Room to improve: ASIC review of IDII claims handling practices released

4 minute read 07.09.2022 Kate Hilder, Siobhan Doherty

The focus of the review was on both checking in on the extent to which insurers had changed their practices in response to concerns previously raised by the regulator and to monitor how they had approached implementing Hayne reforms. Our key takeaways are below.

The headline finding of the Australian Securities and Investments Commission (ASIC) review into how insurers handle individual income disability insurance (IDII) claims is that:

'more work is needed by insurers to ensure that consumers are protected from unfair practices in non-disclosure investigations and physical surveillances'.

Why the review was undertaken

ASIC gives two main reasons for undertaking the review.

The first, is that the regulator has held 'longstanding concerns' about the potential consumer harms resulting from the over-use of 'intrusive claims handling practices' such as non-disclosure investigations and physical surveillances (as highlighted by the Hayne Commission) and the review is part of the regulator's monitoring of these issues.

Previous ASIC reports - ASIC’s 2019 report, Report 633 Holes in the safety net: a review of TPD insurance claims (REP 633) (summarised) and follow up 2021 report, Report 696 TPD insurance: Progress made but gaps remain (REP 696) (summarised in Governance News 04/08/2022 p19) – have highlighted the regulator's concerns in the context of total and permanent disability (TPD) insurance.

The second is to monitor compliance with insurer's obligations to handle claims 'efficiently, honestly and fairly' following the commencement on 1 January 2022 of Hayne reforms which brought claims handling and settling services under the AFS licence regime. ASIC comments that the reforms mean that:

'Insurers may be in breach of the obligation to handle claims efficiently, honestly and fairly if they do not have a reasonable basis to test for non-disclosure or misrepresentation. Without a reasonable basis, the insurer may be engaging in ‘fishing’ and may be in breach of the obligations'.

Against this background, ASIC Deputy Chair Karen Chester said that the purpose of this latest review into handling of IDII claims was to:

'test whether insurers were now entrenching good practices, especially with insurers now being subject to new claims handling obligations. We also sought to identify any outliers and areas for improvement.'

Scope of the Review

ASIC assessed 'nearly 4800' IDII claims received by the following insurers between 1 January and 30 June 2021:

AIA Australia Limited (AIAA), comprising AIAA and The Colonial Mutual Life
Assurance Society Limited (CMLA);TAL Life Limited (TAL), comprising TAL and Asteron Life & Superannuation Limited (Asteron);
Zurich Australia Limited (Zurich), comprising Zurich and OnePath Life Limited (OnePath);
MLC Limited;
Resolution Life Australasia Limited (formerly AMP Life Limited); and
Westpac Life Insurance Services Limited (Westpac) (now TAL Life Insurance Services Limited as of 1 August 2022).

Review findings

As initially flagged, ASIC identified two key areas of concern.

1. Some insurers appear to be 'fishing' for non-disclosure

ASIC Deputy Chair Karen Chester states that ASIC remains concerned that:

'some insurers still appear to be "fishing" for non-disclosures to avoid paying out legitimate claims'.

For example, ASIC found that five insurers 'appeared to commence non-disclosure investigations only on the basis that the claim was lodged within three years of policy inception or renewal', which ASIC considers may heightens the risk of 'fishing'.

Ms Chester cautioned that ASIC will take action, 'where we see consumer harm' resulting from these practices.

2. Over-use of 'intrusive claims handling practices', especially in the context of mental health claims and investigations

ASIC found that:

non-disclosure investigations were conducted in around 5% of claims and physical surveillance was conducted in around 1% of claims
in 40% of cases, ASIC found that the investigations related to mental health non-disclosure
use of surveillance 'may have been unwarranted' in 10 of the 57 claims where surveillance was used 'because the insurer had not shown that other investigative methods had been exhausted'
in five of the ten mental health claims where physical surveillance was used, 'ASIC considers that surveillance may have been unwarranted'

Commenting on this, Ms Chester said:

'Non-disclosure investigations and physical surveillance are intrusive measures and insurers must ensure they have reasonable grounds to undertake them. We expect physical surveillances to be used as a last resort only,'.

Next steps

ASIC states that it has written to the life insurers covered by the review to 'outline areas for improvement and communicate expectations for their use of investigative tools, including the obligation to handle claims efficiently, honestly and fairly'.
ASIC states that its 'inquiries are continuing with those life insurers that had a higher proportion of potentially unwarranted investigations identified in the review'.

[Source: ASIC media release 02/09/2022]