Risk products: The changed face of the life insurance market and new, more flexible, remedies for non-disclosure or a misrepresentation

30 June 2016

The modern life insurance market offers almost wholly risk products. This has been a development of the past 30 to 40 years which has fundamentally altered the products available in the market. This has had major consequences for the legal remedies available for non-disclosure or a misrepresentation with recent amending provisions.

The 2004 Cameron and Milne report, Review of the Insurance Contracts Act 1984, (Cth) – Final Report on Second Stage: Provisions Other than Section 54 (Australian Government, The Treasury, June 2004), led to the 2013 amendments to the life insurance sections of the Insurance Contracts Act. The authors referred in section 2.130 to a submission to the Review Panel which indicated that, whereas in 1972 whole of life and endowment insurance represented 95.3 per cent of sales that year, by 1996 whole of life and endowment products represented 6.1 per cent of sales. At the time of the publication of Australian Law Reform Commission Report No. 20 in 1982 the major part of life insurance business was endowment and whole of life policies. Endowment policies pay on a nominated date and are investment account and investment-linked products, which typically have surrender values. Term life insurance products, on the other hand, provide for an insurance benefit payable only on death without an investment or savings component. In 1977 the proportion of new business constituted by term insurance was less than 15 per cent. By 2004, the proportion of new long term life insurance represented by disability insurance (including crisis or trauma insurance, permanent and total disablement, partial disablement and income protection) was 94 percent. Since 2009, the industry has seen a steady increase in the market share held by risk products, with the exception of a sharp decline in 2014. The downturn in 2013 and 2014 affected individual disability income protection and group death/TPD insurance predominantly. Recent quarterly data from March 2016 indicates that both group lump sum and individual lump sum risk products have experienced an increase in market share since 2013 and 2014 and the apparent recovery for risk products has exceeded previous years. This was predicted by APRA in its Life Insurance Industry Overview in 2014.

The Review Panel commissioned by the Federal Government in September 2003 to review the Insurance Contracts Act considered the remedies for misrepresentation and non-disclosure concerning “non traditional” contracts of life insurance under section 29. The Review Panel agreed that the remedies available to life insurers under the Insurance Contracts Act for non-disclosure and misrepresentation did not adequately take into account the changed nature of life insurance products. The Review Panel recommended a different approach to remedies for misrepresentation and non-disclosure according to the type of insurable event. These short-term or non-traditional types of life insurance policy were considered better dealt with using remedies akin to those available for general insurance policies. “Traditional” is a term used in the Explanatory Memorandum to the amending Act to describe a contract of life insurance with a surrender value or providing death cover. For contracts of life insurance that cover mortality or contain a surrender value, it was recommended that the three year period in which an insurer can avoid a contract should remain. However, for contracts of life insurance that do not cover mortality or do not contain a surrender value, it was recommended that remedies equivalent to those applicable under s 28 to general insurance be adopted with modification.

The treatment of traditional contracts of life insurance was largely not affected by the amendments to s 29. The old s 29(1), 29(2) and 29(3) continue to apply to all contracts of life insurance. Subsection 29(3) has been amended and allows avoidance within three years for conduct which is not fraudulent. An insurer no longer has to prove that it would not have been prepared to enter into “a” contract of life insurance if the duty of disclosure had been complied with or the misrepresentation had not been made. Under the new s 29(10), “traditional” contracts of life insurance which have a surrender value or provide cover on death, the insurer may not vary the contract under s 29(4) more than three years after entry into the contract. The new remedies apply to “non-traditional” contracts of life insurance.

The Regulation Impact Statement to the Insurance Contracts Amendment Bill 2013 noted submissions to the Review Panel that the remedies for non-disclosure were inadequate and inappropriate for many life insurance products in a market characterised by the:

  • Increasing popularity of risk-only products such as income protection and total and permanent disablement, as well as trauma / critical illness and term life insurance;
  • Practice of some life insurers of selling multiple types of cover within one contract (‘bundled contracts’);
  • Incidence of life insurance products allowing for more than one life insured; and the
  • Increasing proportion of policies taken out on a short term basis.

The reports were critical of insurers having to resort to remedies to allege fraud after the policy had been on foot for three years. However, it was accepted that the existing regime should be maintained for surrender value and death cover policies. Other submissions were to the effect that section 29 remedies were not sufficiently flexible to allow avoidance of the contract by the insurer or correction of one cover that is affected by a non-disclosure or a misrepresentation without affecting the other covers bundled in the same contract.

Under the amended section 29 of the Insurance Contracts Act a life insurer will continue to be able to avoid a policy within the first three years. These amendments applied to policies entered into, or varied, after 28 June 2014. However, an insurer can at any time vary a life policy in accordance with the formula in sub-section 29 (4).

If the insurer does not avoid the contract in the first three years under sub-section 29(3) or vary the contract in accordance with the formula in sub-section 29(4), the insurer may now vary the “non-traditional” contract to place it in the position it would have been had the misrepresentation or failure to comply with the duty of disclosure not occurred. The ability to vary the contract is only available if the varied position of the insurer is not inconsistent with the position in which other reasonable prudent insurers would have been in respect of similar contracts of insurance if:

  1. They had entered into similar contracts of life insurance to the relevant contract; and
  2. There had been no failure to comply with the duty of disclosure and no misrepresentation by the insureds under the similar contracts before they were entered into.

This means that there will be an increased role in litigated claims for expert underwriting and other evidence relating to policies which are available in the market. Under the new s29(7) the position of the insurer of the varied “relevant contract” must not be inconsistent with the position in which other reasonable and prudent insurers would have been if they had entered into “similar” contracts and if the conduct had not occurred. A contract is similar to the “relevant contract” under s s29(8) if it provides insurance cover that is the same as, or similar to, the kind of insurance cover and was entered into at, or close to, the time the relevant contract was entered into. Insurers will now be required to call expert evidence from underwriters and other life insurance professionals or executives to give evidence of how other reasonable prudent insurers would have varied a similar contract.

Written by Matthew Harding, Partner and Elizabeth Esber, Associate.

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