Life insurance industry awaits review as government flags priorities

People paying for cover they don’t know they have is set for scrutiny, as life insurance is drawn into a review of the quality of advice.

Jane Hume addresses the Financial Services Council conference in Sydney on Wednesday. Picture: Daryl Charles

The life insurance sector has been attacked by the federal government for being too complex, having an excessive amount of policies and in some cases taking consumers for a ride.

The comments by Superannuation and Financial Services Minister Jane Hume came as she outlined plans to raise pressure on the industry by shifting a landmark review of the under-pressure sector under way from the corporate regulator to Treasury.

Senator Hume outlined the plan to combine the life insurance framework review into the current broader review of quality of advice.

The Australian Securities & Investments Commission had been poised to gather the data and conduct the review of the life insurance sector.

But the review will now be conducted by Treasury, which will consider issues relating to quality and affordability of financial advice.

Speaking at a Financial Services Council conference in Sydney, Senator Hume said Treasury was best placed to “appropriately consider the full breadth of issues impacting on both quality and ­affordability of all forms of financial advice”.

She said the government was looking closely at legacy policies and the proliferation of life insurance that left many people with multiple policies.

“In many cases, consumers are paying for these products when they aren’t even aware that they have them,” she told the FSC conference.

“I’m sure most of you are familiar with the statistic that for the 12.5 million working Australians there are 22 or so million active life insurance policies. That’s a few too many.”

Senator Hume said current legal, consumer and tax issues were preventing the rationalisation of legacy products.

“What’s more, for consumers legacy products can have higher risks, lower returns and higher fees when compared with modern products,” she said.

“They may not have protection from unfair contract terms. They may use outdated definitions, in particular for medical conditions. They may not be internet-enabled.”

The review comes amid significant issues for sections of the life insurance market, highlighted by official figures released this week that found payouts across several lines were significantly exceeding premiums.

At the same time, APRA showed almost a third of some disability injury insurance policies were being rejected by insurers when consumers made a claim.

ASIC senior executive leader of insurers, financial services and wealth group Emma Curtis, also speaking at the summit, said the regulator was concerned about the viability of the industry.

“It’s not in anyone’s interest that products are being introduced that are not sustainable,” Ms Curtis said. “If prices are going up because a product hasn’t been priced or designed properly then that’s not good for the product holder.”

Senator Hume took aim at the proliferation of life insurance, noting only 20 per cent of policies were being sold through an adviser.

“I recognise that a flat fee charged for advice can be a challenging business proposition,” she said.

“Consumers struggle to understand what they are paying for. They may not have the cash to pay upfront themselves.

“Advisers need to be paid for their work, work that is fundamental to the proper functioning of the life insurance market.”

But the minister stopped short of calling for commissions to be scrapped on life insurance policies.

“The issue with commissions is not their existence per se. The issue is when they influence the advice provided. In short, the problem is when an adviser receives conflicted remuneration,” she said.

Senator Hume’s speech came as the superannuation industry prepares for the July 1 implementation of account stapling, to ensure many workers only have one account.

Data released on Wednesday revealed payouts on life insurance policies held through superannuation were nearing or exceeding 100 per cent, in a development even the regulator warned was unsustainable.

This was acknowledged by TAL chief executive Brett Clark, who warned that the current model for disability injury insurance was broken.

Mr Clark said the current trajectory of disability income insurance would leave the industry in a situation where “there are no winners”, which would result in a “pretty bleak” outcome that left policies out of the reach of many.

“Industry losses continue, capital retreats and then the products are not offered at all,” he said.

“The products are no longer fit for purpose — we’re at a point now that requires real material and sustainable change; it’s not just tweaking around the edges.”

APRA life insurance division general manager Suzanne Johnson said the life insurance industry was significantly troubled both in how it managed risk and sold and priced products.

“One of the things we are concerned about is seeing the impact of what’s happening in this industry of a shrinking market that’s highly competitive,” Ms Johnson said.

She said although the industry needed to act fairly, that did not mean paying every claim.

“We want that to be done in a way that’s fair for consumers now and fair for consumers in the future,” she said.

FSC chief executive Sally Loane said a single review of the life insurance industry was part of the discussion about supporting access to financial advice and broader issues of under-­insurance.

“The FSC has always believed the quality, affordability and accessibility of financial advice should be looked at holistically and efficiently,” she said.

“We welcome this announcement from the government which will mean less duplication of process for the industry.”