If insurers were made to drop underwriting policies at the time of claim could they accept the accompanying commercial pain?
A key factor in the commercial arithmetic which underpins the delivery of both group and direct life insurance is the underwriting and the reality that a proportion of direct and group insurance is declined at time of claim.
If the current Parliamentary Joint Committee (PJC) on Corporations and Financial Services inquiry into Life Insurance has achieved nothing else, it has succeeded in publicly highlighting the important difference between life insurance obtained via an adviser and that obtained by consumers directly or via their superannuation fund.
Simply put, insurance policies underwritten at time of claim are more frequently rejected by insurers than those sold via a financial adviser, which are underwritten at the time of sale.
What members of the PJC should also understand is that the financial planning industry is united on this issue.
Both the Association of Financial Advisers (AFA) and the Financial Planning Association (FPA) believe that insurers who underwrite policies at time of claim are guilty of unconscionable conduct.
FPA chief executive, Dante De Gori in late February told the PJC that life insurance is a “contract of trust” and that underwriting at time of claim meant that, in many cases, “consumers are paying premiums for no cover at all”.
The AFA chief executive, Brad Fox was similarly scathing before the PJC, stating that it was to his organisation “unconscionable that a widow, who is expecting $300,000 or whatever the sum might be, now gets nothing. The person was never covered. What she will get is the premiums refunded for the period that they were paid”.
“That is not much of a consolation,” he said.
Both Fox and De Gori are right. Notwithstanding the commercial formulas which underpin the delivery of direct and group insurance in Australia, there is insufficient consumer understanding of the actual mechanics and the risks.
It is undeniable that group insurance represents the most common and effective way in which Australians access life insurance, but how many superannuation fund members really understand what they have got and how it works – the medical exclusions? How often claims are declined? The role of the superannuation trustee?
Equally, how many people understand why there are no medical checks associated with the purchase of direct insurance and the implications this carries at claims time?
Both the FPA and the AFA have urged the PJC to recommend a change which would force insurers to underwrite policies at the time of sale.
Such a move would prove commercially testing for the insurers but risk advisers would argue it is likely to be no less testing than the remuneration changes forced by the Life Insurance Framework (LIF).