Financial Services Royal Commission Round 6 Hearings: Overview of week 2 life insurance and general insurance

10 mins  20.09.2018

Royal Commission Round 6: week 2, 17 September 2018 – 21 September 2018

Carrying on from week 1, the second week of Round 6 hearings into Insurance again focussed on the topic of Life Insurance before moving on to consider the topics of general insurance and the regulatory regime.  A high level overview of some of the issues to arise in the CommInsure, TAL and REST and AMP case studies (life insurance) and the issues identified for investigation by Senior Counsel Assisting Rowena Orr QC in relation to general insurance is below.


Life Insurance Case studies (continued)

CommInsure Case study

In her opening statement to the Commission, Counsel Assisting Rowena Orr QC said that the focus of this case study would be on issues connected with policy design and the claims handling process.  The primary focus was on two claims involving the definitions of 'heart attack' and 'radical surgery' (for breast cancer) in trauma policies issued by CommInsure, which were relied on by to reject or to partially reject, customers' claims for full payment under their policies for these conditions.

Questions were asked in relation to the following issues (among others): the time taken to update definitions and the review/update process; the clarity of communication to customers regarding cover in advertising material; the approach by CommInsure to dealing with the claims in these two instances and with the subsequent complaints to Financial Ombudsman Service (FOS); and the way in which CommInsure approached engaging with the FOS and also with the regulator (the Australian Securities and Investments Commission (ASIC)).  An overview of some of these issues in the context of the first claim (heart attack) is below.

  • Delay in updating policy definitions: The first claim investigated by the Commission involved the denial of the full trauma payment to one customer (the insured) on the basis that his heart attack did not meet CommInsure's policy definition of 'heart attack' contrary to medical opinion supplied by the Insured, and contrary to CommInsure's knowledge that the definition did not meet the accepted medical definition of heart attack for two years prior to his claim.  The Commission heard that the heart attack definition had not been updated by CommInsure for 11 years, and that and the decision to update it (following media reports raising concerns about the definition) as well as decisions concerning when the backdated revised definition should apply, were prompted in part by commercial considerations.  The Commission also heard that ASIC had raised concerns.  Commenting on the use of outdated definitions by CommInsure, Senior Counsel Assisting Rowena Orr QC said that 'ASIC considers, and we agree, that reliance on outdated definitions is clearly out of step with community expectations.  The community expects that medical definitions in life insurance policies will appropriately reflect the community’s understanding of what constitutes a particular medical definition…As we’ve heard in relation to CommInsure, the evidence suggests that those expectations have not always been met'.
  • Issues with outdated definitions not unique to CommInsure: Ms Orr said that 'this issue [outdated definitions] is not unique to CommInsure'.  Based on submissions from the ten entities (Auto & General, CommInsure, Greenstone, MLC, OnePath, Suncorp, Westpac and Zurich, as well as Freedom and ClearView) supplied to the Commission, Ms Orr said that 'eight of the 10 accepted that there had been deficiencies in their processes'.  Ms Orr added that a 'central theme was the lack of procedures to ensure regular and formal reviews'.
