Jenée Tibshraeny on how life insurance will continue to be 'sold' and not 'bought' without more transparency

Jenée Tibshraeny on how life insurance will continue to be 'sold' and not 'bought' without more transparency

By Jené​e Tibshraeny

‘Insurance is sold, not bought.’

This is the age-old mantra that remains the go-to for those required to make insurance-related small talk.

It makes sense. Normal people do not start their days feeling inspired to go insurance shopping.

Dwelling on what would happen if you got sick or died, knuckling into the detail of insurance policy documents and getting quotes aren’t particularly enthralling activities.  

Insurance is therefore only something you think about at a major life event, when you see your financial adviser, visit your bank or see an ad on Facebook. 

Yet the problem with insurance being ‘sold, not bought’, is that you - the consumer - is not the empowered one in the exchange.

By not doing the ‘buying’, you aren’t identifying what you need, weighing up the options and asking the questions to make a purchase you’re happy with.

Why is it like this with insurance and not other equally as mundane necessities like power, internet or banking services?

I believe it’s because consumers don’t have enough information to understand and take ownership of our insurance affairs.

Unfortunately I also believe the insurance industry is happy with this power imbalance.

It claims to be committed to making insurance easier to understand, but when push comes to shove, it sees transparency as an impediment to it achieving a healthy bottom line.  

Review of Aussie life insurers a cause for concern

The Australian Securities and Investments Commission (ASIC) on October 12 published the findings of an industry-wide review of claims handling in the life insurance sector.

ASIC collected a whole heap of data including figures around what various insurers’ claims decline rates were for different products.

It found declined claims were highest for Total and Permanent Disability (TPD) cover. TPD is a lump sum benefit paid if you suffer an illness or injury that leaves you totally and permanently disabled.

The average TPD decline rate was 16%, with one insurer having a rate as high as 37%. In other words, it declined one-in-three of the TPD claims it received.

While ASIC didn’t identify the insurers in its review, Westpac's life insurance arm, BT Financial Group, has been outed as the big TPD decliner.

ASIC also found the average decline rate for trauma cover was 14%, income protection 7% and life insurance 4%.

As a caveat, it noted different insurers used slightly different definitions for ‘declined’ claims.

NZ insurers refuse to reveal decline rates

So how concerned should we be in New Zealand? Could life insurers here have similar decline rates? Many of our insurers are Australian after all.

Without such data collected by our regulators and industry bodies, I asked our main life insurers to tell me what their TPD claims decline rates were.

To ensure I was comparing apples with apples, I also asked them to explain how they calculated their decline rates.

Perhaps unsurprisingly, all but one insurer refused to provide this information. Here’s what they said:

AA Life and Asteron Life (part of Suncorp): “We are unable to provide a breakdown by policy type, but our acceptance rate overall for all claims assessed across Asteron Life and AA Life generally sits at between 94-96%.”

AIA: It’s too hard to extrapolate the data and TPD isn’t a core product for AIA.

AMP: “On this occasion we're not going to take part in the story.”

ANZ OnePath: “We don’t compile this data. We keep a record of declined claims for Life Insurance and Non-Life Insurance, but do not break this down for TPD.

“These high levels stats are used by our actuaries and are commercially sensitive.”

Cigna: “We do not offer TPD as a standalone product which is why we can’t respond to your query. Some of our products do have an element of the benefit included as a package of wider benefits but it is impossible to extract the data accurately enough for your enquiry.”

Asked why it chose not to sell TPD, Cigna declined to comment.

Fidelity Life: No response.

Partners Life: No response.

Pinnacle Life: “Pinnacle Life’s decline rate is currently 0%.  That is, we haven’t declined any TPD claims. In saying that, our volumes in total for this product are relatively low. 

“In a TPD claim we would consider a case declined if we had received a full claim form and medical notes, had it fully assessed by our underwriters and chose not to admit the claim. We would not normally consider not paying fraudulent claims as “declines”.”

