The only thing worse than no insurance is junk insurance

Insurance within superannuation is turning out to be a serious “sleeper’’ issue that will impact on the lives of millions of Australians.

First there was the issue of life and total and permanent disability insurance being automatically stripped out of many accounts, particularly inactive accounts.

Now the corporate watchdog, the Australian Securities and Investments Commission (ASIC), is warning that around half a million Australians are locked into paying premiums for total and permanent disability insurance that is effectively “junk.’’

The problem is so bad that ASIC wants the Federal Government to press ahead with legislation to bring such insurance under its jurisdiction following a raft of complaints about application denials of “junk” total and permanent disability policies bought inside superannuation.

Full price paid for junk policies

The ASIC review found that while the Australians concerned – often high risk and casual workers – were paying the same insurance premiums as those with good coverage, the cover provided by junk policies offered such poor value for money that people could not rely on the cover.

ASIC Commissioner Sean Hughes said despite these people paying full price, when it came time to claim they were facing some highly restrictive terms.

Some of the problems stemming from such insurance included higher than expected claim decline rates, restrictive TPD definitions and problems in the claims handling processes that resulted in many applications being withdrawn.

He said the regulator had instructed insurers and fund trustees to remove definitions in policies that “are so restrictive as to make the policy unlikely to benefit consumers”.

ASIC powerless to do much about junk policies

Mr Hughes said when a person takes out a TPD policy there was an implicit promise that at their time of need the insurer should pay.

“However, the conversation is started at the wrong place. It’s about how can we decline this claim, how can we deny cover,” he said.

Mr Hughes urged the government to press ahead with a recommendation of the Hayne Royal Commission to bring claims handling under its jurisdiction.

“We would encourage government to ensure that the claims handling exemption which is currently applied in relation to the definition of financial services is removed, so that ASIC can acquire jurisdiction over it,” he said.

“At the moment we are hamstrung at being able to do much about it.”

Claims processing also a problem

“Insurers need to streamline procedures, to adopt models for claims handling that are much more empathetic and understanding – and tailored to the individual circumstances of policyholders.”

TPD insurance is held by a lot of Australians with more than 13 million receiving automatic cover via their super.

It is a huge business too, with TPD premiums totalling $3.5 billion with consumers making more than 26,000 claims.

Under the very narrow definitions of total and permanent disability used in some policies, payouts are made only if consumers cannot perform “activities of daily living,” such as feeding, dressing or washing themselves.

Mr Hughes said about 60% of claims assessed under this narrow cover are declined – five times higher than decline rates for all other TPD claims.

“Where you get 60% of claims under that test declined, compared to 12% under other definitions for TPD, we’ve got a problem we have to fix,” he said.

ASIC also found poor claims handling processes resulted in 12% of claims lodged with insurers not proceeding to a decision.

Onerous conditions forced on disadvantaged consumers

“We consider that this high withdrawal rate is, at least, partially due to insurers subjecting consumers who are vulnerable (due to life-altering illness or injury) to a claims process that is often unnecessarily challenging and onerous,” the ASIC report said.

The review looked at seven insurers representing 70% of all TPD claims – AIA Australia, AMP Life, National Mutual, Asteron Life, MLC, TAL and Westpac Life.

Of the group, Asteron and Westpac were among the worst for overall TPD denial of claims, with decline rates of 29% and 28%, respectively.

ASIC has given a deadline of 31 March next year for insurers and super funds to comply and said it would use its product intervention powers to take enforcement action, if required.

Mr Hughes said ASIC had a range of tools to force compliance.

“If we saw a continued issue that puts consumers in real harm, we can ban a TPD product for up to 18 months,” he added.