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The Pitfalls of Direct Life Insurance

10 Nov 2016 3:57 PM - ASIC's report into Australia's life insurance industry

Part of being a financial advisory business involves jobs clients want to delegate or don’t want to do. Modelling financial outcomes, monitoring government legislation, compiling decades of data to formulate an investment philosophy – most recently it was reviewing ASIC’s 120-page report into Australia’s life insurance industry.

 

It’ sounds a snooze, but it’s not when it underlines the importance of seeking advice when buying an insurance policy or making a claim – which is what ASIC’s report did.

For the sake of the report “life insurance” amounted to life cover, TPD cover, trauma cover and income protection insurance and it surveyed 2013-2015.

 

We’ve noted the insurers surveyed in the report below, essentially most of Australia’s life insurance industry. Unfortunately, none of the insurers were specifically identified within the report in respect to claims data, so we don’t know who were most aggressive in declining claims, but there are many worthwhile across the board points.

 

The most striking stats in the report were the differences for declined claims. Declined claims across all forms of cover were higher for non-advised policies at 12%, than the 7% through a retail channel coming from an adviser or broker. Translated, there is a 70% higher rate of claim denials for a buy it yourself policy over purchasing it after getting advice.

With those 12% of declined claims through non-advised channels there were three insurers who had very high decline rates at 29%, 22% and 20%.

 

Contrast those numbers to the highest decline rate for an insurer where the policy was advised – 11%.

 

A total of 3% of disputes involved sales practices, another 3% are from pre-existing conditions while 5% are from eligibility. As ASIC points out, these issues relate to sales practices in some way, meaning representations made to policy holders at sale don’t align with a claim outcome.

 

Life insurance distributed directly to consumers usually involves no personal financial product advice and as ASIC noted, they had case studies where policyholders purchased policies without understanding the extent or limits of coverage at the point of sale. This tends to suggest having an adviser who provides personal advice may ensure coverage is appropriate in the first instance.

 

ASIC found most life insurance disputes are about claims procedures and this can be troubling for policy holders in two ways. ASIC noted some insurers have included incentives and performance measurements for claims handling staff that are in apparent conflict with their obligation to assess each claim on its merit. In other words, at some insurers it’s in the best interests of the claims handling staff to decline claims.

The second troubling issue ASIC found was claims procedures tend to be extremely complicated for consumers, which can lead to adverse outcomes. Evidence required can lead to delays in claims decisions, specifically, claim forms can be lengthy and complicated, ASIC noted one claim form was 26 pages for the claimant and 11 pages for their doctor.

Again, we’d suggest the difference in decline rates between non-advised policies and advised policies can be explained by the presence of an adviser in the sales process and in the claims process.

 

To back this up, ASIC themselves pointed out, the difference “may be explained by the assistance that financial advisers provide during the claims process as part of their ongoing relationship with the policyholder.”

 

Advice – it may just save a lot of hassle.

 

Insurers included in the report: AIA, Allianz, AMP Life, Clearview, Colonial Mutual (Comminsure) Hannover Life, Macquarie Life, Metlife Insurance, MLC, OnePath Life, St Andrew’s Life, Suncorp Life, TAL Life, Wespac Life, Zurich Australia. However, as noted none were specifically identified.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

 

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