  • Approach to engaging with FOS: The claim eventually became the subject of an Financial Ombudsman Service (FOS) complaint, and the Commission heard in detail how this process played out, with a number of questions focussing on CommInsure's conduct in engaging with FOS.  The Commission heard that CommInsure challenged the jurisdiction of the FOS to hear the complaint and elected not supply certain information in response to CommInsure's requests.  FOS raised a number of concerns with CommInsure concerning this, including that it had 'caused significant delay in the handling of the investigation, it hampered the timely resolution of the matter for the applicant, had the potential to prejudice the outcome of the dispute' and may amount to 'serious misconduct as defined in paragraph 11.3 of the FOS terms of reference' which CommInsure resisted.  Unsatisfied with CommInsure's response, the issues were referred by the FOS to ASIC for further investigation and resolution as part of ASIC's broader investigation into issues concerning life insurance claims handling at CommInsure.
  • CommInsure's advertising and promotion of heart attack cover: A number of questions also concerned CommInsure's advertising and promotion of heart attack cover.  Counsel Assisting noted that ASIC has raised concerns that certain 'advertisements were misleading and deceptive, and that by those advertisements, CMLA [CommInsure] was also breaching its obligation to act in the utmost good faith in section 13 of the Insurance Contracts Act' as no indication was given that only some heart attacks were covered in the advertisements.  Asked whether she accepted that certain advertisements were 'misleading' to consumers about the coverage of trauma policies for heart attacks, Ms Troup agreed that this was the case.
  • Engagement with ASIC/ASIC's approach to enforcement: A number of questions in relation to the heart attack claim also concerned the approach taken by CommInsure to engagement with ASIC and more particularly, CommInsure's continued defence of its position.  ASIC's approach to enforcement was also questioned.  In relation to engaging with ASIC on the issue of 'misleading and deceptive' statements in advertising material, Ms Troup described the way in in which ASIC and CommInsure had 'come to an – agreement in terms of how to close to matter'.  This included agreement by CommInsure to make a voluntary community payment of $300,000 and CommInsure commissioning a compliance review of advertising and sign-off processes.  It also involved review and approval by CommInsure of ASIC's media release announcing the resolution of the issue (as a result of which, the reference to 'misleading and deceptive' statements was removed from the ASIC media release).  In relation to the community payment, it was alleged that ASIC could have pursued a heavier penalty/pursued enforcement action against CommInsure to resolve the matter.  The Commission heard that as a result 'CommInsure has never acknowledged that it engaged in misleading and deceptive conduct in that advertising'.
  • ASIC's approach to engagement: Counsel Assisting referenced part of an email from ASIC to CommInsure which said: 'Could you [CommInsure] please consider and let us know whether this is sufficient for CommInsure to resolve the matter, including by way of payment of the community benefit payment in the absence of infringement notices'.  Commissioner Hayne then asked Ms Troup understood by 'Let us know whether this is sufficient for CommInsure to resolve?' to which she responded  'I think it was the two organisations resolving the matter that was satisfactory for both companies'.  Commissioner Hayne said: 'The regulator asking the regulated whether the proposal was sufficient in the eyes of the party alleged to have broken the law.  Is that right?'   Ms Troup said: 'I guess in terms of we could have taken an approach of continuing to defend our position, and so this was the alternative'.

