Attachment to 17-076MR: Report on ASIC's Investigation into The Colonial Mutual Life Assurance Society Limited

Executive summary

ASIC confirms we have now largely concluded our investigation into the life insurance business of The Colonial Mutual Life Assurance Society Limited (trading as CommInsure). The results of our investigation to date are outlined in this report.

We note that ASIC has confidentiality obligations in the Australian Securities and Investments Commission Act 2001 which place limits upon what we can publicly disclose following formal investigations.

Key findings

ASIC's key findings from the investigation are as follows:

1. Medical definitions

CommInsure used medical definitions in its trauma policies that were out of date with prevailing medical practice, specifically for heart attack and severe rheumatoid arthritis.

In itself, this is not against the law because the law allows an insurer to set out the cover its policy provides, and in doing so, to define what it means by various terms, including medical terms. Under the law, an insurer can use medical definitions that are out of date, as long as this is clearly disclosed in the policy.

While some of CommInsure's definitions had not kept up with the latest medical developments, they were disclosed in the relevant Product Disclosure Statements (PDSs) and life insurance policies.

However, it is important to recognise that a consumer can end up with a life insurance policy that has out of date medical definitions in two distinct ways (both of which we found applied to CommInsure).

On one hand, a consumer can purchase a policy which already has outdated medical definitions. Although this is not against the law, it is clearly out of step with community expectations, given that consumers cannot be expected to know whether a medical definition is already outdated when they purchase life insurance. The life insurance industry has recognised this and from 1 July 2017, the Life Insurance Code of Practice will require subscribing insurers, including CommInsure, to review medical definitions for on-sale products at least every three years and update them where necessary to ensure they remain current at the point of sale.

On the other hand, because life insurance is a long term product, a consumer can also find themselves with a life insurance policy where medical definitions have become out of date over time. This occurs because life insurers are legally required to maintain a consumer's cover, and cannot easily update a policy or change its terms. This is an important consumer protection – it means, for example, that an insurer cannot refuse to renew a life insurance policy because a consumer's health has deteriorated. This protection for consumers does, however, create a 'legacy products' issue in the life insurance industry. The Government is considering this industry-wide issue further in response to a recommendation of the Financial System Inquiry.

2. Treatment of medical staff

ASIC conducted a thorough investigation and examination of CommInsure's practices, including reviewing over 60,000 documents, including a significant amount of emails, interviewing staff and customer and consumer representatives, and obtaining independent medical and legal advice.

We found no evidence to support allegations that CommInsure claims managers applied undue pressure on doctors to change or alter their medical opinions.

3. Claims handling

In the course of ASIC's investigation, CommInsure has acknowledged there are a number of areas where it needs to make improvements to its claims handling processes. ASIC is working with CommInsure to make sure these improvements are implemented as quickly as possible.

We have requested CommInsure to undertake a further independent review in mid-2018 to provide additional assurance to ASIC and the public that CommInsure is making the necessary changes to its business. CommInsure has agreed to this request.

4. Advertising and promotion

ASIC is continuing to investigate concerns that CommInsure's advertising and promotion of life insurance policies to consumers contained potentially misleading or deceptive information in the period before March 2016.

We will provide a further update on this aspect of our investigation when appropriate.

Wider industry reforms to insurance claims handling

In addition to ASIC's investigation of CommInsure, there are a number of important initiatives intended to bolster the regulatory regime for life insurance, including claims handling, and other financial services and improve consumer outcomes. These include:

• a review of ASIC's enforcement regime, which is considering the adequacy of the penalties that ASIC can seek for misconduct;
• a review of ASIC's constrained jurisdiction over claims handling under the Corporations Act 2001 (Corporations Act); and
• a review of the Australian Consumer Law, which is considering the extension of unfair contract terms provisions to insurance contracts (which are currently exempt).

ASIC's investigation into CommInsure

Background

In April 2016 ASIC commenced an investigation into the life insurance business of CommInsure. The investigation examined a number of areas following allegations made in the media in March 2016 including:

• the use of outdated medical definitions in life insurance policies
• treatment of medical staff by claims managers including applying undue pressure on CommInsure's internal doctors and 'cherry-picking' doctors to support a particular claim decision strategy
• poor claims handling procedures and practices including deliberately delaying decisions about claim outcomes
• poor surveillance practices, and
• deletion or alteration of medical opinions from a CommInsure database.

In addition, ASIC examined how insurance policies were advertised and promoted to consumers.

