Short-comings of traditional wisdom

In part one of a two-part article, Col Fullagar will consider an alternative way to achieve Trowbridge's suggested reforms for life insurance companies, and in so doing similarly achieve a compelling flow on advantage for the risk insurance advice process.

The relative merit of perception over reality is a discussion topic not dissimilar to a merry-go-round at an amusement park; fun to be involved in but the risk is it takes you nowhere.

Questions such as "Is it better to be something or be perceived to be that something?" and "Does it matter because perception drive reality anyway?" would no doubt have kept Socrates and Aristotle going well into the night; except for one small detail, the former died 15 years before the latter was born.

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But bringing the issue back from ancient Greek philosophy to 21st Century Australian financial services, the crucial question becomes, is the industry reasonably represented by the relatively poor perception it has laboured under for many years and then even worse press it has been receiving of late or is there a brilliant reality hiding under a bushel craving the light of day?

Of course, there is a third alternative i.e. the conduct of insurers differs and whereas the reality of some may be prejudiced by the perception, for others this is less the case.

The Trowbridge Report (March 2015) made various recommendations designed to influence the future direction of the life insurance industry in Australia, one of which was the development of a life insurance industry Code of Practice which would have, in part, the following objectives:

  • Promote better, more informed relations between insurers and their customers;
  • Improve customer confidence in the industry;
  • Provide complaint and dispute resolution mechanisms; and
  • Commit insurers and other insurance professionals to high standards of customer service, including in relation to claims practices (Trowbridge, page 60).

Lofty, yet worthy ideals, with the first two being about perception and the last two, reality.

Code of Ethics and Code of Conduct

Now, whilst a Code of Practice may sound like a great way to "improve trust and confidence in the industry" (Trowbridge, page 15), a healthy skepticism may be warranted bearing in mind the existence of the Financial Services Council's (FSC's) Standard 1, set up in November 1999 and revised in 2001 and 2007.

Standard 1 is headed up as a "Code of Ethics and Code of Conduct", which might reasonably be mistaken for a Code of Practice equivalent, that its member organisations including life insurance companies are required to follow.

Standard 1 states in part:

2.1 FSC members will conduct themselves with integrity and in a manner consistent with fostering and maintaining the good reputation of their industry and refrain from any conduct that may discredit their industry.

2.3 FSC members must be fair and not allow conflicts of interest or bias to influence their actions. That is, to ensure that:

  • Client and investor interests are paramount in all decisions and transactions;
  • The execution of client requirements come before those of the member; and
  • Their conduct contributes to markets operating in an efficient and informed manner.

2.4 FSC members must carry out business with due care, competence, and diligence.

2.5 FSC members will strive to ensure people acting on their behalf are properly trained and perform their duties and obligations to a high standard of professionalism.

Standard 1 certainly promotes similar ideals to Trowbridge but forgiveness might be necessary if some felt its existence has had little effect over the last 16 years in achieving the Trowbridge ideals.

Effectiveness of a new code of practice

Following on from this, the same some might ask "Why would a new Code of Practice be any more effective?" and "Do we have the time to wait for a Code to bring about the requisite change in practices and perception?"

If Trowbridge's ideals are deemed worthy, what is required is a way to quickly, effectively and comprehensively move life insurers in that direction and, it is respectively suggested, that will only occur when there is a much increased imperative for the insurers to so move.

Enter the attack on traditional wisdom which will start by way of a flanking manoeuvre.

Consider for the moment risk insurance product development over the last 25 years; ponder on the number of people and quantum of financial resources that insurers have enthusiastically thrown at this matter and ask whether the driver for this has been a purist customer focus or a zealot-like desire to capture adviser hearts and minds and, in the process, new business production.

For the sake of expediency, let's go with favouring the latter over the former.

The desired road to new business production by compulsion begins with the insurer's products being available for adviser recommendation i.e. by entry onto licensee approved product lists. If financial incentives are removed from the equation, entry to these lists is predicated on the perceived merit or otherwise of the risk products on offer, with merit being measured by way of risk insurance research ratings.

The point is that material levels of insurer attention are gained when, and generally only when, there is a financial incentive coming out of new business production. This statement, whilst possibly over-simplistic yet not overly incorrect, should not be read as a criticism.

The reality of business in large part is rightly that there needs to be an alignment of corporate attention and new business driven profit potential.

Thus, the strategy of the flanking manoeuvre mooted above is to recognise the importance to a life insurance company's imperative-barometer of having its products available for adviser recommendation.

Therefore, if Mr. T wants to achieve the ideals set out on page 60 of his report, the fastest, most effective and comprehensive way of doing this may not be via a Code of Practice but by having the achieving of these intrinsically and directly linked to new business driven profit potential. Or to put it more simply, if an insurer is to have its products available for adviser recommendation, it must behave in a way that will further the ideals trumpeted by Trowbridge.

