The Many Lives of Life Insurance as new rules and codes bite

"The determination of life insurance salesmen to succeed has made life pretty soft for widows." - William A. Feather (1889-1981), American publisher and author.

That determination has also led to consumers paying for pretty hefty commissions and made life cover anything but comfortable for those seeking to make a claim.

But this week some major changes were unleased on the life insurance sector which, while not the end of the story, might help regulate away some of the problems.

And for anyone with life insurance, or who seeks it in all of its various forms such as trauma and total and permanent disability, it pays to know what’s going on and why.

The changes see: controls on the level of commissions paid, an industry-led code of conduct with standard definitions for conditions such as heart attacks and a review of how quickly life claims are handled.

First, legislation capping the amount that can be paid in commissions to those determined salesmen, who might also be financial advisers, has been tabled in parliament.

Over three years the up-front commission paid by the insurers to the salesmen, which can be as high as 120%, will be cut back to 60%.

The justification for the payments has always been that there can be a lot of unpaid work in matching the consumer with the best type of cover for their circumstances.

In a similar way it’s been said life insurance is rarely bought and often sold meaning the impetus for product comes less from the consumer seeking to buy it than the salesman seeking to sell it!

But given the huge amounts involved, and the risk they could cause salesmen to make recommendations in their interests and not the clients’, meant there had to be change.

As The Australian newspaper’s columnist John Durie says it’s widely acknowledged the reforms are “only a step on the way to the industry finally accepting its role as serving customers, not itself.”

The effect of the regulation on the premiums paid for life , which have increased sharply due to higher claims, remains to be seen.

Secondly and also this week the industry body the Financial Services Council released its code of conduct which amongst other things sets standard definitions for cancers, strokes and heart attacks.

The fine print of trauma policies caused consternation as some cancers were ruled in and others out. The Commonwealth Bank’s insurance arm stands accused of using old-fashioned definitions for its own ends.

The shortcoming is that the code does not immediately cover the large number of consumers who hold their life cover within their superannuation. The FSC says this will come later.

Thirdly the corporate watchdog ASIC has just released its review of how claims are handled and found significant shortcomings.

It says there needs to be public reporting of life insurance claims outcomes both at an industry and individual insurer level.

By way of an example a financial planner assured me it was worth paying higher premiums for CommInsure products because he knew through long experience they settled claims more readily.

However given CommInsure is being looked at by ASIC because of the ways it didn’t settle claims it’s fair enough the consumer and others should have access to the data around who pays out what and how often.

ASIC has found 16% of Total and Permanent Disability claims were declined, the highest rate for all life insurance products.

It also signalled a major review of life cover sold without personal advice, known as direct life insurance, a sector where it found there were higher claim denial rates.

Bit-by-bit life insurance, which ASIC says is a vitally important financial product is being made more consumer friendly.

Hopefully these moves may address some of the high rates of non and under-insurance  which the industry says bedevils too many Australians