Introduction

The Australian Securities and Investment Commission (ASIC) has released the findings of its review into the sale of direct life insurance products in the form of two reports: (ASIC) Report 587: The sale of direct life insurance and ASIC Report 588 Consumers' experiences with the sale of direct life insurance.  Ultimately, ASIC found that sales practices and product design are leading to poor consumer outcomes and has outlined its expectations of industry to improve.

About the review

• The purpose of the review was to explore whether, and how, the way direct life insurance products are designed and sold contributes to poor consumer outcomes.
• The review included term life, trauma, total and permanent disablement (TPD), income protection, and accidental death insurance. ASIC states that though 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.
• 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.

Report 587: The sale of direct life insurance 

Key Findings

• Consumers are cancelling their policies in very high numbers: One in five of all policies taken out were cancelled in the cooling off period 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sold direct compares poorly with other channels when it comes to claims: 15% of claims are declined, with 27% of claims withdrawn.
• ASIC 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.
• Sales of accidental death insurance were identified as 'particularly problematic' with a claims ratio of only 16.1% over the 2015-17 financial years.

Areas of concern highlighted in the report

'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,' ASIC Chair James Shipton said.  More particularly, ASIC identified three areas of concern: consumer outcomes, product design and sales practices (training and scripts, quality assurance and incentives).

1. Consumer Outcomes — outbound sales associated with ongoing conduct issues: ASIC found that outcomes for consumers who buy direct life insurance are often poor and that 'firms engaged in sales conduct that is likely to lead to consumers buying a product they do not want or cannot afford, or that does not meet their needs'.  Further the report draws a connection between sales conduct and poor consumer outcomes stating that there is a  'clear link between sales conduct and poor consumer outcomes'.
2. Product Design:  ASIC found that some 'products or product features provided little value to consumers, while others were difficult to understand and therefore may not perform as expected'. 
3. Sales practices (Training and scripts, quality assurance and incentives): The report found that training and scripts 'did not always set clear and professional standards for sales conduct' and that quality assurance frameworks were 'not always effectively designed to detect and address poor sales conduct'.  In addition, the report found that 'conflicted incentive schemes were linked to inappropriate point-of-sale conduct' and that a review of sales culture had demonstrated that there 'can often be a disconnect between firms’ "target culture" and what happens in practice'.  ASIC notes that changes being made in response to recent reforms (the Life Insurance Framework (LIF) reforms which came into force on 1 January 2018) should mitigate this risk and improve conduct.

ASIC Report 588 Consumers' experiences with the sale of direct life insurance 

Report 588 summarises the findings of consumer research (including review by ASIC of more than 540 recorded sales calls) conducted as part of review.  It found that 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’s expectations of industry to address issues identified in the review 

Review of the Life Insurance Code of Practice

The Life Insurance Code of Practice 'needs to set higher standards and raise professionalism across industry' ASIC writes.  ASIC adds that it expects that the revised code will set 'rigorous standards' to address the findings in the report, including imposing additional requirements for providers to: 

• provide adequate explanations of key exclusions and future cost; 
• 'stop' (clearly define and prohibit) pressure selling;
•  introduce a deferred sales model for downgrades (if a consumer is not eligible for a policy and the firm offers a downgraded option, they should provide a clear warning upfront about the product’s extra restrictions or limitations. Firms should also provide the Product Disclosure Statement and schedule a call back at a later date, after a set number of days); 
• stop using techniques that frame consumers’ choices (firms must allow consumers to make their own choices about cover type and sum insured and must not engage in techniques that reduce informed decision making, such as bundling cover into a quote without seeking explicit consent from the consumer upfront); 
• establish a clear target market for limited value products and only sell these products where there is genuine consumer need.