The first break with traditional wisdom, therefore, is that it is the rating of the insurer that opens the gate to the approved list, rather than the rating of the insurer's products.

The second break with traditional wisdom follows immediately on; having earned the right to be included on the approved list, all the risk insurance products of that insurer become available to the adviser for the purposes of making a recommendation.

Whether or not an adviser recommends a particular product of a listed insurer will be dictated by the fact-finding and analysis process leading up to the recommendation being made; which, strangely enough, seems appallingly reasonable, logical and appropriate.

These two breaks with tradition would in turn break the nexus that has developed over the last 25 years whereby advisers, in large part, have been led to believe that only the "best" products i.e. those with the highest risk research rating, are worthy of being recommended for, to do otherwise, would expose the adviser to the risk of litigation if, at the time of a claim, the client discovered a more "generous" product had been available.

Whilst the above may often be the case, it is far from always the case; ask any pending insured who is unable to gain access by virtue of insurability issues to the "best" products.

The recommendation is, and always has been, contingent on appropriateness, not bestness!

Time lag

If the above traditional wisdom breaks are accepted for now, the question follows: "If an Approved Insurer List is based on the behaviour of insurers, surely there will be an unacceptable time lag while an insurer behaves and that behaviour is assessed?"

The point is a fair one but there is a highly practicable alternative to waiting and assessing, and that is to enable insurers to make commitments to behaving in a particular way with these commitments either being ahead of the behaviour or, potentially, in line with behaviour already occurring.

Behavioural commitments would be drafted by the licensee and, on the basis of the commitments the insurer is able and/or prepared to make, entry to an approved list can be granted.

To ensure the industry is not flooded with a chameleon of commitments, there might be merit in adviser representative bodies or groups of licensees developing and agreeing to shared commitments.

The sting-in-the-tail for the insurer is, of course, if they flippantly or unthinkingly agree to commitments but subsequently fail to live up to them and these breaches are of sufficient severity, entry to the approved list can be suspended or ended.

Now it gets exciting because suddenly there are serious insurer imperatives:

Firstly there is the loss of new business production coming out of a suspension or termination from the Approved Insurer List, and not just for one licensee but for all licensees sharing the same criteria; and

Additionally, the potentially greater issue of the flow-on brand damage as advisers, clients and possibly media become aware of the suspension or termination.

If Trowbridge was looking for increased imperatives to encourage insurers to move in a particular direction, he may just have found them.

The strategy so far and next steps

Pulling the strategy so far together:

  • An Approved Product List becomes an Approved Insurer List;
  • Entry to a list is driven by the behavioural commitments of the insurer;
  • All products of listed insurers are available for adviser recommendations; and
  • Recommendation of a particular product of a listed insurer flows out of the advice process.

The next step is to establish the basis of the behavioural commitments.

Fortuitously, this has been provided on page 60 of the Trowbridge Report, and set out at the start of this article.

Were these customer-centric ideals to become the reality and recognised as such, it would be difficult to imagine that the popular perception of the life insurance industry would not enjoy a rapid rise in a northerly direction.

The last step, apart from certain housekeeping matters, is to decide on the behavioural commitments that would need to be made and adhered to such that Trowbridge's ideals would become that reality.

Housekeeping questions

Space will dictate that the suggesting of actual commitments will be held over for part 2 of this article but moving past this for the moment, housekeeping questions can be considered.

How will commitments be decided upon?

The ones to be suggested arise out of real life situations that have been accounted, generally on multiple and often on frequent occasions.

In all cases, customer dissatisfaction and disadvantage has resulted with "the customer" in this context being the life insured/policy owner and/or their financial adviser or otherwise representative.

In general terms, two crucial criteria would be:

  • The commitments should be designed to "stretch" the insurer; yet
  • If reviewed by the ubiquitous "reasonable person", the response would be that the commitments are in fact more than reasonable.

How should commitments be drafted?

The commitments have been written in the form of conduct criteria with background commentary included.

How many commitments should there be?

In theory, there can be any number but 20 will be suggested.

Is there merit in having tiered levels in the Approved Insurer List?

Bearing in mind the number of commitments, having tiered levels holds some merit.

Once again, in theory, there can be any number of tiers; two are suggested but three might work just as well.

The two suggested are:

  • Approved status — insurer agreement to the first 10 commitments is necessary for entry onto the Approved Insurer List; and
  • Priority status — insurer agreement to all 20 commitments results in the insurer gaining a priority listing.

If three tiers were used, bronze, silver and gold status might be used with commitments divided up in an appropriate way.

Can flexibility be provided for?

Yes. An insurer can, at any time choose to drop back or even drop out, if meeting the commitments is proving onerous.

Alternatively, an insurer at an approved level can at any time apply to upgrade their listing by committing to the additional criteria. Similarly, bronze could move to silver and/or gold.