TAL case study

In her opening statement to the Commission Counsel Assisting Rowena Orr QC highlighted that a key question for consideration in this round of hearings would be 'what changes to the existing regulatory framework are necessary to improve the experiences of people with mental illness in dealing with life insurance companies’.  She also noted that the treatment of mental health and of pre-existing medical considerations was raised as a concern in a number of public submissions and by beyondblue and the Public Interest Advocacy Centre (PIAC). See: Governance News 17/09/2018]
A central area of focus in this case study, was the treatment by TAL of a customer who made a claim for income protection on the basis of 'general anxiety disorder'. A high level outline of some of the issues in relation to this is below. 

Income protection claim for 'general anxiety disorder'

  • Denial of claim based on undisclosed condition: The claim considered the case of a nurse (the insured) who made a claim under her TAL income protection policy for 'generalised anxiety disorder' caused by workplace stress.  The Commission heard that the insured's claim was supported by her doctor who found that her condition was a 'new onset illness' as distinct exacerbation of an existing condition.  Upon receipt of the claim, the Commission heard that a TAL case manager undertook a 'general review', as the claim was categorised as 'high risk'.  As a consequence of this, the insured was informed by letter that her case had been referred to the TAL legal team for investigation and potential remedies on the basis that she had a history of work-related stress.  TAL's conclusion was based on her two visits to the employee assistance program (which the Commission heard were unrelated to employment-based stress).  The Commission heard that the insured challenged this decision, and that eventually the claim became the subject of an FOS complaint.  The FOS found in favour of the insured on the basis that her isolated instances of stress did not need to be disclosed to TAL when she took out the policy and were unrelated to her later anxiety disorder.  TAL rejected the FOS' initial recommendations and the FOS then made a determination in the insured's favour requiring that TAL complete the assessment of her claim, and that any outstanding premiums should be deducted from any payment made should the assessment by successful.  Contrary to this, TAL required the nurse to pay $2215 in outstanding premiums for reinstatement of her policy before reassessing her claim.  FOS then wrote to TAL saying that the proposed approach appeared to be in breach of its direction.  The Commission heard that the claim took over three years (from the initial claim being lodged) to be accepted.
  • Use of surveillance: Following acceptance of the claim, and the commencement of monthly payments, the Commission heard that a TAL case manager took various actions which Counsel Assisting suggested, and which were admitted by TAL, to be 'inappropriate' and 'bullying' and which were intended to end payments to the insured.  These included: engaging a private investigator to conduct surveillance on the insured and asking her to complete a daily activity diary (despite medical opinion that doing so was worsening her condition).  The claimant was informed that completion of the diary was necessary to avoid delay in receiving her payments.  The Commission heard that the insured's case was then subsequently reviewed by a claims committee at TAL (which included the insured's claims manager) and that this committee determined, on the case manager's recommendation, that the insured claim was spurious (though the Commission heard that there was no evidence to support this) and decided to cease making payments on that basis.  The committee then wrote to the insured informing her of the decision, the fact that she had been under surveillance and stating that TAL would seek to reclaim moneys paid over the past two years.  Further complaints were made to the FOS by the insured.  TAL admitted to various issues in relation to this complaint including (among others) that 'refusal to participate in the FOS conciliation conference in the second dispute and continuing to maintain an allegation of fraud against the insured was…conduct that fell below community standards and expectations'.  In addition, Counsel Assisting asked a number of questions in relation to the incentives paid to case managers for ending claims including detailed questions about the key performance indicators (KPIs) used to assess case manager performance and the percentage of KPIs linked to ending payments/closing claims to which the witness was unable to give detailed responses.  Questions were also asked about the adequacy of oversight of the claims manager involved in the claim.  Counsel Assisting also alleged that the claim was indicative of broader cultural issues at TAL 'that the misconduct…admitted in connection with this claim is attributable to a culture within TAL that endorses and encourages attempts to limit TALs liability to pay out under claims'.  This was rejected by TAL on the basis that 'this is one individual claim.  And it does not happen to all our claims'.

Broader issue: use of surveillance in mental health claims

Counsel Assisting provided a summary of the information received by the Commission in relation to the use of surveillance by ten entities from 1 July 2013 to 30 June 2018.  Among other things, MS Orr said made the following observations.

  • Surveillance more likely to be used in mental health claims: Throughout the relevant period of the last five years, insurers more regularly engaged in surveillance activities in connection with mental health claims than in connection with physical health claims.  Of the 10 entities from which the Commission sought statements, surveillance activities occurred in mental health claims more than twice as frequently as in physical claims.
  • Impact of the Insurance Code of Practice: Ms Orr said that according to the data, since 1 July 2016, the number of claims in which surveillance has been used has decreased significantly.  She said that it was likely that this is due to the 'influence' of the Life Insurance Code of Practice, which obliges insures to use other methods of verifying information before arranging surveillance and places a number of limitations on the use of surveillance.

Provision of life insurance through superannuation: REST and AMP case studies

In her opening statement, Ms Orr Said that the REST and AMP case studies would consider issues connected with the provision of group life insurance policies through superannuation including: the design of the products and the role of superannuation trustees in the claims handling process.  

REST case study

This case study largely concerned the case of a REST member who suffered a total and permanent disability (TPD) (she became a paraplegic) and made a claim under TPD cover held through the fund (with AIA).  The claim was made five days after her insurance cover ended (due to exclusions in her cover, in this case because she had been out of work for 71 days and because her balance was below a minimum stated threshold) and the insurer notified the member that the claim was declined. The Commission heard that because REST was unaware that she had ceased her employment, the member had continued to pay insurance premiums with the result that at the time she was injured, she was paying premiums for a policy on which the insurer found, she was ineligible to claim.  Instead, she was found to be entitled to a partial refund of her premiums.  The claim eventually proceeded to the Supreme Court of NSW before it was eventually settled with the member.

