In its final report, released on 27 March 2018, the Parliamentary Joint Committee on Corporations and Financial Services for the Life Insurance Industry has made a number of unanimous recommendations including: removing the industry's exemption from parts of consumer law; extending the banking executive accountability regime (BEAR) to the sector; stronger regulatory oversight of the sector; consolidating the two existing industry codes of practice into a single mandatory code (enforceable by ASIC) and four further investigations by regulators into various issues.  A brief outline of key recommendations and the initial industry response to the report is below.

Key takeouts

  • Removing the industry's exemption from parts of consumer law
  • Four additional investigations by regulators
  • Extending the banking executive accountability regime (BEAR) to the sector

[Note: On 14 September 2016 the Senate passed a motion asking the Parliamentary Joint Committee on Corporations and Financial Services to inquire and report on: 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; and the effectiveness of internal dispute resolution in life insurance; and the roles of ASIC and APRA in reform and oversight of the industry. See Governance News 14/09/2016. After several extensions of time, the Committee has released its final report.]

Key Recommendations.

The report makes a number of unanimous recommendations including (among others):

  • removing the industry's exemption from parts of consumer law

  • extending the banking executive accountability regime (BEAR) to the sector

  • stronger regulatory oversight of the sector

  • consolidation of the existing life insurance industry codes of practice into a single mandatory code (enforceable by ASIC)

  • four additional investigations by regulators

In his foreword to the report, the Committee Chair writes that there are 'sections of the industry that can and must do better in delivering the protection they promise whilst remaining financially viable long into the future'.

Further Detail

Strengthening consumer protections: The report recommends that consumer protections for financial products including life insurance be aligned with Australian Consumer Law. This recommendation includes, the Committee Chair writes, removing a number of exemptions that the life insurance industry currently enjoys compared to other financial services (recommendations 3.1 and 3.2). To ensure that life insurance industry participants are treated fairly, the committee also recommends that the changes 'uniformly cover all types of life insurance, all sectors (direct, retail and group), and all industry participants' the chair writes. Recommendation 3.3 also proposes to extend ASIC's proposed product intervention power.

Enhancing accountability measures — extension of BEAR to the sector: Recommendation 3.4 and 3.5 recommend that The Banking Executive Accountability Regime (BEAR) be extended to apply to life insurance and life insurers.

[Note: The BEAR Bill: Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017 which will implement the Banking Executive Accountability Regime (BEAR) was passed by the Senate on 7 February. See: Governance News 09/02/2018]

The adoption of a 'co-regulatory approach' as recommended by the ASIC Enforcement Review Taskforce; and the consolidation of existing industry codes of practice into a single mandatory code enforced by ASIC (with penalties for breach) (recommendations 4.1-4.4).

[Note: The co-regulatory approach referenced in the report was put forward in the ASIC Enforcement Review Taskforce position paper: Position Paper 7: Strengthening Penalties for Corporate and Financial Sector Misconduct as part of its review of ASIC's enforcement regime. See: Governance News 27/10/2018.]

  • Codes of practice: The Chair of the Committee writes that though the committee welcomed the introduction of codes of practice in the life insurance industry, the committee is 'not convinced that a self-regulatory approach is sufficient' and therefore recommends the 'co-regulatory approach foreshadowed by the ASIC Enforcement Review Taskforce position papers be adopted across the financial services sector including the life insurance industry' (recommendation 4.52). The report adds that that the committee 'encourages the implementation of one single combined code of practice [for the life insurance sector]' (recommendation 4.63). The report also sets out the minimum requirements for the mandatory code (and for other codes of practice in the financial services sector): codes should be registered with ASIC; be mandatory for all industry participants; give the code compliance committees the power to determine whether breaches have occurred; give the Australian Financial Complaints Authority the power to enforce compliance through determinations; and 'provide genuine remedies for breaches of the code, including financial remedies, thereby creating an incentive for compliance'.

  • Co-regulatory arrangements – increased power for ASIC: The committee writes under the proposed co-regulatory arrangements, 'ASIC may not have the power to undertake enforcement action for systemic and systematic code breaches. This would result in a very significant gap in consumer protections. The committee is therefore also recommending that ASIC be given the power to undertake enforcement action in relation to systemic or systematic breaches of codes of practice in the financial services sector, including in the life insurance industry' (recommendation 4.58).