Cease selling accidental death insurance unless they can demonstrate value/meet 'genuine' consumer need

• Accidental death insurance was identified as 'particularly problematic' by the regulator on the basis that it is 'unlikely to meet consumer needs'.   For this reason ASIC writes,  'Firms should cease selling this product except where they can demonstrate that it provides value and meets a genuine consumer need'. 
• Review of other product features: In addition, ASIC said that firms should also review other product features and not include them if they do not serve a clear purpose and offer value in terms of consumers managing risk'; strengthen protections for vulnerable consumers (eg set clearer expectations about how sales staff should behave when dealing with vulnerable consumers, including when it will be appropriate to end a call); ensure that automatic cover increases do not exceed what the consumer can claim; implement training and quality assurance frameworks that establish standards, monitor sales conduct, and resolve poor consumer outcomes (implement frameworks that specifically test sales staff against the Code obligations).
• Review of internal policies and procedures in light of the report findings: firms must take action to ensure they are meeting their licensing obligations
  ASIC writes that it expects firms to review their internal policies and procedures against the report findings to ensure they are sufficient to meet AFS licence obligations, including obligations to: provide financial services efficiently, honestly and fairly; ensure that representatives are adequately trained and competent to provide financial services; ensure that representatives comply with financial services law; and have adequate arrangements in place for managing conflicts of interest.
• Timeframe: 'We expect that firms selling direct life insurance will not wait for the Code to be updated but will review the findings and recommendations in this report and implement changes as required to improve consumer outcomes'.
• Broader implications: While we did not cover sales of consumer credit insurance and funeral insurance as part of this review, consumers will be facing similar challenges when being sold those products. We expect firms selling consumer credit insurance, and in particular funeral insurance, to act on our findings and recommendations.

ASIC actions

• Outbound sales: ASIC states that it intends to restrict outbound sales calls for life and funeral insurance and is considering what regulatory tools it will use to implement this reform.  'In the meantime, the small number of firms who are still engaged in outbound sales will need to move away from this practice' ASIC writes.
• ASIC will intervene if industry does not stop selling poor value accidental death insurance: ASIC states that it will monitor consumer outcomes for accidental death insurance, including rates of cooling-off cancellations, short-term lapses, and claims outcomes and if there is no improvement, 'will use our current and/or proposed future powers, including product intervention powers, to intervene'.
• Monitoring and possible intervention in the absence of improvement: ASIC states that it will monitor outcomes, and if there is no improvement, 'consider what further regulatory interventions will be necessary, using the full range of our powers'.
• Enforcement action already on foot: ASIC states that remediation has already commenced:
  • Clearview has commenced refunding approximately $1.5 million to 16,000 consumers ASIC writes.
  • ASIC is 'reviewing what further remediation is required by other firms to address consumer harm': ASIC states that 'Any firms who have engaged in the inappropriate sales conduct identified in this report must review past sales of direct life insurance and remediate consumers appropriately. This includes any firms selling direct life insurance who were not subject to this review. We are assessing the conduct of individual firms to determine whether enforcement action is required'.
• Follow-up work on LIF reforms and incentives: As part of our 2021 review to test whether the LIF reforms have achieved their objective of improving the quality of advice, we will also assess whether a reduction in conflicted remuneration has led to better consumer outcomes in the direct life insurance channel.

ASIC Chair James Shipton commented: '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.'  Mr Shipton added that '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.'
The AFR reports that ASIC senior executive leader Michael Saadat said in an interview:

• Cold calling and telemarketing to customers to sell them life insurance should stop: 'We haven't landed on a concrete method for doing this… but we don't think there is a role for cold calling consumers'  ASIC's senior executive leader Michael Saadat is quoted as saying.
• Enforcement action expected: 'There absolutely will be enforcement action on the back of some of these [report] findings….We are investigating a number of firms that were in the review and not in the review.'

Industry response to the review

• TAL CEO Brett Clark reportedly welcomed the release of ASIC's findings and has said that the his firm no longer sell accidental death insurance as a standalone product.  The AFR quotes Mr Clark as stating: 'Outbound sales represent one channel in our direct life insurance business, and we intend to engage further with ASIC to understand their recommendations in more detail…We are committed to continually improving our business for our customers in line with and to exceed community expectations.'
• ClearView Wealth CEO Simon Swanson has reportedly called on the industry to 'collectively implement' change to improve customer outcomes.  
• Freedom Insurance has reportedly said it would 'evaluate any actions' it may take to ensure sales practices and product design aligned with regulatory and community standards.

[Sources: 18-250MR ASIC’s review of direct life insurance finds high cancellation rates and poor claims outcomes; REP 587 The sale of direct life insurance; REP 588 Consumers’ experiences with the sale of direct life insurance; ABC 30/08/2018; [registration required] The AFR 30/08/2018]