  • Role of the trustee in the claims handling process: One of the lines of questioning pursued by Counsel Assisting concerned the role of REST as trustee, in the process of handling complaints.  Counsel Assisting asked AMP witness Lachlan Ross, 'what I’m trying to understand is what REST conceives its role as being.  Are you an intermediary between the two [the insurer and the insured/member], are you there to fight for the member, or are you there to defend the insurance policy on behalf of the insurer?'.   Mr Lachlan responded: 'REST's view is that insurance is very valuable to its membership.  And ultimately, it’s REST that has made the decision to provide this benefit to its members.  And it works very hard to make sure that any benefits that a member is entitled to are paid to the member', he went on to say that 'It [REST] works with the insurer and in RESTs case we have an administrator, an external administrator to design the claims process and monitor claims, make sure that any benefits members are entitled to are paid'.  More specifically, in relation to the claim described above, Counsel Assisting questioned whether 'at any point REST failed to act in the best interests of this member?' to which Mr Ross replied that 'With hindsight, I wish we had done more… I wish we could have got the benefit to the member sooner because REST is only interested in providing benefits to members who are entitled to them'.  Counsel Assisting also questioned whether the 'mistakes' made in relation to the handling of the claim were 'preventable due to record keeping' which Mr Ross agreed was the case.
  • Value of cover/REST systems: On a separate issue, Counsel Assisting questioned the value of income protection cover, offered through REST, for unemployed members given that 'under the REST group life policy, an income protection benefit is payable, and when it is payable, it’s calculated by reference to the member’s pre-disability income' ie if the pre-disability income is nil, 'necessarily the income protection benefit is nil'.  The Commission also heard that REST does not have a process in place to detect whether members are employed beyond being notified by the employer, with the result that unemployed members (whose employers had not informed REST) would continue to be charged income protection insurance.  Asked whether in these circumstances 'that the income protection insurance becomes a junk insurance product' Mr Ross said that he did not believe that it is.
  • Universal definitions: Counsel Assisting questioned whether Mr Ross saw any value in there being universal definitions for group life policies for key terms and exclusions, to which Mr Ross responded 'I think theoretically, yes, would be my answer to that.  But how that would work in practice, I don’t know.  But I think there is merit to that in theory, yes'.

AMP case study

Among the issues considered in this case study were: a complaint in relation to charging a non-smoker a higher premium and continued payment by deceased members of insurance premiums.

  • Non-smoker complaint: One issue investigated in this case study, concerned a complaint received by AMP from a member who had been charged at a higher premium (alleged smoker rate) for his insurance for the period 2005-2013 because he did not provide AMP with a non-smoking declaration at the time he transferred from coverage via his employer to a new policy.  The complaint was made on the basis that he was a non-smoker, and had not received enough notice of the option to make the declaration/pay the lower premium.  He requested a reimbursement of the additional premiums, which the Commission heard amounted to approximately $72,000.  The Commission heard that in the absence of evidence to the contrary, AMP members were (allegedly) assumed to be smokers and charged at the higher rate, despite ASIC's view in Report 529: Member experience of Superannuation that: 'Trustees should not presume that members smoke in determining their insurance premiums. There are low levels of smoking in the community, with only 14.5% of adults being daily smokers. In these circumstances, it is statistically appropriate to assume a person is not a smoker, in the absence of other information about that member or that group of members'.   The Commission heard that an AMP internal assessment of the complaint and request for reimbursement, suggested that it was 'unethical' not to include smoker status in annual statements to members, rather than on one occasion by letter (upon entry).  Asked whether he agreed that it was unethical, AMP witness John Sainsbury did not agree, but conceded that it would have been better if the annual statements did disclose the smoker status (the Commission later heard that in 2013 this change was made).  When AMP declined to reimburse the member, a complaint was lodged with the Superannuation Complaints Tribunal (SCT), and AMP maintained its position that the it 'acted fairly and reasonably in declining to refund the difference in standard and non-smoker rates'.  However, the SCT found in the members' favour, on the basis that (among other things) there is a legal requirement that 'the annual statement must give the member information that the trustee reasonably believed the member would need to understand his or her investment' and that the tribunal’s view is that it 'was not fair and reasonable for the trustee to refuse to refund to the complainant’s account in the fund the premiums that were debited to his account which exceeded those that would have applied if the complainant had provided a non-smoking declaration to the trustee'.  The member received back the differential premiums, together with the interest that had been lost on the use of that money.  Among the issues raised with Mr Sainsbury by Counsel Assisting were a number of questions about how the AMP structure enables the trustee to act in the best interests of members, including in relation to the example above, given that the administrator was also representing the insurer.  Counsel Assisting asked: 'is part of the problem here that AMP views these questions from the perspective of the insurer and not the perspective of the members who are paying for the insurance' and went on to ask 'I have asked you a question twice now expressly about the perspective of a trustee who is presumably advocating on behalf of the members and both occasions you have answered by reference to a consideration relevant only to the insurer'.
  • Timing of breach reporting/systems: A second issues considered concerned the fact that AMP systems do not cease charging members upon notification of their death, but have been 'coded' to continue charging premiums, and then refund them, once the claim is finalised.  The Commission heard that AMP had become aware of the issue in 2016, but has not yet reported the issue to either ASIC or APRA.  The Commission also heard that AMP reported to ASIC this year, some instances in which premiums charged to deceased members had not been refunded, or where the amount of the refund was not correct.  Counsel Assisting questioned whether continuing to charge premiums for group life insurance where the member had passed away was conduct falling below community standards and expectations, and whether the conduct was attributable at least in part to AMP's control systems – to which Mr Sainsbury agreed.  Mr Sainsbury disagreed that AMP 'has not acted efficiently, honestly and fairly by continuing to charge premiums in those circumstances expectations' which Mr Sainsbury denied was the case on the basis of the fact that it was not AMP's 'stated practice'.   