Further Inquiries: The report recommends a number of additional inquiries, reviews and audits be undertaken. These include:

  1. ASIC review of payments and benefits: Recommendation 5.105 recommends that ASIC conduct a 'systematic review and risk assessment of all payments and benefits flowing between participants in each sector of the life insurance industry…and inform the government of any regulatory gaps'. The report adds that the government should consider regulation of payments between life insurance industry participants following ASIC's review. The Committee Chair writes that this measure was required because rules banning conflicted remuneration aimed at mitigating risks around conflicts of interest in the life insurance industry have not been effective in that there is evidence 'that a plethora of hidden payments including commissions, fees, performance-related payments, soft dollar benefits, and nonfinancial benefits still exist within the various structures of the life insurance industry' and that these contribute to 'poor practices and misconduct in the financial services industry including misleading advice and mis-selling with poor outcomes for customers'.

  2. ASIC/ACCC joint investigation on the past use of approved product lists (APLs): Recommendation 6.48 recommends that ASIC and the ACCC jointly investigate 'whether the past use of APLs in the life insurance industry breaches any anti-competitive laws they administer'. The Committee Chair comments that currently APLs may lack transparency and 'generate conflicts of interest that lead to selling life insurance on the basis of misleading advice that herds customers to products from insurers that pay the most to be on the APL'. The report adds the committee is unconvinced that the draft APL Standard being proposed by the Financial Services Council will adequately address 'the full range of concerns' identified. The report recommends that the that the life insurance industry should 'have, as a matter of urgency, a balance of affiliated and non-affiliated products on their APLs, and if affiliated products are recommended, the affiliation should be disclosed, and the customer should be offered a comparison with non-affiliated products. Beyond this, the committee further recommends that the industry transition to open APLs' (recommendation 6.45).

  3. Review of compliance with obligations under the Superannuation (industry) Supervision Act 1993: Recommendation 7.53 recommends that the 'appropriate existing body' undertake an 'immediate review of all superannuation trustees to determine their compliance with existing obligations under the Superannuation (industry) Supervision Act 1993, including s52(7)(c) covenants, 'to only offer or acquire insurance of a particular kind or at a particular level if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries'.

  4. Inquiry into funding of rehabilitation by life insurers: Recommendation 10.190 recommends that the government conduct a 'thorough inquiry or consultation process before it progresses any reforms relating to life insurers funding rehabilitation services, including impacts on private health insurance, or Medicare, and any conflicts of interest that may arise for an insurer vis-vis their customer and the most appropriate care'.

  5. Audit of superannuation trustees: Recommendation 5.108 recommends that ASIC and APRA 'immediately undertake an audit of all superannuation trustees to identify the nature, propose and value of all payments including any 'soft-dollar' benefits that occur between life insurers and trustees or any related parties in connection with the provision of default insurance to members of MySuper and choice superannuation products'.

  6. Random audit of life insurance advisers: Recommendation 3.7 recommends that ASIC conduct random audits of 20% of the life insurance adviser population over a three year period to identify misconduct.

The report also recommends:

  • Limiting life insurers' ability to access consumers' full medical records and regulating the sector's dealing with genetic testing result (recommendations 8.1-9.4)

  • The report also recommends that life insurance be included in the Open Banking regime.

Additional comments from the Committee Chair: In addition to the recommendations outlined above, the Chair of the committee also highlighted the following recommendations in his foreword to the report.

  • Claims handling: The current exemption under the Corporations law that excludes certain claims handling activities by life insurers from ASIC's oversight should be reviewed. Lack of transparency in the claims handling process, delay and lack of information provided to consumers in circumstances where a claim is denied were highlighted by the Chair as areas of concern for the committee. He also noted that polices with technical definitions, tended to have high decline rates. To address these concerns, he explained, the report recommends that the current exemption under the Corporations law that excludes certain claims handling activities by life insurers from ASIC's oversight should be reviewed (recommendation 10.1). In addition, he noted a number of other recommendations aimed at addressing the issues identified including that industry:

  1. Develop a mandatory and enforceable Code of Practice for its members in relation to mental health life insurance claims and related issues (recommendation 10.101)
  2. Set industry standards for claim timeframes and limits on the number of medical examinations (recommendations 10.129 and 10.130).

  3. Standardise definitions across all types of polices and use clear and simple language in definitions (recommendation 10.60).
  • Life insurance in superannuation: make 'opting out' easier and life insurers be more proactive in informing customers about the status of group life insurance accounts.

    • Make it easier to 'opt out': The report found evidence supporting the 'opt-out' model for life insurance within group superannuation, particularly as a means of addressing the problem of under-insurance but noted concerns about the model, and more particularly concerns about the difficulty of 'opting out': 'The mechanism for opting out of life insurance held within group superannuation does not appear to be straightforward' the report notes and this may negatively impact those with low super balances, particularly women, low income earners and young people.