As part of our investigation, ASIC:

• obtained approximately 60,000 documents for consideration, including significant amounts of emails
• interviewed a range of individuals, including customer representatives (financial and legal advisors, at the request of the customers)
• conducted compulsory examinations
• reviewed client files from CommInsure, the Financial Ombudsman Service (FOS) and the Superannuation Complaints Tribunal (SCT)
• obtained external legal advice
• obtained independent expert medical advice
• engaged extensively with APRA
• engaged extensively with CommInsure and its independent reviewers, and
• liaised with FOS and the SCT and consumer law groups in relation to CommInsure matters to understand the issues faced by consumers.

Our investigation has not considered concerns raised publicly about the treatment of whistleblowers or to allegations of contraventions under the Life Insurance Act 1995 as these matters are under APRA’s jurisdiction.

Medical definitions

In March 2016 concerns were raised in the media about certain medical definitions used in CommInsure's retail trauma policies. It was alleged that the definitions were out of date with current medical practice, specifically the definitions of heart attack and severe rheumatoid arthritis.

ASIC found that there is no legal basis for us to take enforcement action in relation to this concern. This is because the law allows the insurer to set out the cover its policy provides and to define what it means by various terms including medical terms. Under the law, it can use definitions that are out of date, as long as it clearly discloses those definitions in the policy.

While some of CommInsure's definitions had not kept up with medical opinion, they were disclosed in the policy documents and PDSs. However, ASIC considers this practice falls short of what the community reasonably expects, and can result in poor outcomes for consumers. As set out in our broader review of life insurance claims handling (Report 498), this is an industry wide issue that needs to be addressed, including through the recently announced Life Insurance Code of Practice.

ASIC raised these concerns with CommInsure, which has recently introduced a process to review both medical definitions and general exclusions across all of its life insurance products on sale to new customers. This will also ensure that CommInsure meets its obligations under the new Life Insurance Code of Practice. ASIC will continue to monitor the progress and outcomes of this review.

In March 2016, CommInsure updated the definitions of heart attack and severe rheumatoid arthritis in its trauma products and reassessed past claims under the updated definitions back to 11 May 2014. As a result of that process, CommInsure has paid benefits for 18 claims, totaling approximately $2.58 million. In response to ASIC’s concerns that its heart attack definition was out of date from at least October 2012, CommInsure has now voluntarily agreed to apply its updated heart attack definition back to October 2012. This is the date at which global cardiology bodies published an updated consensus on the appropriate clinical marker for heart attack. CommInsure will now commence the process of identifying affected consumers and making payments as appropriate. ASIC welcomes CommInsure’s revised position on this matter.

Treatment of medical staff

As a part of ASIC's investigation, we interviewed each doctor in CommInsure’s Medical Risk Team who worked at CommInsure during the relevant period. ASIC has determined from the interviews and from other enquiries undertaken including document and email review, that there is no evidence to support allegations that CommInsure claims managers applied undue pressure to doctors to change or alter their medical opinions. 

In addition, we found no evidence that the alleged practice in relation to doctors being selectively chosen to give preferred opinions in favour of the insurer (sometimes referred to as 'cherry picking') had occurred within the claims handling function of CommInsure.

Claims handling

ASIC examined CommInsure's life insurance claims handling processes. We conducted a range of enquiries including reviewing CommInsure's relevant policies and procedures, conducting interviews including with representatives of customers, reviewing client files and conducting a review of the data and complaints retained by FOS and the SCT. We also reviewed complaints to FOS and the SCT and spoke to consumer legal centres to understand the issues faced by consumers.

Overall our investigation did not find any breaches of the law in relation to claims handling. However, we did identify a number of areas of concern in which CommInsure fell short of consumer expectations or best practice. We have written to CommInsure to set out ASIC's concerns and expect that CommInsure will consider and address these concerns and make improvements.

In relation to key performance indicators (KPIs) for some claims staff, ASIC identified that for previous financial years KPIs included net loss ratios and income protection terminations rates. Although the weighting allocated to each of these KPIs was typically low, between 10% and 15%, this was subsequently addressed by CommInsure, with the relevant KPIs removed for claims staff.

We also note the following findings and recommendations from the independent review conducted by Deloitte:

• Deloitte reviewed around 800 claim files and found that there were 12 claims where CommInsure's decision to decline the claim was incorrect or an incorrect payment was made. These consumers have been compensated around $1,370,000 in total. A further six claims are currently being assessed to determine whether compensation is required; and
• Deloitte has made recommendations designed to improve CommInsure's claims handling practices with a view to ensure customers are not treated poorly. These recommendations included improved communications with consumers and training and assistance for claims managers. We note that a number of the findings were based on Deloitte's consideration of planned improvements by CommInsure.