General Insurance

Further opening remarks introducing the topic of General Insurance

As flagged in her initial opening statement, Counsel Assisting Rowena Orr QC said that the case studies considered would examine issues relating to the way general insurance products are sold, how general insurance products are designed, and how claims are handled under general insurance policies (including cases deferred from round 4 of hearings concerning the experiences of people who have made claims under home insurance policies following natural disasters).  More particularly, Ms Orr said that the  hearings would focus on general insurance products that are sold to consumers, in particular, home insurance, travel insurance and add-on insurance.  Finally, themes concerning the regulation of both life insurance and general insurance would be considered. 
Ms Orr went on to provide an overview of the general insurance industry based in part on data that certain general insurance companies have provided to the Commission, summarised what consumers and consumer advocates have told the Commission about their experiences with general insurance and explained what ASIC, the Financial Ombudsman Service (FOS), and the General Insurance Code Governance Committee have told the Commission about their compliance roles in relation to general insurance.

Submissions received in preparation for this round of hearings.

In preparation for this round of hearings, Ms Orr said that the Commission sought witness statements from AAI, IAG, QBE, Allianz, and Youi, and from the three major banks that have general insurance businesses, CBA, ANZ and Westpac.  The entities were asked to tell the Commission about how they design general insurance products; how they sell and promote general insurance products; how they handle claims under general insurance policies; and how they remunerate the personnel involved in selling general insurance products and handling general insurance claims.  

Reverse Competition in sale of add-on insurance

Ms Orr noted that general has always been excluded from the conflicted remuneration provisions of part 7 of the Corporations Act which 'means that there is no limit on the amount that general insurance companies can pay in commissions in relation to the sale of general insurance products'.  Ms Orr went on to say that this exclusion has led to what ASIC has termed 'reverse competition' in relation to the sale of add-on insurance products through intermediaries (eg through car dealers).  Ms Orr explained that this refers to a situation where insurers compete on the price paid to car dealers in commissions to buy access to distribution channels, as opposed to competing on price or value of products offered to consumers.  Ms Orr went on to say that in the financial years from 2013-2015 ASIC found that insurers paid more than $600m in upfront commissions to car yard intermediaries for the sale of add-on insurance products.  In the same period, the insurers collected $1.6 billion in premiums from those products, and paid out only $144 million in claims.  In addition to this, Ms Orr also said that submissions provided information about other forms of monetary benefit given to AFSL licensees or AFSL representatives eg standard commissions calculated as a percentage of insurance premiums written, as well as profit share payments, additional commissions, and volume-based incentives and outlined the amounts paid by insurers.