    • Insurers required to inform customers about the status of their group life insurance accounts to address the issue of duplicate insurance: Commenting on the issue of duplicate insurance within group superannuation, the report states: 'The committee views the current dearth of action by superannuation trustees and life insurers to fix the problem of duplicate insurance within group superannuation as completely unacceptable'. For this reason, he explained, the committee recommends that superannuation funds, superannuation trustees, and life insurers be more proactive in informing customers about the status of group life insurance accounts (recommendations 7.41 and 7.42).

  • Access to medical information — insurers should have access to targeted information only: Noting that patients are sometimes reluctant to seek necessary treatment, particularly for mental ill health, due to concerns over life insurers having access to their full medical record and then using such information to limit or deny coverage or a claim, the committee expressed the view that 'life insurers should only have access to targeted medical information'. The committee recommended that the Financial Services Council and the Royal Australian College of General Practitioners collaborate to prepare and implement agreed protocols and standards for: requesting and providing relevant medical information only, not complete medical files; uniform authorisation forms for access to medical information; appropriate storage of medical information; and real-time disclosure to consumer about the progress of their claim, including requests for medical records.

  • Moratorium on life insurers using predictive genetic information? The report states that 'The committee is of the view that it is inherently unfair to limit or deny a person access to products such as life insurance based on factors that are out of their control'. The Chair explains that for this reason, the committee recommends that the Financial Services Council, in consultation with the Australian Genetic Non-Discrimination Working Group, assess the consumer impact of imposing a moratorium on life insurers from using predictive genetic information.[Sources: Parliamentary Joint Committee on Corporations and Financial Services: Inquiry into the Life Insurance Industry Final Report 27/03/2018]

Initial Industry response to the report

  • The Financial Services Council (FSC) issued a statement welcoming the release of the report and expressing support for a number of recommendations. The FSC noted that: 'Many of the recommendations made in the PJC’s final report; particularly with regard to claims handling, medical definitions, time frames for communications with customers, and mental health; are either already included in the FSC Life Insurance Code of Practice or will be adopted in the second iteration, a draft of which is well-advanced and expected to be released for consultation by the end of the year'.

    The statement adds that the FSC is opposed to the extension of the BEAR: '[the FSC] does not support the Committee’s recommendation to extend the Banking Executive Accountability Regime (BEAR) to life insurers as it was specifically designed for Authorised Deposit Taking Institutions and there has been insufficient consultation with industry about this proposal'.[Source: Financial Conduct Authority media release 27/03/2018]

  • Australian Institute of Superannuation Trustees (AIST) also issued a statement welcoming the release of the report and more particularly the recommendations to enhance 'consumer protections around life insurance in super — which included — closing legal loopholes and standardising consumer disclosure'. Commenting on the recommendation for a co-regulatory code for insurance in superannuation, the statement adds that 'the AIST is confident that the industry’s voluntary code of practice had strong industry support and would deliver improved outcomes for consumers'. AIST CEO Eva Sheerlinck is quoted as stating: 'Importantly, the Code addresses key recommendations in the PJC’s report, including those aimed at reducing duplicate accounts, improving claims handling and protecting consumers from account erosion'. The statement adds that though the AIST is supportive of strong regulatory oversight of insurance offerings in super, 'the report’s recommendations for four additional and very comprehensive reviews of insurance would require significant resourcing by regulators and needed careful assessment'. Ms Sheerlinck is quoted as stating in relation to this: 'There are already a number of reviews of insurance currently underway which means the recommendations in this report will need to be carefully considered and prioritised in that broader landscape.'[Source: Australian Institute of Superannuation Trustees media release 27/03/2018]

  • ASFA issued a statement in which ASFA CEO Martin Fahy expressed the view that that 'Many of the recommendations in the PJC report are addressed by the Code' [ie the Insurance in Superannuation Voluntary Code of Practice] and that in some instances the voluntary code of practice has 'higher standards in place than those proposed in the PJC report.' He added that the superannuation sector is currently working to fully implement the Code and that ASFA anticipates the vast majority of superannuation members will be in funds that have adopted the Code.[Source: ASFA media release 27/03/2018]

  • ANZ also issued a statement welcoming the release of the report. ANZ Group Executive Wealth Alexis George said: 'The committee has considered a range of issues in producing this important report. While ANZ is considering the findings, we believe there are a number of recommendations that should be reflected within the next update of the Life Code. It would also be timely for the Australian Securities and Investments Commission to review and approve the Life Code given the positive consumer outcomes it could deliver. An open and transparent review process, followed by ASIC registration and enforcement will enhance the credibility of the Code and start to rebuild consumer trust and confidence in the life insurance industry'. The statement added that ANZ would 'continue to work constructively' to implement consumer-focussed reforms and noted that it was the first retail superannuation fund to announce it would sign-up to and comply with the new Trustee Code.[Source: ANZ media release 28/03/2018]