ASIC moves on direct life insurance

Corporate watchdog ASIC is moving against life insurers that use call centres and TV ads to push pointless policies.

Corporate watchdog the Australian Securities & Investments Commission has tolled the bell on life insurers using outbound call centres, after a damning sector-wide investigation found highly-incentivised sales staff were pushing unneeded products on customers who often ended up cancelling the policies or being rejected when they made a claim.

ASIC released a wide-ranging report after its review of the “direct” life insurance business, which found high cancellation rates and poor claims outcomes. It has also announced a move to force businesses to restrict outbound sales of life insurance and funeral insurance and demanded companies to stop selling accidental death insurance, after it found the product was largely useless.

The direct life insurance model, where companies sell policies through outbound call centres or through TV advertising, has come under increasing scrutiny since ASIC conducted its landmark review of the $60 billion life insurance sector.

Claim rejection rates are notoriously higher in the direct channel, compared to policies sold through advisers or obtained through superannuation.

The release of the report also sets the stage for the upcoming royal commission round of hearings into insurance, which is dragging one of the country’s largest direct insurers, Freedom Insurance, onto the witness stand.

Shares in Freedom Insurance plummeted to a new record low at the open of trade on Thursday, dropping 14 per cent at 29c by 1030am (AEST). The stock has fallen about 25 per cent since it was named as one of the case studies at the royal commission.

ClearView Wealth, which is also set to appear at the hearings, last year immediately moved to shut its direct insurance business down after ASIC raised concerns with the sale of some policies.

The rest of the sector is now likely to be forced to do the same.

The Australian understands the Australian Prudential Regulation Authority is unlikely to grant approval for Freedom Insurance’s takeover of St Andrew’s life insurance while it remains under investigation by ASIC. Freedom has been in dialogue with ASIC over concerns about its sales tactics in a separate investigation.

“ASIC is also announcing today that we intend to restrict outbound sales of life and funeral insurance, in order to protect consumers,” chairman James Shipton said.

ASIC’s investigation covered 11 companies, including CommInsure, ClearView, NobleOak, Suncorp, TAL Life, ANZ’s OnePath, St Andrew’s Life Insurance and its distributor Select AFSL, Hannover Life Re and its distributors Greenstone Financial Services and Auto & General Services.

Select AFSL, selling Bank of Queensland’s St Andrew’s life insurance, last month had its reputation shredded at the royal commission

after it was found to be using high pressure sales tactics to force policies onto Indigenous Australians. The company is now without an underwriter and cannot sell insurance.

ASIC’s direct insurance investigation found that one in five polices was cancelled during the cooling off period — suggesting the product was unwanted in the first place. After this, 25 per cent of all policies were cancelled within 12 months, and a third of all policies were cancelled within three years.

Moreover, 15 per cent of all claims were rejected by companies, with nearly one in three claims were withdrawn by the customer after being unable to claim or making a mistake.

“Life insurance is a long-term product but cancellation rates and poor claim outcomes show that people are being sold products they don’t want, can’t afford, or don’t perform as they expected,” Mr Shipton said.

ASIC also found consumers struggled to understand the products being pushed on them due to the complexity of the policies and poor understanding of the key features of the products.

The watchdog tuned into 540 recorded sales calls and found every company involved in its investigation failed to provide important information about the policies, including key exclusions and future premium increases.

Four companies were engaging in high-pressure sales tactics by refusing to send out paperwork unless a customer committed to buying the product.

Bonus payments and sales incentives which made staff put sales volumes before customers interests were found in half the companies involved in the investigation.

“Aggressive selling practices and products that don’t pay out when consumers expect undermine trust in the industry,” Mr Shipton said.

“Selling direct life insurance can be done well and we have seen this where firms have moved away from riskier business models, such as outbound sales and reliance on products with broad exclusions,” he said.

“ASIC will use all of its regulatory tools to address failures in this market – including through enforcement action and policy reform. We have several investigations underway.”

ASIC found sales of accidental death insurance were “particularly problematic”, with only 16 per cent of claims actually being paid.

Unless firms can demonstrate that accidental death insurance can meet consumer needs, ASIC expects firms to stop selling this product.

This week Freedom Insurance’s shares plunged to a record low after it was called, along with Commonwealth Bank, AMP, IAG, Suncorp and five other firms, to appear at public hearings on the insurance sector from early next month. Freedom specialises in selling life and funeral insurance.

Most of Freedom Insurance’s revenue comes from trailing commissions and upfront commissions.

Freedom Insurance, which bought St Andrew’s Insurance from Bank of Queensland earlier in the year, is still yet to gain regulatory approval for the $65m purchase, which is the company’s ticket to an insurance licence from the Australian Prudential Regulation Authority. APRA is yet to endorse the takeover.

Currently, Freedom Insurance sells policies underwritten by Swiss Re.