Reasons for denying claims

The most common reasons why insurers denied claims were identified in submissions as including:

  • motor vehicle insurance claims: a specific exclusion in the wording of the policy which prevented the claim being covered (eg where the claimed damage was found to result from lack of maintenance rather than being caused by an accident), non-disclosure by the claimant at the time of purchasing the policy, or because the customer did not meet a condition of the policy which related to the specific circumstances of the claim.
  • home and contents insurance claims: claims were commonly denied because there was no coverage for the particular claimed event or item under the policy, or because a specific exclusion or exception in the wording of the policy prevented the claim from being covered (eg where the damage was found to be caused by wear and tear rather than by the claimed event.
  • travel insurance claims: claims were commonly denied because there was no coverage for the claimed event or item under the policy, because a specific exclusion or exception in the policy prevented the claim being covered, or because the customer was unable to prove loss or ownership of the claimed item.

Decline rates

Ms Orr said that claims made under travel insurance policies are declined the most frequently (of all kinds of claims) with more than one in every 10 claims declined.   Motor vehicle claims and home and contents claims were declined in full at a rate of .27% and 5.77% respectively.  

Closure rates

Many of the problems associated with the handling of general insurance claims can arise after a decision about the claim has been made.  Claims are closed most quickly in relation to travel insurance claims, averaging approximately 41.18 days after receipt of the claim.  Claims made under motor vehicle and home and contents policies take significantly longer to resolve and are closed at approximately 64 and 65 days respectively.  

Areas of concern raised in public submissions

Of the 8977 public submissions received by the Commission to 14 September, 620 were identified as relating to general insurance.  Of these, the three most common types of general insurance policies referred to were: home and contents insurance; car insurance; and travel insurance.

  • Home and contents insurance – delays/refusals to pay out on policies: The most common issues raised in the public submissions concerned claims handling processes.  Many submissions referred to delays in handling insurance claims and refusals to pay out on insurance policies.  The negative impact of ongoing delays in processing claims and undertaking repair work, use by insurers of third parties to undertake repairs, the selective use by insurers of assessors or reports from professionals, insurers' requiring that particular service providers be engaged to undertake repairs (and the associated delays/issues with repair quality) were areas of concern.  In addition, Ms Orr said that a number of the public submissions related to the handling of insurance claims following natural disasters.  Many of which raised similar claim handling concerns.  Some also referred to pressure from insurers for policyholders to accept cash settlement payments which did not reflect the true cost of the damage or were substantially below the claim amount and which left organisation of repairs within the settlement amount to the consumer.
  • Travel Insurance — treatment of pre-existing conditions/denial of claims on the basis of pre-existing conditions: The most common concerns in relation to travel insurance related to the treatment of pre-existing conditions, including charging high premiums to cover such conditions or a denial of claims on this basis.

Issues raised by consumer organisations

  • Concerns in relation to the disclosure of policy terms: CHOICE noted that long and complex terms and conditions in the product disclosure statements for insurance policies often result in consumers facing loopholes or exceptions that mean they don’t receive the support that they expected from their insurance policy when they make a claim.  CHOICE identified use of non-standard definitions as one contributor to a lack of understanding on the part of consumers about what they are covered for.  The Financial Rights Legal Centre (FRLC) told the Commission that it commonly hears consumers complaining that they have been caught by the fine print of their insurance policies.  It considers that disclosure documents are overly complex, long and ineffective in empowering consumers to make informed choices at the point of  sale, and that rather than promoting consumer understanding, disclosures allow insurers to manage their liability and reduce claims’ outcomes.
  • Concerns in relation to sales practices for general insurance: The Financial Rights Legal Centre (FRLC) and the Consumer Action Law Centre (CALC) both told the Commission that general insurance sold under a no advice or general advice model results in the widespread selling of insurance that is unsuitable for the people buying it.  CALC considers that this leads to poor outcomes for consumers who are provided with insufficient or inadequate information to inform their decision or to engage with the complexities of the products.  The Financial Rights Legal Centre also told the Commission that this model leads to significant under-insurance as consumers are not fully informed about the limitations of their cover.
  • Claims handling: Consumer Action said that many consumers are discouraged from making claims in the first place because of a fear that the claim would lead to an increased premium.  It also said that the two stage internal dispute resolution processes adopted by general insurers can deter people from pursuing legitimate complaints as the complaint process is seen as laborious.
  • Sale of add-on insurance.  CALC told the Commission that these products are often expensive compared to insurance bought directly from an insurer, and that they are often low value.  FRLC also raised concerns in relation to the selling practices for these products including keeping consumers captive until after a sales pitch is completed, using the cooling off period as a selling point, deliberately masking the cost of insurance in loan payments, and serious deficiencies in scripts used for sale of consumer credit insurance products.
  • The experience of clients in relation to national disasters: The submission from the FRLC raised issues relating to the price of premiums for flood coverage.  It expressed concern that events similar to the floods in 2011 are likely to occur again with significant numbers of properties uninsured for flood as a result of customers being unable to afford appropriate cover, being refused cover, or opting out of cover without appreciating the full extent of their risk.

