ASIC’s review of direct life insurance sales has found that sales practices and product design are leading to poor consumer outcomes. ASIC's Report 587 released today reveals that:
Consumers are cancelling their policies in very high numbers:
- one in five of all policies taken out were cancelled in the cooling off period
- one in four of all policies that remained in force beyond the cooling off period were cancelled within 12 months
- three in five of all policies sold were cancelled within three years.
- life insurance sold direct compares poorly with other channels when it comes to claims: 15% of claims are declined, with 27% of claims withdrawn.
'Life insurance is a long-term product but cancellation rates and poor claim outcomes show that people are being sold products they don’t want, can’t afford, or don’t perform as they expected,' said ASIC Chair James Shipton.
ASIC has also released Report 588, consumer research conducted as part of this review, which found consumers struggle with the direct life insurance sales experience and the complexity of the products, and consumer understanding of key features is often poor.
ASIC listened to more than 540 recorded sales calls and identified a failure by all firms to provide adequate information about important aspects of the cover, including key exclusions and future premium increases.
Four firms were also found to engage in pressure selling techniques, including refusing to send out paperwork unless a consumer committed to buy.
More than half the firms had incentive schemes which encourage sales staff to prioritise closing a sale ahead of the needs of the customer, including bonus payments heavily focused on value or volume of sales.
Mr Shipton said, 'Aggressive selling practices and products that don’t pay out when consumers expect undermine trust in the industry. However, selling direct life insurance can be done well and we have seen this where firms have moved away from riskier business models, such as outbound sales and reliance on products with broad exclusions.'
'ASIC will use all of its regulatory tools to address failures in this market – including through enforcement action and policy reform. We have several investigations underway.
'ASIC is also announcing today that we intend to restrict outbound sales of life and funeral insurance, in order to protect consumers,' said Mr Shipton.
Sales of accidental death insurance were particularly problematic, including where consumers were 'downgraded' to accidental death insurance after being rejected for comprehensive life insurance. Accidental death insurance only covers death due to some types accidents, and offers little value to consumers, with a claims ratio of only 16.1% over the 2015-17 financial years.
Unless firms can demonstrate that accidental death insurance can meet consumer needs, ASIC expects firms to stop selling this product.
ASIC is calling on industry to respond to these findings by committing to higher enforceable standards that improve customer outcomes.
ASIC also identified certain business practices, including scripts, training, quality assurance and incentives contribute to poor consumer outcomes: see infographic.
Life insurance is distributed in three main ways in Australia: as group cover, for example through superannuation; by financial advisers; and directly by insurers or their sales partners without personal advice.
While direct life insurance makes up less than 10% of all life insurance in Australia, it has been a growing part of the market in recent years.
In 2016, ASIC’s review of life insurance claims handling (REP 498) showed higher declined claims for life insurance bought through the direct sales channel than for retail and group insurance.
Data published by the Australian Prudential Regulation Authority (APRA) and ASIC in May 2018 found that 93% of finalised claims across all channels (advised, group and direct) were paid, while for the direct channel this was only 84%.
ASIC undertook a review of direct life insurance to explore whether, and how, the way direct life insurance products are designed and sold contributes to poor consumer outcomes.
The review covered 11 firms, including six insurers selling directly to consumers and three distributors selling on behalf of two insurers. They are CommInsure, ClearView Life Assurance, NobleOak Life, Suncorp Life & Superannuation, TAL Life, and OnePath Life (part of ANZ Banking Group), St Andrew's Life Insurance and its distributor Select AFSL, Hannover Life Re and its distributors Greenstone Financial Services and Auto & General Services.
ASIC's review included term life, trauma, total and permanent disablement (TPD), income protection, and accidental death insurance. While it did not specifically look at consumer credit insurance (CCI) or funeral insurance, the findings and recommendations are also applicable to the direct sale of these products.
ASIC also engaged an external firm, Susan Bell Research to conduct research about consumer experiences in buying direct life insurance.
The Life Insurance Framework (LIF) reforms which came into force on 1 January 2018 reduce conflicted remuneration in life insurance, including for direct sales. We expect that the changes to firms' incentive schemes as a result of LIF coming in to force will result in better consumer outcomes, including lower lapses.
ASIC's MoneySmart website has information for consumers about the different types of life insurance and what to check before buying a policy.
ASIC has taken action against ClearView for poor sales conduct of direct life insurance (18-029MR). Following ASIC’s review, ClearView refunded over $1.5 million to 16,000 customers after pressuring them to buy life insurance over the phone.