Banks royal commission means death for life insurance reforms
Laws need to be changed so that the life insurance sector can make rehabilitation payments for clients, not just health insurers or Medicare.
There are many reasons why a royal commission into banking and financial services would be a waste of public funds and time. One of the most compelling is that Australia's $44 billion life insurance sector is part-way through its biggest reform agenda for decades.
The advocates for a royal commission will never admit it, but the industry and parliament are already working on seismic reforms across the financial services sector.
Life insurance is a major part of an industry which has been subject to unrelenting scrutiny – 15 major inquiries – over the past decade, at a cost of nearly $3 billion, ultimately borne by consumers.
We need to stop the cycle of endless inquiries and collective amnesia and get on with the job of concluding the reforms recommended by David Murray's Financial System Inquiry, the various bipartisan parliamentary reports and the landmark Trowbridge review of life insurance.
The reforms under way for life insurance and financial advice are significant.
The life insurance industry is developing a code of practice, as recommended by Trowbridge, due to be launched in October. This will be mandatory for all insurance companies that are members of the Financial Services Council – which covers 99 per cent of all premiums in the market – by next July.
Out for public consultation, the code is the industry's commitment to strengthen community trust and confidence in life insurance, which is one of the most important financial protections a person can obtain. The code will include timetables for decisions, standard disclosures, medical definitions and a transparent governance regime.
In addition, the way advisers are paid for selling life insurance will change if a new bill gets through parliament. Under the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, which will cap upfront commissions to a maximum of 60 per cent of the first year's premiums as broadly recommended by Trowbridge and Murray, bringing the sector more in line with all other financial advisers who operate under a fee-for-service model.
However, while these reforms will improve the delivery of life insurance products and services for consumers, some critical issues remain.
Most Australians access their life insurance through a “group” superannuation policy accessed through their workplace which is inexpensive and provides broad coverage. Group life insurance is the risk protection most Australians rely on to protect their lives and livelihoods. It is an integral part of our world-leading superannuation system and means that millions of Australians are covered for death and disability through their super, cover they might not otherwise have.
Right now, under the group superannuation life system, there are significant barriers to people getting back to work after illness or accident, which need to be urgently changed.
Specifically, life insurers cannot make targeted rehabilitation payments for medical treatment or therapy that they determine to be relevant, appropriate and necessary to return the claimant to work.
At the moment, only a health insurer or Medicare can make a rehabilitation payment. Insurers are prevented from acting in the best interest of their clients.
These restrictions must be removed so life insurers can assist people back to work earlier by offering rehabilitation benefits. This would markedly increase an injured person's probability of successful rehabilitation relative to the status quo.
Cost of life insurance premiums within group superannuation funds is another issue which must fixed.
In the past five years, there has been a significant increase in claims for TPD (Total and Permanent Disability) in group superannuation funds, and the time taken for people to lodge these claims has been getting longer. Because there is no time limit on claims, people are able to claim for something that may have happened decades before.
Because of the increase in both number of claims and the fact that there is no limit to time taken to lodge a claim, insurance companies can find it difficult to form a clear actuarial and pricing assessment. Over this similar time period, this has contributed to increases in premiums.
We need new laws to mandate a reasonable notification period for claims. This would assist life insurance companies to better manage price volatility.
A royal commission into financial services would derail overdue reforms to life insurance and financial advice. A 16th review, inquiry or commission is unnecessary. You cannot simultaneously hold a royal commission and proceed with structural reforms. It's time for action, not Sir Humphrey and more reviews.
Sally Loane is chief executive of the Financial Services Council. This article originally appeared in The Australian Financial Review.
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