Last April, the Federal government provided ASIC $57 million to launch the ‘HMAS Enforcement and Surveillance’. This ship is currently steaming around the financial services seas and has already taken aim at a number of issues facing the life insurance, general insurance and banking sectors.
On 17 March 2017, in a speech at ‘Money Management’s Claims Handling Breakfast’, Peter Kell fired a shot across the bow of the life insurance industry, aimed at claims handling by life insurers.
Mr Kell, the Deputy Chair of ASIC, reiterated a recent common theme of ASIC – its desire to see improvement in the underlying culture of the life insurance industry. He stated:
Clearly, claims outcomes are of key importance to consumers, as this is when the value of the policy is realised. Our work in this area confirms the importance of a strong firm culture that puts consumers first.
This is not the first time ASIC has raised concerns with claims handling by life insurers. In October 2016, ASIC released Report 498: Life insurance claims: an industry review which contained an industry wide review of claims handling in the life insurance industry. Based on the findings in that report, ASIC determined that it needs to manage or resolve certain issues which it perceives exist in life insurance claims handling.
For instance, ASIC is concerned about scenarios where performance benefits for claims handlers are linked to the declining of claims. We suspect any practice of insurers rewarding claims handlers merely for declining claims is extremely uncommon in the Australian life insurance industry, but we do not doubt that claims handlers are rewarded for effectively managing the claims of the insurer. Effective claims management is essential, especially considering that claims represent such a significant portion of an insurer’s expenses. While it would be strange for an insurer not to manage claims in the most cost efficient manner, what must be balanced is whether minimising costs comes at the expense of properly assessing and accepting valid claims and facilitating a positive consumer experience.
The long term solution to this comes back to ASIC’s stated goal of improving the culture in the industry around claims handling.
While the actual change of culture in the industry needed to improve results may be minimal, a broader issue is addressing public perceptions of the industry’s culture. It is trite to say that the industry should aim for all consumers to have a positive claim experience, but life insurers must also ensure that they conduct proper reviews of all claims to determine whether they are in fact valid because the payment of valid claims is positive and beneficial for all policyholders. The reality is that a proper review of a claim, even in the best culture, may still create tension between the life insurer and the policyholder, in particular around TPD and trauma claims when the policyholder desires a quick resolution, but significant evidence must be obtained and considered by the life insurer before making its determination.
As a guide, ASIC would support a system where claims handlers can review a claim and identify quickly which claims are valid and should be paid. However, it must also be acknowledged that there are categories of claims which require further review and that claims handlers should be rewarded for their ability to efficiently manage these claims, even when the end result may be a declined claim. Therefore, any rewards for claims handlers should be based not on the number of declines, but on the number of “correct” determinations.
With the aim that claims are handled in the appropriate manner and that valid claims are not denied, the industry will soon operate within the framework of the Life Insurance Code of Practice. This self regulation should improve consumer experience – however, ASIC is also considering further regulation. In particular, ASIC has requested legislation or regulations that will:
- Extend ASIC’s authority by amending the definition of ‘financial services’ to include claims handling (which is currently excluded);
- Enable the unfair contract terms provisions in the Australian Consumer Law to apply to insurance contracts; and
- Apply changes to the duty of utmost good faith.
ASIC is seeking to include claims handling in the definition of ‘financial services’ so that it may review unnecessary or extensive claims handling delays, challenge insurer incentives systems that promote conflict with the requirement to settle claims based on merit, and regulate the use of surveillance. Whether ASIC is successful in this request will likely be confirmed before the end of 2017 if new legislation on this issue is introduced.
Finally, ASIC is also considering the need for the industry to publicly report its claims results. The industry is working with ASIC to ensure that any data reporting regime, to be effective in educating consumers, must be reliable, compare “like to like” and be released at the appropriate time in the claims life cycle.
To return to the opening metaphor, failure by the life insurance industry to respond to, and enact, claims handling measures in line with the measures foreshadowed by ASIC may result in the regulator’s next shot being a direct hit on the industry.
This article was written by Mark Kimberley , Partner.