As it released Report 633, Holes in the safety net: A review of TPD insurance claims, ASIC said it found that:
- Nearly half a million Australians, often working in casual roles or high-risk occupations, are covered by a very narrow TPD policy definition that only pays out in the most catastrophic circumstances, if they are unable to perform several “activities of daily living” (known as ADL cover), such as feeding, dressing or washing themselves.
- Three out of five, or 60 per cent of claims assessed under this narrow cover are declined, which is five times higher than the average declined claim rate for all other TPD claims (12 per cent).
- Poor claims handling processes contributed to some consumers withdrawing their claims, with one in eight, or 12 per cent, of claims lodged with insurers did not proceed to a decision.
- Insurers lacked key claims data to help them effectively manage the risk of consumer harm – including being able to identify the value of products to consumers and key friction points in their claims handling processes.
In response to the review, ASIC said it expects industry to make prompt changes to ensure this cover provides real value.
Further, ASIC noted that over 12 million Australian workers automatically pay for TPD cover through their superannuation to provide financial protection when they are so sick or injured that they can never work again.
“Alarmingly, we found that three TPD claims a day are assessed under the restrictive ‘activities of daily living’ definition, which has a concerningly high decline rate,” said ASIC commissioner Sean Hughes.
“People that hold this type of automatic cover through superannuation are typically paying the same premium – for what is essentially junk insurance – as people who can access less restrictive definitions under general TPD cover.
“We also find it inexcusable that insurers did not use, or in some cases even collect, data to enable them to identify the very poor consumer outcomes that are being produced because of these restrictive definitions.”
Good old ASIC. If you read the report you will discover that ASIC have decided to put expensive data collecting demands upon the insurers who provide ADL TPD cover to certain trustees of industry funds. As it stands ADL TPD, used appropriately by advisers as solely a care funding device, has a place in the spectrum of TPD.
Where it doesn’t have a place is when an employee in a superfund is tempted by some extra money ( but no sick leave or holiday pay) to become a casual without really thinking it through. Anyone who thinks that that particular employee, upon deciding to become a casual, is immediately going to contact his superfund to see what definition of TPD will apply in the future, has got rocks in their head. And that includes you ASIC. This requires advice, and it must be paid for
The insurers in this case are merely protecting themselves from anti-selection and I hate myself for having to argue their case, but anyone in their right mind knows the risk in providing DEFAULT TPD cover for someone who may only be working 15 hours a week is very high
The problem is of course is that the eligibility criteria for TPD benefits for our new casual employee, holding default cover, are only ever revealed if he has a TPD claim. That’s because the industry funds despite their protestations are extremely poor in communicating effectively to the workers who are members of their funds. I believe for example that almost 90% of members of industry funds in default cover think that the level of DEFAULT cover they have when they join at 25 will be the same right through to age 65, when every adviser knows that the cover decreases from age 37 on down to zero at age 65. Do the industry funds explain that to fund members in default cover – not really!.
If ASIC proceeds in its high handed manner with its excessive demands on insurers for data on TPD claims and in particular ADL TPD claims, then there can only be one very obvious outcome – the insurers who supply product to trustees of industry funds will announce upfront restrictions to TPD coverage and could even decide not to provide TPD coverage to the Trustees. The next step could even be accidental death cover ONLY, unless you buy the “fixed ” (underwritten) cover offered by trustees.
Why don’t ASIC and the FSC also respond to the this request published some weeks ago as well.
https://www.ifa.com.au/risk/27247-an-open-letter-to-asic-and-the-fsc
Since publication I’ve had emails from both AIA and Asteron (now TAL) with yet another 16% increase on premiums including level premiums (they say because of claims experience). Both companies offering higher new business premium discounts for the very same products though.
But industry funds are cheap, the TV adds show we are always better off. Surely they wouldn’t make you pay for insuance that you have little chance of claiming. After all, it is always disclosed in a 100 page PDS that a phone operator that i wait for an hour to talk too tells me is online and i should read it because they likely haven’t.