‘Notable deficiencies’: ASIC urges action on direct sales practices in life insurance

ASIC commissioner Alan Kirkland laid out the regulator’s recommendations in a letter to industry CEOs.

“While we acknowledge the improvements made by some life companies in recent years, there remain notable deficiencies in industry practices in relation to direct sales,” Kirkland stated in the letter, adding that the key observations should be “shared with your board and actions implemented where relevant to your company’s operations”.

Council of Australian Life Insurers (CALI) chief executive Christine Cupitt noted ASIC’s findings and said its life insurer members are “committed to ensuring the millions of people they serve every day receive products and services that genuinely meet their needs”.

“CALI members take this promise seriously and want to meet the expectations of the community,” Cupitt said.

“We note the findings of ASIC’s recent review of direct sales of life insurance products and ASIC’s call to consider areas of better practice identified in the review.”

Since an initial review into direct sales practices in 2018 and following the royal commission, Kirkland stated that there has been “mixed progress”, highlighting improvements, including fewer customers who bought policies directly withdrawing their claims, companies linking sales agent’s pay to compliance and customer satisfaction, and others now quality assuring sales calls by using AI-powered speech analytics. Cupitt noted that ASIC’s 2018 review had previously highlighted the improvements made by life insurers in sales practices following the introduction of the Life Insurance Code of Practice.

“The Life Insurance Code of Practice (Life Code) was developed in consultation with consumer groups and government and requires life insurers to design policies which are clear, easy to understand and up to date,” she said.

“It also requires staff and authorised representatives to follow good sales practices, for appropriate sales training to be provided, and most importantly, specific rules governing the direct sales of life insurance products.

“The Life Code is closely monitored by the Life Code Compliance Committee which reports publicly on its activities and can apply sanctions and financial penalties for non-compliance. It operates independently of the life insurance industry and is administered by the Australian Financial Complaints Authority.”

In the letter, Kirkland highlighted that lapse rates for directly sold polices have dropped from 14.1 per cent to 12.1 per cent in this period.

However, the commissioner also laid out what he labelled “remaining challenges”. This includes claims disputes for directly sold polices significantly increasing since the initial 2018 review.

He also called out advisers directly, saying “there have also been concerning increases in rates of disputes involving policies sold through a financial adviser”.

The four key actions ASIC believes will lead to better legal compliance and customer outcomes, as Kirkland detailed, include:

• Strengthening product design, which the commissioner stated would be achieved through “better use of customer feedback by testing and incorporating complaints, claims and cancellation data into design processes and improving product monitoring”.
• Improving sales and pay practices by “enhancing quality assurance process” as well as implementing practices such as linking sales staff pay to compliance and customer satisfaction measures.
• Apply consistent quality standards to retention calls and streamline cancellation processes by creating clear criteria for identifying inappropriate pressure tactics, proper oversight of retention activities, and respecting customer decisions in rejection-handling practices.
• Treating complaints as business intelligence by “sharing complaint information across relevant business units to enable systematic improvements”.

In terms of strengthening product design, Kirkland highlighted that some life companies in the sample “made limited use of customer feedback and relied heavily on sales data during the product design phase”, as well as insufficient systems to monitor product problems. In some cases, there were no processes for front-line staff to report concerns. Retention and cancellation practices at most life companies were also found to be inadequate, with the majority making more sales calls than quality assurance checks or retention calls.

Kirkland noted that ASIC had “observed complexity in cancellation processes”, with some insurers making it particularly difficult.

“Some companies have complex cancellation processes that require customers to complete multiple steps or provide extensive paperwork to cancel their policies. A small number of life companies had notably onerous processes for their staff to follow, to try to convince customers not to cancel their policies,” he added.

Governance surrounding emerging technologies is another area that needs work, according to the regulator.

While not discouraging the use of new technology such as AI, Kirkland emphasised the need for “oversight procedures and accountability frameworks to ensure their governance practices keep pace with their adoption of [new technology]”.

In highlighting the next steps after this report, Kirkland explained that as life companies look to expand their direct sales operations, they should take the contents of this report into mind.

“The steps you take in responding to the matters identified above will inform ASIC’s response if we identify conduct of concern, commence investigations or take enforcement action.”

Cupitt added: “CALI looks forward to working closely with ASIC on their recent findings to ensure direct life insurance sales live up to the high standards Australians deserve.”