Also, commitment criteria can be amended or added to if circumstances warrant a change.

How would monitoring of insurer performance occur?

Creating administration monoliths should be avoided at all costs.

A simple, yet effective way to monitor performance would be adviser feedback through a central source e.g. someone within the licensee or an external organisation.

As soon as trends or sufficiently serious isolated events occur, the central source would report to the relevant licensee(s) and remedial action would ensure.

In this way, monitoring is in dynamic real-time rather than on a regular basis; further simplifying the administration process.


The scene is set and the spectre of breaking with traditional wisdom has been raised.

The questions remain, can Trowbridge's ideals become a reality and can this happen sooner than many would expect and, picking up on the second issue detailed at the start of this article, in so doing, will there be a compelling flow on benefit to the risk insurance advice process and, if so, how will this occur.

In order to respond to all these questions, part two of this article will follow in the next issue of Money Management.

Col Fullagar is the principal at Integrity Resolutions Pty Ltd.

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and. we all wonder why this industry is stuffed, people don't think before putting pen to paper and publish absolute garbage which they think is the answer,

The problem with the suggestions put forward here are that insurance companies and the FSC must modify there behavior. (it seems to a greater extent). It is far easier to blame individuals and get them to change. In this case it's the individual adviser and their business. Far easier to point the finger at advisers, as they are easy targets.

I agree with a lot of what Col has suggested. You can have a great contract with competitive premiums but if for example at time of claim it takes an insurer 6 months to analyse financials because they are scrimping on costs by using C grade accountants, your great contract and competitive premiums are worthless. Insurer attitude and behaviour at time of claim is equally important as contract quality. Consider the impact on the insured and the resulting image issues for the industry of the often ridiculous timeframes it takes group insurers to assess IP claims via some funds. The sometimes relatively lower quality of the group contract being compounded by taking 12 months to assess a claim. I think a set of commitments as to how the insurer is going to deal with the policy/insured at time of claim is a great idea.

Great article! I think this is on the right track and I'm interested in hearing the rest of Col's thoughts in part 2.

Col's article is thought provoking and insightful.
I have worked in this profession for over 30 years and I believe his comments are "on the money" The contract is all about the claim, that's the only reason it is bought and as advisers and licensees we often overlook the power we have to make the change happen.
I look forward to seeing the development of this article.
Well written Col

Thanks, Col. Ground-breaking and insightful. What a way to win back public trust and confidence in an industry that's sleep-walking towards a Royal Commission.

Well done, Col. An interesting bit of "thinking outside the square". As always, the devil would be in the detail. That said, recommending an insurer to a client is AT LEAST as much about the integrity of the institution as it is about their premiums and rating scores. In other words, recommendation at "house" level seems a perfectly reasonable suggestion. Looking forward to Part 2.

Interesting thought-piece, it does fall in line with some of my recent ideas around reform possibility for the sector, hopefully the above article is considered along with other suggestions. Genuinely looking forward to part two.

I am not an adviser, but a client of an adviser and a policy holder of life insurance. I have also had the need to claim on several policies due to a recent injury. I think this is an excellent and quite relevant article, proposing what is long overdue, what the public is demanding and what no insurer with any integrity and acting in good faith should have any objection to. In my personal experience and knowledge of that of others, every point of "Standard 1" of the current "Code of Ethics and Code of Conduct" as outlined by Col, was blatantly contravened, with no apparent recourse available to me or accountability on the part of the insurer. All contracts offered bu different life insurers are very similar. Generally, no one has concerns about the contract terms and agreements per se when taking out these policies. They are pretty standard and fair. Let's be clear. The large concern is how the insurer will and commonly does manipulate the interpretation of these terms, draw out time frames, employ unethical, translucent and intimidating tactics, generally and seemingly deliberately making the claims process more stressful than the reason for needing to claim in the first place. It is this that casts a dark shadow over the industry. People insure themselves largely for "piece of mind", (which underpins the marketing campaign of most insurers), but currently what they seemingly pay for is a reservation for a "dirty" fight at a time they are at their weakest and in most need. Without profits there would be industry and therefore no ability to pay claims. No one would begrudge the insurance industry's need to make a good one. Somehow, linking the insurer's ability to acquire and retain business and therefore make bigger profits to a graded, standard, code of ethical "practice" seems entirely reasonable for all. One would have to question the motivation of anyone who objected to it. Where the current "Code of Ethics" appears to "talk the talk", the proposed "Code of Practice" may just make them "walk the walk".

Interesting idea from Col Fullager. Col has been developing this concept for a number of years via his engagement with a number of licensees so it's not a thought bubble nor can it be labelled "absolute garbage".

