’. Asked whether he accepted that the conduct was also ‘unconscionable’ Mr Orton did not agree that this was the case.
The Commission heard that ASIC is currently ‘looking’ at Freedom’s retention practices and sales practices. In relation to the sales practices at Freedom, the Commission heard that the commission structure in place in recent years at Freedom had ‘created a situation where your [Clearview’s] sales agents have been incentivised to aggressively pursue sales’ eg the commissions Freedom sales agents can earn is uncapped and that this is emphasised during Freedom’s recruitment processes (though this has recently ceased to be the case). The Commission also heard that incentives eg trips to Bali were offered to incentivise staff and that those offered during the period 1 January to April 2018 were recently reported by Freedom to ASIC as a potential breach of the Life Insurance Framework (LIF) reforms (conflicted remuneration) in force from 1 January this year. It was suggested by Counsel Assisting that these remuneration structures have led to poor customer outcomes. Mr Orton disagreed that this was so in every case, though he acknowledged that there are ‘some examples here today which I can only apologise for’. The Commission also heard that incentives were also employed to incentivise staff to persuade customers not to cancel their policies. Commissions were paid to retention staff on the basis of the number of policies ‘saved’ and incentive campaigns were implemented to retain as many policies as possible. Counsel Assisting suggested that the processes and incentives in place at Freedom were designed ‘to make it as difficult as possible for people to cancel their policies’ which Mr Orton agreed had been the outcome. Mr Orton also outlined changes to retention practices including (among others) stopping commissions to retention staff.
The Commission heard evidence of internal communications from sales managers to staff focussing on encouraging volume of sales, and it was suggested, insufficiently focussing on managing conduct issues, even in the face of complaints. In one example, Counsel Assisting questioned the approach to managing the conduct of one sales agent with multiple complaints against him and the (alleged) delay in taking action to address it. ‘He was given compliance warnings, but at the same time he was strongly encouraged to continue trying to hit sales targets and maximise his commission?’ Counsel Assisting said, to which Mr Orton agreed. Ms Orr went on to suggest that the community could expect Freedom to have taken more decisive action in relation to the repeated misconduct, to which Mr Orton responded that it would do so today.
Counsel Assisting questioned the value of accidental death insurance and the practice of ‘downgrading’ clients ineligible for life insurance to the product. The Commission heard that as at 3pm the day prior to appearing before the Commission, Freedom ceased selling four of six products it offers through outbound sales calls, with the exception of funeral insurance and loan protection insurance. The Commission also heard that there are no current plans for Freedom to cease selling funeral insurance (which comprises 85% of its sales) though Freedom is engaging with ASIC in light of concerns raised in ASIC’s recent report into sales of direct life insurance. [See: The reference to ASIC’s report into direct life insurance appears to be a reference to: ASIC report 587: The sale of direct life insurance and ASIC Report 588 Consumers' experiences with the sale of direct life insurance see: Governance News 03/09/2018]
In a statement issued following Mr Orton’s appearance before the commission Freedom said that it ‘acknowledges the instances of unacceptable behaviour highlighted by the Commission. For this the board, management and staff of Freedom are deeply sorry’. The statement goes on to say that the examples of conduct highlighted during the hearings are ‘not in line with community expectations, our code of conduct or our company values’ and to reiterate its apology to Reverend Stewart and his son. The statement adds that Freedom has made a number of changes to policies and procedures including ‘improved training of staff, increased internal monitoring of customer calls, reviewing and enhancing compliance procedures, and improving our sales targeting to better protect vulnerable customers’ and that Freedom will ‘carefully review the findings and recommendations of the Royal Commission when they are released’. A separate statement Freedom confirmed that it outbound sales of accidental death and accidental injury insurance had ceased from 6 August, and that the company will cease outbound sales of Term life (death and terminal illness) and trauma insurance as well as the marketing of loan protection cover later in the month.
Accidental Death Policies: The value of accidental death policies to customers
Referencing a recent report from the Australian Securities and Investments Commission (ASIC) released ahead of the hearings (ASIC report 587: The sale of direct life insurance and ASIC Report 588 Consumers' experiences with the sale of direct life insurance see: Governance News 03/09/2018) which raised a number of concerns regarding the value of accidental death policies to customers, Ms Orr highlighted in particular ASIC’s concerns that: accidental death insurance was ‘unlikely to perform in the way that the consumer or their family or dependents expected at claim time due to the product and its exclusions being poorly described on sales calls’; and concerns in relation to the value of the product.
Ms Orr then outlined the information provided by 10 entities (Auto & General, CommInsure, Greenstone, MLC, OnePath, Suncorp, Westpac and Zurich, as well as Freedom and ClearView) to the Commission in relation to accidental death policies and identified common themes across the statements. These themes included:
- ‘extremely high claim denial rates’ across all entities;
- the most common reason for denial of a claim was that cause of death was not solely due to accident (excluding claims where a person dies of multiple factors, even where the death was partly or predominantly due to accident);
- a number of entities had ‘received few or no claims under their policies.’
On this basis Ms Orr said that ‘Taken as a whole, the information provided to the Commission by the 10 entities is consistent with the view recently expressed by ASIC that accidental death products have substantial limitations and limited benefits for consumers.’ [Sources: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: 10 September 2018 – Draft Transcript for Day 50; 11 September 2018 – Draft Transcript for Day 51; 12 September 2018 – Draft Transcript for Day 52; Freedom Insurance Group media release 12/09/2018; 13/09/2018]