A review by ASIC has found 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. 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 prompt changes to ensure this cover provides real value.
ASIC’s review found that:
- Nearly half a million Australians, often working in casual roles or high-risk occupations, are covered by a very narrow TPD policy definition that only pays out in the most catastrophic circumstances, if they are unable to perform several ‘activities of daily living’ (known as ADL cover), such as feeding, dressing or washing themselves.
- Three out of five, or 60% of claims assessed under this narrow cover are declined. This is five times higher than the average declined claim rate for all other TPD claims (12%).
- Poor claims handling processes contributed to some consumers withdrawing their claims: one in eight, or 12% of claims lodged with insurers did not proceed to a decision.
- Insurers lacked key claims data to help them effectively manage the risk of consumer harm – including being able to identify the value of products to consumers and key friction points in their claims handling processes.
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.
We also find 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.
Superannuation trustees also have a crucial role to play in the delivery of life insurance to their members. We expect trustees to act in their members’ best interests by providing access to affordable insurance products that are suitably designed for their members while also safeguarding superannuation balances from inappropriate erosion.’
ASIC collected data on 35,000 TPD claims and commissioned consumer research. The review identified that insurer practices such as difficult lodgement processes, poor communication practices, multiple requests for medical assessments, and excessive delays were just some of the problems consumers found during the claims assessment process. Each of these issues presented a hurdle to making a successful claim, and ASIC is concerned that insurers had limited insights about the reasons for withdrawn claims, showing poor oversight of their products.
The granularity of ASIC’s data collection allowed us to conduct industry-wide statistical modelling that, to our knowledge, has not been undertaken in the Australian life insurance market before. This modelling showed that for claims where a decision has been made, AMP, Asteron (formerly Suncorp Life) and Westpac had declined claim rates higher than expected. The declined claim rate for Asteron was almost double what we predicted.
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.
ASIC also expects insurers to invest in data resources and improve the quality of their data. This includes collecting data on outcomes for different types of TPD cover including claims assessed under restrictive definitions such as ADL. ASIC and APRA will continue to work together to improve the public reporting of life insurance data.
TPD insurance is a type of life insurance that pays a lump sum if the consumer becomes totally and permanently disabled under the terms of the insurance policy. Data published by APRA for the 2018 calendar year shows that almost 90% of consumers with TPD obtained their insurance cover through their superannuation fund.
This report builds on ASIC’s previous review of life insurance in Report 498 Life insurance claims: An industry review (REP 498). In REP 498 we identified several concerns about TPD insurance including high rates of declined and withdrawn claims, and poor claims processing times. Concerns about poor claims handling processes have also been highlighted by ASIC in its ongoing work focused on insurance in superannuation (see Report 591 Insurance in Superannuation).
This review focused on seven insurers:
- AIA Australia Limited
- AMP Life Limited and the National Mutual Life Association of Australasia Limited (part of the AMP Group of companies)
- Asteron Life & Superannuation Limited – previously Suncorp Life & Superannuation Limited
- MetLife Insurance Limited
- MLC Limited
- TAL Life Limited
- Westpac Life Insurance Services Limited.
These insurers represent 65-70% of the total number of TPD claims. The comparative cross-section of insurers included a spread across the three sales distribution channels: group, retail and non-advised.
ASIC reviewed conduct between 1 January 2016 and 31 December 2017. We obtained data on 35,000 TPD claims and reviewed more than 2,400 documents from the seven insurers. ASIC commissioned an independent market research firm to conduct qualitative research with 20 consumers who made a TPD claim with one of the insurers in our review.
Addressing harms in insurance is one of ASIC’s seven strategic regulatory priorities for 2019-2023.
ASIC’s MoneySmart website has information to help consumers when taking out total and permanent disability insurance. It also has an online tool which allows consumers to compare life insurers’ performance in handling life insurance claims and disputes, including TPD.