Sovereign: “We don’t share data at the level you’ve requested.

“I can, however, provide you with our total claims acceptance rate (for all claims) which is 94% for FY15/16.”

How are consumers meant to know which insurers have better payout histories?

I commend Pinnacle Life for disclosing its decline rate. However, we don’t know whether it discourages those who it believes won’t be paid out to withdraw their claims at the underwriting stage, so they aren’t officially registered as claims.  

While ANZ OnePath was the only one to acknowledge it, I believe all insurers are so tight-lipped because they deem the information commercially sensitive.

I understand insurers may be hesitant about releasing data that could be misinterpreted, or used out of context. Yet an insurer’s decline rate is a material piece of information consumers are entitled to know.

When you buy insurance, the main thing you want to know is that the insurer will pay out when you need it to. Knowing which insurers have better track records of doing so is paramount.

Insurers in New Zealand may have exceptionally low decline rates for life insurance products, but one can’t help but be suspicious when they withhold this information.

I have also heard anecdotal evidence of decline rates being particularly high among older ‘legacy’ TPD policies.

Industry body: NZ regulators don’t need to be as heavy-handed as ASIC

The Financial Services Council’s (FSC) executive director, Owen Gill, says there’s “no demonstrated need” for regulators to take the actions they’ve taken in Australia in response to there being such a large variation in decline rates among insurers.

ASIC says it will “undertake targeted surveillance” to understand why certain insurers have such high decline rates. It will also do more reviews on TPD and establish a consistent public reporting regime for claims data.

Yet Gill admits “establishing the overall position in New Zealand for declined claims” would be useful for providers and regulators.

ASIC has also committed to reviewing the “currency and appropriateness” of life insurance policy definitions and advertising to make sure “the messages are aligned with the definitions and cover provided”.

Gill says this issue is “difficult to solve” in the short-term, given the number of legacy policies, but it “may be possible” to “standardise some straight-forward definitions”.

“The biggest issue, in definitions, is in making policies comparable, for consumers. This would require a careful, all-of-industry response, to achieve a comprehensive response, and would take some time to achieve and implement.”

In terms of claims handling, ASIC says it “expects” insurers to “ensure that incentives and performance measurements for claims handling staff and their management are not in conflict with their obligation to assess each claim on its merit”.

Gill says there’s “certainly no evidence of conflicted incentives being offered” in New Zealand.

“Nonetheless, recently the FSC proposed to MBIE a joint industry-Government approach, to some sales practices in insurance sales.” 

Both Gill and Sovereign also point out there are some constraints to comparing the Australian and New Zealand markets when it comes to TPD specifically, as TPD forms part of the mandatory superannuation insurance offering across the Tasman. TPD sales are therefore more modest in New Zealand.

Yet Sovereign notes there are some challenges with TPD.

“Establishing the permanency of some medical conditions (e.g. mental health claims) may involve a lengthy process and input from medical specialists and occupational therapists,” it says.

Generally speaking, it says claims are often declined if the condition isn’t covered as part of the policy, the claim occurs during a "stand down" period or if the claimant hasn’t disclosed material information about themselves.

FMA has power to regulate misleading conduct and representations

So will our regulators pull finger in the same way ASIC has?

The Financial Markets Authority (FMA) says that under the fair dealing provisions of the Financial Markets Conduct Act, it has the remit to look at issues related to “misselling and misleading representations in the insurance sector”.

“That’s why our first focus on this sector was on sales practices and reviewing the extent to which insurance replacement business and churn is an issue in New Zealand,” it says.

“The FMA would also be able to take action on misleading conduct and representations relating to claims handling and pay-outs.”

Yet it notes: “It’s not easy to make direct comparisons between ourselves and ASIC, as they have an extensive remit when it comes to insurance regulation.

