Key Takeaways

On 2 August 2021, ASIC released report 696 ‘TPD insurance: Progress made but gaps remain’.  

As the title suggests, this is a report card on the progress made by life insurers in addressing the industry wide issues identified in ASIC’s report 633 ‘Holes in the safety net: A review of TPD insurance claims’ (REP 633). Please see this link for the article we published on ASIC Report 663 on TPD - Analysis and Implications.

Whilst ASIC acknowledges the significant steps taken by most life insurers to assess and improve their practices in light of the issues identified by ASIC in REP 633, the report also identifies areas where ASIC considers further action is required. These areas range from product design and data capability to claims handling practices. In this way, ASIC Report 696 provides important insights into areas of TPD cover for both insurers and trustees that will likely be the subject of enhanced regulatory scrutiny.

Background 

In REP 633, ASIC identified four industry-wide issues:

1. Poor consumer outcomes from the ‘activities of daily’ (ADL) disability test.
2. Frictions in the claims handling process, contributing to withdrawn claims.
3. Consumer harm arising from life insurers having inadequate data to monitor product performance and consumer outcomes.
4. Higher-than-predicted declined claim rates for claims with certain features.

ASIC Report 696 provides an update on insurers’ progress to address these issues.  

TPD Definitions – ADL Test

ASIC noted that insurers had taken some of the following steps to address restrictive TPD definitions including:

• Providing options to their trustees for changing onerous ADL definitions in group policies.
• Broadening the eligibility criteria to assess consumers under an ‘any’ or ‘own’ occupation definition, rather than an ADL definition. ASIC notes that this should help lead to fewer consumers being funneled into restrictive definitions.
• Including mental health criteria in TPD definitions. ASIC commented that such a change should produce fairer outcomes for consumers with mental health claims.

Importantly, ASIC acknowledged most insurers had developed ways to measure customer experience, complaints, claims outcomes, claims loss ratios and lapse rates in order to better assess the value of their TPD products to customers.

Going forward however, ASIC made its expectations clear that:

• Insurers should continue to review restrictive TPD definitions and consider their removal or consider product redesign having regard to design and distribution obligations in effect from 5 October 2021. This includes engaging with trustees on TPD definitions as early as possible before renewals.
• Insurers should continue to improve the design of their products to meet consumer needs.
• For group insurance, trustees should continue to review whether their insurance strategies and offerings are meeting members’ needs and providing value for money.
• For group insurance, trustees should proactively consider how they can refine the design and pricing of default cover working closely with insurers.

Claims Handling Practices

ASIC observed that most insurers had made efforts to identify claims friction points and improve claims handling practices. ASIC commented on the following enhancements made to claims handling practices:

• enhanced written and verbal communication with customers – with most insurers, for example, now offering customers alternative claims lodgement (such as paper, online and ‘tele-claims’);
• a shift towards minimal use of physical surveillance (ASIC again commented that physical surveillance ‘would rarely, if ever, provide evidence of a consumer’s mental health status and may exacerbate an existing mental illness’);
• enhanced controls for requesting medical information and investigating potential non-disclosure; and
• improvements to the format and/or content of claim forms and reduction in the length of some claim forms (as discussed below, ASIC also raised concerns regarding some claim forms still requesting more information than is needed).

ASIC also identified areas of claims handling which they considered require improvement and review. These included:

• streamlining tele-claim lodgement processes;
• focusing on the length and content of the claim form to lower hurdles for consumers;
• keeping more accurate records of withdrawn claims relative to a particular claim event; and
• continuing to enhance communications on the type of TPD cover an insured member may be eligible for in various circumstances.

In addition, the report referenced the need for insurers to comply with the new claims handling obligations coming into effect from 1 January 2022. This of course includes the overarching obligation to act efficiently, honestly and fairly in claims handling.

Interestingly, ASIC also referenced that trustees, in light of their obligations, should proactively address hurdles that members face when making a claim.

ASIC also flagged it will consider targeted surveillance of insurers if the consumer harms highlighted in the report are not addressed.

Insurer Data and Data Usability

The report identified data capability to be the area in most need of improvement. Whilst insurers have generally worked to strengthen their data capabilities, ASIC found there remain gaps in the data needed to properly monitor consumer outcomes. The top three data gaps identified include:

1. key claim events;
2. group data from trustees and intermediaries; and
3. claims experience of consumers assessed under each TPD definition.

The common theme to emerge from the data gap analysis is that captured data is not in ASIC’s view stored by insurers in a consistent, searchable or reportable format.

ASIC’s key message was that insurers need to uplift their data capability ‘because poor data capability creates key conduct, compliance and governance risks, which can lead to financial risk.’

Moving forward, ASIC has set out clear expectations for improvement by insurers in data capability, including:

• Continuing to invest in systems to capture, store and retrieve data, particularly in relation to key claim events (e.g. IMEs) and policy-level data.
• Maintaining searchable and reportable data to proactively identify trends and manage consumer harm.
• Using data to drive a consumer centric approach to designing, marketing and distributing sustainable products.

ASIC found that trustees also need to enhance their data capability for insurance in superannuation in line with the findings in Report 675 ‘Default insurance in superannuation: Member value for money’, which we discussed here.

Implications 

ASIC Report 696 identifies a number of ways in which life insurers have addressed key issues identified in REP 633.

Nonetheless, ASIC Report 696 also identifies areas within TPD product design, claims handling and, in particular, data capability where ASIC expects insurers to take steps. Significantly, whilst ASIC Report 696 is focused on findings from ASIC’s work with insurers, the report also emphasises the key role trustees have to play in group TPD insurance and the areas where ASIC expects trustees to better monitor member outcomes in relation to TPD insurance.

As such, ASIC Report 696 provides a useful roadmap of areas of product design and claims handling that are likely to attract more regulatory scrutiny. These areas include the design and pricing of default insurance and the data analysis that sits behind this, restrictive TPD definitions, communicating on different TPD definitions, surveillance, reducing hurdles that members face when making a claim and non-disclosure investigations.