The report by the Australian Securities and Investments Commission (ASIC) into total and permanent disability (TPD) claims has just dropped. The report is comprehensive and puts the microscope on some products and practices.
Activities of daily living (ADLs), claims handling, withdrawn claims and data collection are highlighted as the holes in the safety net that TPD insurance benefits provide. There is also a mini name-and-shame table.
TPD is a life insurance product designed to top up future retirement savings lost because of disablement. It is not designed to replace working life income: that is the province of income protection insurance.
As the report notes, most working age Australians hold TPD insurance and most through employment superannuation. Data collected records $3.5 billion in premiums was collected and 26,000 claims were made in 2018.
TPD is big business which ASIC stressed played a “crucial role as a safety net in supporting financial security” for Australians.
ASIC looked at life insurance in a review of claims generally in 2016 and flagged that they would follow up on “problem areas”, including rejected TPD claims for some insurers. Whilst the average TPD acceptance rate was 84%, outliers rejected up to 37% of TPD claims.
In March 2019, ASIC and the Australian Prudential Regulation Authority (APRA) jointly released life insurance claims and disputes data which showed that 87% of individual policy TPD claims were accepted after an average of 8.2 months. TPD claims through superannuation fared even better with 88% accepted after an average 5.1 months per claim.
This latest report reviewed data on 35,000 TPD claims from seven life insurers between January 2016 and December 2017.
That ASIC did not review data beyond 2017 has some questioning its value. Nevertheless, the findings are definitive and powerful.
ACTIVITIES OF DAILY LIVING
The headline take-out is the criticism of the practice of some insurers to offer TPD cover with a non-standard and restrictive definition known as ADLs.
The standard TPD definition is the permanent incapacity for an insured’s usual occupation or any other suitable work within his/her education, training or experience, perhaps with a retraining clause added.
Some retail life policies offer more generous own occupation cover, yet we’ve seen situations where some insurers have applied an ADL test even for individually underwritten policyholders. This means that for their claim to succeed they need to show that they are unable to perform two or more daily living activities such as feeding, bathing, dressing, toileting, walking and transferring to and from bed.
Since 2014 employment superannuation funds were required to offer default TPD insurance cover in MySuper products that satisfy the early release preservation rules and were consistent with the “permanent incapacity” definition in the Superannuation Industry (Supervision) Act 1993.
Despite this, some group life policies flipped superannuation fund members who were classified as working in high-risk occupations, casuals or part-timers from standard TPD definitions into ADL definitions.
The ASIC report estimates up to 500,000 Australians hold TPD policies subject to ADL definitions and that 60% of ADL claims were rejected. In contrast, only 12% of other TPD claims were rejected.
Most consumers have little or no insight into the inner workings of insurance policies, such as the classification of their occupations or how disadvantaged they are if an ADL definition applies to their circumstances.
The Productivity Commission in its 2018 report into the “efficiency and competitiveness” of superannuation noted the loss ratio of group life and TPD (mostly in superannuation) at 79%, which is a very high figure indicative of a well targeted product.
The ASIC report bemoans that no reliable data is available as to the loss ratio of ADL cover. However, in our experience only a fraction of Berrill and Watson’s clients who may satisfy a standard TPD definition would qualify for an ADL benefit.
The ASIC report describes the outcomes from the review of the ADL test as “poor” with a high risk of harm to vulnerable consumers who are disabled and yet are unlikely to be able to successfully claim on a policy with an ADL definition.
Despite this, ASIC reports that those with ADL cover may pay the same premiums as those covered under a standard TPD definition and this is particularly true of group insurance policies where individual characteristics of members are not usually known prior to claim.
What stands out is that ADLs have no place in employment-related insurance benefits, such as MySuper. They measure an inability to self-care and not an incapacity for work and as such are better suited for trauma insurance benefits (which cannot be offered as part of insurance in superannuation).
The report notes that one insurer has removed ADL cover from TPD within superannuation and ASIC say they will conduct further assessments and will use their product intervention powers if necessary.
ASIC identified a second area of concern about what it described as “friction” in claims handling and in particular focused on the 12.5% of claims recorded as withdrawn.
They listed friction points such as poor communication, multiple medical assessments, oppressive investigations (including desktop surveillance) and excessive delays.
Whilst the March 2019 joint report indicated claims timeframes had come down, ASIC rightfully identified withdrawn claims as a potential red flag.
That said, the nature of TPD claims with the assessment of permanency does usually mean that eligibility issues and returns to work are more common. Indeed, claimants returning to work should be encouraged and that feeds into a broader debate about the potential role of life insurers in providing limited rehabilitation and medical supports, perhaps under the umbrella of a standard TPD definition which includes a retraining clause.
The report noted that decline claims rates varied between insurers. TAL had the lowest decline rate of 9% whilst Westpac Life and Asteron Life had the highest rates at 28% and 29% respectively.
Whilst they lamented the general lack of quality data, ASIC did identify mental health and musculo-skeletal injuries as having higher decline rates than disease-related claims.
They also found that younger claimants and those with shorter membership periods had higher decline rates than older insureds.
Given the requirement for permanency for the payment of a TPD benefit, none of the above was surprising. Nor was the lower acceptance rate for old or legacy claims.
ASIC says it will review certain insurers claims practices, require specific data and reports, and conduct targeted surveillance to examine reasons for substantially higher decline rates over the next six months.
They will use existing notice powers but have also urged government to strengthen the regulatory framework for insurers to invest in data resources and the management of risk.
All are sensible measures for the “effective and proactive management of the risk of consumer harm”.
The ASIC report is the latest in a long line of reviews of the life insurance industry. In the last three years alone, we have seen three reviews of life insurance claims by the regulators as well is the Productivity Commission and Royal Commission reports.
There has also been the implementation of the life insurance code of practice in 2017 and insurance in super voluntary code in 2018, and the pending Treasury review of universal life insurance terms and conditions in MySuper products.
All this on top of significant legislative intervention in the marketplace with the removal of default cover for inactive superannuation accounts, small accounts under $6,000 and for members under 25 years of age.
Much as the industry may be feeling well and truly under the pump, some of the scrutiny was warranted and some changes were overdue. In my view, a key part of the reform is the removal of ADLs in employment-based TPD cover.
The ASIC report is an important step along the road to improve consumer confidence in an industry that plays a vital role in supporting vulnerable Australians and reducing reliance on the welfare system.
Perhaps the last major piece in the puzzle will be Treasury’s universal terms and conditions review. We shall see!
John Berrill is a director at Berrill and Watson Lawyers.