ASIC enforcement actions in relation to general insurance.

ASIC told the Commission that it has taken action on 32 occasions since 1 January 2008 that it described as enforcement action against general insurers.  Ms Orr then gave an overview of these actions.  The actions included: issuing three sets of infringement notices in respect of misleading advertising of insurance products; the imposition of additional conditions on the licence of two insurers, the acceptance by ASIC of an enforceable undertaking from one entity in relation to the misconduct of sales people who had made misleading statements to consumers and sold unsuitable insurance policies; and 26 requests by ASIC for entities to take remedial action.

Financial Ombudsman Service (FOS) 

FOS reported an increase in the number of general insurance disputes it received in the 2016 to ’17 year, up by 2612 disputes on the previous year, or approximately 38%.  FOS accepted 8756 general insurance disputes in 2016 to ’17, accounting for approximately 35 per cent of all disputes accepted by FOS.  FOS reported that the increase in general insurance disputes has been due to a continuation of industry specific issues, including higher claim numbers, organisational changes, and the impact of Tropical Cyclone Debbie.
FOS told the Commission that the periods with the highest number of accepted disputes have been linked to the occurrence of natural disasters, particularly during 2010 and 2011.  
The main issue in these disputes was confusion over the extent of cover due to the various definitions of flood and storm.

Allianz case study 

This case study was largely concerned with 'incorrect and misleading statements made by Allianz in relation to its travel insurance products and the compliance processes within Allianz' Ms Orr said.  

The Commission heard that as part of a website redesign in 2015, the content on a website through which customers could purchase various forms of insurance, was also changed, but was not reviewed and approved by Allianz before it went live.  A number of issues were then identified by Allianz a week after the website became accessible to the public.  These included issues relating to disclosure of conditions not being sufficiently prominent/misleading and the absence of Corporations Act disclosures.  During the period between December 2015 and May 2018, the Commission heard that Allianz undertook 'a series of reviews that either identified additional misleading content or confirmed the results of the previous reviews' and that during the period, the 'incorrect, misleading and deceptive content was accessible the public' on the website.  Allianz did not consider taking 'the offending parts' of the website down during this period and did not make a report to ASIC during this period.  
In addition, the Commission heard that Allianz had received advice, prior to the website redesign concerning issues in relation to advertising material. For example, prior to the website redesign, advice from MinterEllison had raised issues in relation to the use of the word 'unlimited' in advertising material, but the content was uploaded despite this.  The Commission heard that a breach report was made to ASIC in June of this year and that 'all the incorrect, misleading and deceptive statements' have now been removed from the website.

