ASIC forces super sector to quit defaulting members into smoker insurance

ASIC has forced the super sector to quit defaulting members into high-premium insurance policies designed to cover smokers.

An ashtray full if used cigarette butts.

The wealth management industry has been “unfairly eroding” the superannuation savings of members by defaulting them into high-premium life insurance policies designed to cover smokers, according to the Australian Securities & Investments Commission.

The new evidence of further gouging in the nation’s $2.7 trillion superannuation sector comes ahead of the royal commission’s next fortnight of public hearings which will focus on the life insurance sector.

It’s the latest reputational blow to the industry, which is having its revenue models torn apart by regulators, politicians and consumer groups after years of drawing tens of billions in easy money out of unsuspecting consumers.

The industry has also been on tenterhooks for the potential for Kenneth Hayne’s royal commission to further smash revenue models, with representatives for the life insurance sector monitoring in-person the inquiry’s public hearings in Darwin, during a probe into funeral insurance, and during last month’s hearings into misconduct in the nest egg sector.

About 70 per cent of all life insurance policies in Australia are held through superannuation funds, where cover is provided to members on a default opt-out basis. The scheme has been an enormous money spinner for the life insurance industry, which about $13 billion worth of policy premiums each year from savers, who often are unaware they are even paying for the cover.

A recent survey showed 24 per cent did not know if they held insurance through their superannuation.

ASIC on Friday said it had got the super sector and the life insurance industry to stop defaulting members as smokers when there was an absence of information about whether they smoked or not. Smokers were charged significantly higher premiums than nonsmokers, and ASIC said the rip-off “unfairly eroded” member retirement savings.

ASIC deputy chair Peter Kell said there was considerable work to do to raise standards in the life insurance and super sectors. ASIC found wide variation in the definitions used by the life insurance industry, which prevented customers from understanding and comparing products.

The industry’s hapless attempt to govern itself with the creation of two separate toothless and legally unenforceable codes of conduct over the last two years was also criticised, and ASIC said the sectors’ code of conduct contained “significant weaknesses”.

“In the coming months, ASIC will be focused on ensuring that members do not experience adverse outcomes arising from poor complaints handling or inappropriate defaults,” Mr Kell said.

Some of Australia’s largest insurers will be grilled by the banking royal commission about problems with the sale of life and general insurance products and the handling of claims. AMP, Clearview, the Commonwealth Bank’s CommInsure, Freedom Insurance, REST and TAL are set to be quizzed about life insurance.

But a cloud has hung over the future of the industry before the royal commission began its investigation. The claims handling scandal at CommInsure brought significant focus onto a poorly understood but lucrative side of the wealth management industry. An 18-month long parliamentary investigation into the sector that found bonuses and “hidden payments” led to bad advice and poorly-sold policies for customers.

Members of parliament are now pushing for a raft of reforms to clean up the sector, including removing the industry’s exemption from parts of consumer law, a tougher code of conduct compliance, a bundle of watchdog investigations into behaviour and greater powers for regulators.

The government already has plans to end automatic life insurance for younger members under 25 years of age, which is expected to slice $3 billion a year off revenue in the sector. Proposed legislation is also aimed at ending the wealth management sector’s $2.6bn feast on fees and insurance premiums collected on the 10 million lost and forgotten accounts alone, as one in three super fund accounts are now unintended multiples. The Productivity Commission has found a typical worker with two super accounts will be more than $50,000 worse off at retirement than a saver with a single fund.

Meanwhile, ASIC last month tolled the bell on life insurers using outbound call centres, which has been a significant channel for the sector’s growth in recent years.

ASIC’s 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, and now companies will either have to close up shop or face legal action.

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 $60bn life insurance sector.

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

Embattled direct life insurer Freedom Insurance, which is yet to even take the stand at the royal commission, this week flagged a dramatic overhaul of its business model after its shares more than halved since early last week.

Life insurer Select AFSL, which runs a telemarketing centre in Chatswood in Sydney, had been revealed to be using high-pressure sales tactics to push Let’s Insure-branded funeral plans on Aboriginal customers. Select AFSL has been forced to stop selling life insurance all together, after St Andrews, which was formerly owned by Bank of Queensland, ended its underwriting relationship with the company.