Life insurers caught selling ‘junk’ insurance through super

Ross Greenwood speaks to ASIC Commissioner Sean Hughes after Life insurers have been found to be selling junk insurance in the form of permanent disability products through superannuation funds.

Ross Greenwood: Time to go another story today. This is actually about your superannuation, but your life insurance as well. Personally, I think this is a scandal, really is, and it’s been something that’s been around for some time. Also have been the subject of some examination by the Royal Commission in the misconduct into banking, superannuation, and life insurance, but I don’t think enough attention is being paid. This is when you sign up for a superannuation plan, you also get insurance along with it. Now, that insurance you presume is there to protect you. It’s there to protect you, if say, for example, you get injured, or if you become ill and you can no longer work.

Now, there are different forms of insurance, and I’m conscious of this. There’s trauma insurance, which is expensive insurance, and that insurance is if you survive a significant illness, a cancer, or something of that nature. There is also something called income protection. If you can’t work for a period of time and your workers’ compensation doesn’t cover you, then the income protection effectively pays you an income to keep going, but the very basic, and traditionally the cheapest forms of insurance are called TPD, Total and Permanent Disability, and outright life insurance. The reason for it is if you’re younger, you’re not likely to claim on those things.

Total and Permanent Disability is effectively, if you are no longer able to work, but the point is, that for many people, who ultimately have to claim it up, remember these people are in terrible strife when they get to that point. When they literally cannot work, they suddenly have discovered in the past, that life insurers have changed the rules on them, maybe moved them to a different classifications, and allowed them not to be able to make the claim. Something called the ADL, the activities of daily living, is a fundamental problem. Others have branded this junk insurance.

Yet to be fair, there are billions upon billions of dollars that life insurances have collected over the years, selling these types of insurance. Well, the Australian Securities and Investments Commission has now conducted a review of this insurance. It would be fair to say that the review is highly critical of the industry. The commissioner from the Australian Securities and Investments Commission, Sean Hughes, is on the line. Sean, many thanks for your time.

Interview with: Sean Hughes, ASIC, Commissioner

Sean Hughes: Hi Ross. How are you?

Ross Greenwood: Good, thank you. All right. Just explain one thing to people here. There is something called Total and Permanent Disability, but there’s a second type of cover that’s called the activities of daily living, but the problem is that some people sign up for what they think is Total and Permanent Disability, and then they find themselves when they try to make a claim that, “Sorry, we moved you into a different type of insurance.” Why would that have ever happened?

Sean Hughes: What happens, Ross, is that generally speaking, people acquire this insurance through their superannuation fund, and generally speaking, they don’t get an opportunity at the time they into the super fund to negotiate their own terms of life insurance covered, such as TPD. It’s all dealt with by the super fund trustee. That’s what happens to 90% of policyholders under these sorts of policies. Now, what we’ve found through our study, over a period of 2016 and 2017, covering about 35,000 claims that we looked at, is that a number of consumers have discovered that they were not able to claim on their TPD policy, because they did not meet the test for activities of daily living.

Put simply, Ross, that means that unless they could not feed, or wash, or close themselves, the insurer decided that they had not met the test for Total and Permanent Disability. Now, as you rightly said before, we’re talking about people who are often at the most vulnerable stage of their lives because of either a physical or emotional or mental disability. They’re unable to work, they’re running out of money. They think they’ve got cover through their super fund, or directly with the life insurance to cover them specifically for that instance, but because they aren’t sufficiently disabled or impacted by their injuries, the insurer says, “No, thanks. You’re not covered.”

What we’ve found through our study, Ross, is that 60% of claims assessed under this test of activities of daily living were declined. That 60%, is a very, very high claims denied number, specifically when–

Ross Greenwood: 60% is astonishing, because if claims rights in many other forms of insurance might be, it might be in the single digits, not 60% rejected.

Sean Hughes: Well, when we looked at other types of TPD insurance, not the activities of daily living test, the average was 12% for those other claims. That is a very significant departure from what we think moms and dads, everyday Australian workers across the country, would be expecting their insurer to do.

Ross Greenwood: These activities of daily living– I mean, this is people who fall into a gap. Therefore, they find that they’ve got this type of insurance, they can no longer work because they are profoundly disabled, or injured, or hurt, or as you say, mentally incapable, but then they discover that, “Hang on, because you can still perform some basic functions such as feeding yourself, washing yourself, going to the toilet by yourself, then, you don’t qualify, you don’t get the money.”

Why is it that the insurance industry, some areas, and you have singled out some companies specifically, about having a higher than expected decline claim right. Why was this form of insurance introduced by some of these insurers, do you believe?

Sean Hughes: Look, it goes back a long way, Ross. We’re saying this data obviously relates to a particular period that we looked at, 2016 and 2017. The lobby group, the industry group for the insurers, the Financial Services Council, has come out today in response to our report and says, “Oh, but hold on, 2018 numbers look better.” What we’re saying is, “Yes, that’s great. The trend is better, but at the end of the day, this activities of daily living test still does not suit the vast bulk of policyholders, consumers, and workers, who would expect their insurer to stump up when they need it, at the very most vulnerable part of their life.

We don’t know whether it’s a pricing issue. We don’t know whether it’s been overzealous claims handlers, but what we’re saying is, the industry and the super funds need to step up and deliver products that better suit the needs of their consumers.

Ross Greenwood: I’ll make an observation here to people. You, in this report, have singled out the AMP. You’ve singled out the former Suncorp Life business, Asteron, that’s now called, and also you singled out Westpac, and in particular BT, that sold a lot of these policies along with super funds. Do you believe that all people need to check to find out exactly what type of Total and Permanent Disability insurance they’ve got? Because it’s a relatively small amount that they pay, but they do pay on an annual basis. Every time they make a payment, there’s a payment that goes for this insurance. Do you think that they really need to check and figure out what type of cover they’ve got?

Sean Hughes: Absolutely, Ross. Look, there’s a role for everybody in this. We as regulators have got to step up and make sure that we are shining the light and really zeroing in on the performance of the life insurance companies and the superannuation trustees, and we will do so. We expect the life insurance companies and super trustees to do the same and make sure they lift their game, but to all of your listeners out there, we do ask that they go home, they check the cover that they’ve got with their super fund, and actually go onto our MoneySmart website. It’s a great tool. You can put in, plug in your–

Ross Greenwood: We’ve lost you on the air. moneysmart.gov.au is the add, I’ve got to tell you, but it is important, so please check it out. If you’ve got that activities of daily living insurance, can I just say, have a little bit of a think about the arrangements that we got for your superannuation and certainly for that in that life insurance that is compulsory. More Money News coming up.

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