  • Delay in rectifying the breaches/reporting to ASIC: A number of questions were asked by Counsel Assisting concerning the delay in addressing the issues identified on the website.  Counsel Assisting alleged that insufficient priority was given to rectifying the issue — to 'protect the bottom line' — despite the fact that Allianz was 'contravening financial services laws' in not doing so.  In addition, questions were asked concerning the decision not to alert ASIC to a potential breach as required by s912D Corporations Act 2001 (Cth) when the issues were identified (which Allianz witness Michael Winter agreed had been the wrong decision).  A number of questions were also raised in relation to the accuracy of the breach report, Counsel Assisting alleging that it did not make full disclosure (because it omitted to identify all previous similar breaches).
  • Remediation: The Commission heard that customers impacted have not yet been identified, but that ASIC data indicates that 'in excess of two million travel insurance policies' were sold during the period when the potentially incorrect or misleading content was on the website.  The Commission also heard that customers have not yet been remediated, but that Allianz is 'very close' to meeting with ASIC on remediation plan.
  • Oversight/Accountability: Asked whether those involved in the 'failures to rectify the incorrect, misleading and deceptive content' had faced internal disciplinary consequences as a result of these issues, Mr Winter said that they had not.
  • Compliance processes more broadly within Allianz: Chief Risk Officer Lori Callahan was also asked a series of questions concerning 'what is happening with this breach with regard to rectification of the issue itself, remediation of customers and then the strengthening of the controls to prevent it from happening again'.  Counsel Assisting alleged Allianz has focused on technical or legal compliance' and that insufficient priority and resourcing had been given to the compliance function over a number of years.  The Commission heard that Allianz is in the process of reviewing 'open matters' going back to 2012, and that 'a framework or a foundation' has been put in place to address historical compliance issues/strengthen compliance function and that Allianz is 'at the start of that process'.  The Commissioner asked: 'Am I to take the burden of the evidence you have just given as an acknowledgement that Allianz does not now have adequate risk management systems?' to which MS Callahan agreed.   A series of questions were also asked about two reports into the compliance function at Allianz including an independent report, completed by Deloitte (intended to be submitted to APRA).  The Commission heard, that the report was critical of Allianz processes/systems, and that Ms Callahan requested that it be withdrawn.  It was alleged that the reason for Ms Callahan's request was that the report contained statements that were inconsistent with statements to ASIC. Ms Callahan maintained that this was not her motivation.  In addition, a number of questions were asked concerning the adequacy of breach reporting systems and the adequacy of risk and compliance functions.
  • Add-on insurance via car dealerships: Another issue explored was 'add on' car insurance sold through car dealerships.  Ms Callahan admitted that Allianz's conduct in this area is below community standards, as insurance was sold to many customers who would be unable to claim, or were sold excessive or otherwise unnecessary cover and that Allianz expects to remediate a number of customers.  Ms Callahan admitted that was an indication of flaws in monitoring some of the distributors and underwriters that sell its insurance products.  Ms Callahan also said that the company is already investing in improved surveillance and monitoring of its third party distributors.

IAG case study (Swann case study)

This case study concerned issues in relation to the sale of add-on insurance products sold through car and motorcycle dealerships and the remediation paid to customers, by Swann after ASIC raised concerns.  
[Note: The action in question appears to be the action referenced in ASIC's 19 December media release.'] 
The Commission heard that IAG has since withdrawn from the market.
Among other issues, questions focused on: sales practices (training/oversight of those selling the products); the payment of incentives to car/motorcycle dealerships and their employees to sell the insurance products (the Commission alleged that this led to outcomes that were not always in the best interests of the customers); product design (the Commission heard that ASIC raised concerns); the approach IAG took to addressing concerns raised by ASIC and the approach taken by IAG to monitoring and oversight.

  • Value of add-on insurance products: IAG witness Benjamin Bessell was asked to comment on whether add-on insurance products are 'of sufficient value to a sufficient number of consumers to warrant them being in the market?' Mr Bessell responded that 'if things like commissions are capped, product disclosure statements are more easily understood, some of the benefit periods are perhaps extended or even removed from a policy.  I think there are a combination of factors there that would – would ensure there is greater value for a – for a consumer'.
  • General advice: Asked to comment on the issue of giving general advice is problematic in ensuring consumers receive products suitable to their needs, Mr Bessell said 'I think it’s an ongoing discussion within the industry, and will be an ongoing discussion for some time.  I think the – the general advice and personal advice model has its place.  Is it perfect?  No, I don’t think it is.'

[Sources: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Round 6: 12 September 2018 – Draft Transcript for Day 52; 13 September 2018 – Draft Transcript for Day 53; 14 September 2018 – Draft Transcript for Day 54; 17 September 2018 – Draft Transcript for Day 55; 18 September 2018 – Draft Transcript for Day 56; 19 September 2018 – Draft Transcript for Day 57]



Point of View: insights into key issues and challenges facing business today.

In this series of interviews with MinterEllison partners we hear their perspective on key areas of interest to our clients and the business community.