“As with other areas of the broader finance sector, regulatory oversight is a shared responsibility with other agencies and for insurance this includes the Reserve Bank of New Zealand with prudential licensing and supervision.”

Transparency the change-maker  

My take on this is that the FMA has limited resources, so needs to prioritise what it investigates.

I suspect it might start collecting decline rates if it sees this to be a major issue and there’s enough of a public outcry around it, as there was around the issue of churn.

In the meantime, it would be great if the industry front-footed the situation, and the FSC collected and published claims data as a starting point.

As for revealing this data to a journalist on request - I am disappointed this was too much to ask for.

If insurers have nothing to hide, and sincerely put customers first, why don’t they put their cards on the table?

We need informed transparency for insurance to be ‘bought’ and no longer ‘sold’. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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You have got it in ONE

Insurance is sold not bought.

People only consider insurance at the time the tragedy
occurs. Too late mate

Perfect article to highlight the need that people need advice. I hope people do not go out now and only shop for TPD/Life cover. Income protection, other monthly disability benefits and lump sum trauma policies are generally much more likely to pay out. Insurance (with the exception perhaps of house, contents, car insurances) is not a commodity - it is a complex area and that why advisers won't disappear anytime soon IMHO.

Problem is much insurance is a rip off - too expensive and the Insurance companies spend lots trying to avoid having to pay out, Christchurch is a good example. They are too keen to be able to declare unpaid premiums as profit, proving the degree of rort that insurance has become.

Also why isn't a lack of insurance policy considered to be "Self Insurance"?

Utmost good faith for thee but not for me.

Failing to disclose every little bit of your medical history may see your claim classed as 'fraudulent' and thus rejected (but not 'declined' according to Pinnacle Life).

Problem is the media focuses on the claims that are declined not the ones that are paid - and there are plenty. If you want to self insure that's your choice.

No it is not (Self insurance is a choice) - there are many areas that require insurance or proof of insurance. Admittedly many do not out of neglect, ignorance, or cost. But a few choose to "self-insure", that is carry all liability themselves.

As to the requirement for an insurance policy, remember the Government refused to payout on "uninsured property" in Christchurch after the earthquake, ignoring the fact that insurance companies wouldn't insure land. So undeveloped property being suddenly zoned red and instantly worthless was not covered. Thus just like the banks, governments are effectively forcing people to buy into a private business rort.

Just to clarify – Pinnacle Life does not discourage people from making TPD claims. As mentioned in our response to the query, TPD policies are a relatively small percentage of our total policies. as a comparison, our life insurance claim approval rate currently sits at around 98%, and is where the majority of our claims occur..

Life Info's not-for-profit consumer website was publically launched this week: www.life-info.org.nz. Its purpose is to assist consumers understand the various life and health insurance options available. In section "Insurance 201" it tells consumers some of the areas they should be aware of when purchasing a product, including TPD.

In regard to what ASIC has raised, readers should study the letter to them written by the respected commentator Sue Laing, and this can be viewed on www.riskinfo.com.au.

Thanks for your feedback KCS. Sue Laing raises an interesting counter argument:

Under the heading of ‘Be Careful What You Wish For’, Laing tells the regulator the risk store is “…extremely concerned regarding the serious potential for irreversible damage to the sustainability of the industry…” if it proceeds with publishing individual claims decline rates.

The underlying reason for Laing’s concern is that a ‘leader-board’ of decline rates will create competition between insurers to avoid rejecting claims in order to achieve a higher placing. She believes this is a dangerous precedent that would lead to an unsustainable pricing structure that could only be addressed by price hikes. Laing writes:

“In other words, pressure from consumers on one side [to be presented with the ‘best’ decline rates to choose from] plus pressure from claims outgoings [to have the ‘best’ decline rates by paying out more than should be paid] from the other side can only mean one thing … premiums will have to rise. Sustainability will be the victim, and this will snowball into an affordability backlash from advisers and consumers alike.”