ASIC has requested CommInsure engage an independent expert by July 2018 to conduct an implementation review designed to ensure the recommendations arising from both the independent reviews and from ASIC's investigation have been appropriately implemented and are working effectively. CommInsure has agreed to this request.

ASIC notes that some of these concerns around claims handling are also found more widely across the life insurance sector, as described in ASIC Report 498.

We note that 'conduct by insurers in relation to handling claims' is expressly exempted from the financial services conduct provisions of the Corporations Act. ASIC has recommended to Government the strengthening of the legal framework covering claims handling and that more significant penalties for misconduct in relation to insurance claims handling be included in the review of ASIC's enforcement regime.

Surveillance practices

In March 2016, allegations were made about an increase in the number of CommInsure claims under surveillance in the period from 1 July 2013 to 28 February 2014 and that referrals made to CommInsure's investigation team for surveillance in that period increased from 42 to 457.

ASIC's investigation concluded that there was no significant increase in surveillance by CommInsure in the relevant period and that the figures quoted to support the allegations raised were inaccurate. In particular, the figure of 42 was the number of referrals for the month of July 2013, whereas the figure of 457 was the cumulative year to date total for the number of referrals for the period from July 2013 to February 2014 inclusive. We also note that not all referrals to CommInsure's investigation team resulted in surveillance being conducted on claimants.

ASIC also reviewed a number of claim files from 2016 in which surveillance was used by CommInsure when assessing mental health claims.

Overall we found the trigger for, and use of, surveillance to be reasonable in each instance. However, we noted that the consistency of CommInsure's record keeping was an area in which improvements can be made. We have raised these matters directly with CommInsure.

Deletion or alteration of medical opinions

Allegations were made about a particular software program previously used by CommInsure in which medical records had gone missing, either through the program not being robust enough or through deliberate deletion of documents.

The software program was a Microsoft Access program named the Medical Officers Referral Database (database). The database's primary function was to store internal medical opinions provided by the Medical Risk Team before they were printed and placed on the hardcopy claim file.

ASIC undertook a review of the database, and conducted interviews with a range of individuals. We found that the database lacked an audit function to track changes and deletions. However, we did not find any evidence to suggest that medical opinions stored on the database were deleted or altered by staff outside the Medical Risk Team, other than for appropriate administrative functions. We also noted that the database was not the main record keeping tool for customer claims and there was no evidence that medical opinions had been removed from hardcopy claims files.

CommInsure stopped using the database from June 2016 and has started using a system with more robust audit functionality.

Based on the evidence we have obtained, ASIC does not consider there are any grounds to take any action in relation to this concern.

Advertising and promotion

During the course of our investigation, ASIC reviewed CommInsure's advertising and promotion of the following life insurance products:

• the Total Care Plan sold through financial advisers; and
• Simple Life Insurance sold directly to consumers.

Our review particularly focused on the promotion of heart attack cover within trauma or critical illness cover and identified a number of potential concerns. These concerns related to statements made about the coverage provided by these products before the definition of heart attack was updated in March 2016. 

ASIC's investigation into these concerns is ongoing.

Independent reviews

Separate to ASIC's investigation, CommInsure commenced a number of independent reviews to address the allegations raised in the media, including about declined claims, its life insurance claims handling processes and ethical concerns.

ASIC has engaged closely with both CommInsure and the independent reviewers to monitor the scope and conduct of the reviews. A number of these reviews have been completed or are in the final stages of completion. ASIC has worked closely with APRA during the monitoring of the independent reviews.

ASIC’s work to raise standards

ASIC is also conducting further industry surveillances to raise standards across the industry. Our current and planned work includes:

• follow-up work on the findings from our industry-wide review of claims handling in the life insurance industry in Report 498 Life insurance claims: An industry overview (REP 498), released in October 2016
• a major review of life insurance sold direct to consumers without personal advice
• a review of total and permanent disablement insurance claims handling,  and
• a review of the surveillance practices used by insurers.

Importantly, ASIC is working with the Australian Prudential Regulation Authority (APRA) to introduce a regular collection of standardised data on life insurance claims across the industry. This data will be publicly reported and will be another way to assist ASIC to identify and respond to trends or anomalies in claims outcomes. Our work on this will continue through 2017.