Recently I had an occasion to act for a client seeking to claim a lump sum commutation of their ongoing income protection claim, with a policy specifically catered for that very request. Unfortunately the insurer, having trumpeted the value of such a benefit for a few years after its introduction, subsequently fiddled with the definitions involved and tightened up the prospect of a claimant being successful. That's what you get when you have a bank owned insurer and the bank is not happy with the level of profits coming from that insurer particularly when it involves a lump sum tax free commutation. I calculated a certain amount of benefit should be paid, but the insurer initially stated that it was two thirds of my amount. I then had to write to them and point out that it appeared they were utilising later provisions than those in the policy owned by the claimant and that they should cease and desist and recalculate the method. Thankfully that was done, solely as a result of my actions, and that client received around $200,000 in additional benefit. The even sadder news is that subsequently to that claim being paid on that basis that particular insurer has once again fiddled with the benefit definitions and that particular lump sum commutation option has been changed in a recent "policy update" and is now effectively worthless.

FOS in its recent report has identified that that it is experiencing problems with insurers misinterpreting definitions in their own policies in their claims decisions or even worse relying on older definitions to avoid paying claims. Many of FOS's claims are to do with group insurance in super funds, and increasingly according to FOS's figures, policies which are sold direct by insurers, often under the guise of a credit card provider but it is still life insurance and it is still income protection. That's where the claims problems are coming from now along with the issue of poor performance by insurers in group super.

Recently I had the misfortune to read draft 16(?) of the FSCs Code of Practice for life insurers. The FSC begrudgingly entered the business of drafting of a code because ASIC put pressure on them to the effect that if the FSC were going to impose commission restrictions on self-employed advisers, then they owed it to consumers to come up with a code of practice applicable to the FSCs insurance members. The first thing the FSC did was to draft code which excluded the trustees of super funds, which considering the number of claims disputes emanating from super funds in the form of TPD claims at the moment, was extraordinary. The FSC code of course is non-binding in the real semse despite it being dressed up as so, particularly in the light of an answer given by the NAB management to a Senate committee in recent times that they did not regard the Banking Code of Practice as legally binding on them.

So if consumers are to regain trust in insurance companies there has to be some sort of system which binds the insurers to a certain standard of behaviour when making claims judgements. Yes it's true at the moment that advisers are reasonably effective in putting cases to insurers with whom they provide a certain level of business, contesting the validity of a claims decision and achieving reasonable success. That's what we do!!

But it has to be said that the insurers are only responding in certain cases to commercial pressure from a very small number of both advisers and licensees.

Col is promoting is a more formalised but not quite legally binding system whereby insurers are publicly bound to a performance standard for claims by both licensees and advisers. In my view it also requires ASIC to change its regulations around APL's, and in particular the joke that currently occurs with bank advisers and their so-called APL's. For example I am aware that one particular bank owned licensee will not put on its APL the products from another bank insurer, despite the obvious difference in quality of the contract offered by the second bank insurer.

What's needed is leverage. We can't rely on the FSC, who are clearly demonstrated an inability to understand what consumers want from their (the FSC) insurer members. And even if they did understand what consumers want they are clearly not prepared to introduce an enforceable code of conduct with penalties of meaningful stature. But even the dumbest of insurers understands a reduction in new business production, which in recent times has reduced by 12% according to the research houses.

The proposal envisages leverage but in my view there has to be a certain standard for the publicity given by licensees and advisers every time one of these agreements is entered into. Otherwise when the insurer breaches the agreement with some outrageous claims decisions, the only people who will know will be advisers and licensees who perhaps read industry email newsletters, if those publications can be relied upon to publish such notices without fear of defamation action.
Properly drafted, this system should give a level of predictability about claims and, God help us, administration processes.

Does that mean we abandon the FSCs code of practice. Probably yes, but in an ideal world the leveraged system of approvals issued by advisers and licensees should also be incorporated in that code of practice.

Good luck with that!

I’m not an adviser but it seems that Col is onto something here. Unfortunately, like so many claimants, I’ve experienced a complete lack of care (and recklessness) from my insurer so as a policy holder, it’s encouraging to read Col’s approach to creating a much needed change in behaviours. Good to see someone thinking constructively about this…

I find it hard to accept the remark by "Brown Financial" that Cols comments are absolute garbage, do you have an alternate solution Mr Brown or are you just shooting from the lip. I can't recall reading any detailed solutions you have offered in relation to this issue. I have recently retired from the Risk Insurance industry after 33 years and I think it's high time that the industry held some Insurers to account for their poor customer service. The idea that insurers should agree to perform to a minimum standard, particularly at claim time, is an essential step in restoring consumer faith in an industry that is sadly lacking in consumer confidence. As we all know, the Risk Insurance industry is designed to provide incredible financial outcomes for families in their time of greatest financial need but sadly it is continually plagued by real life stories of claims being delayed, or denied, by some recalcitrant or non compliant insurers who seem to adopt the attitude of "if you're not happy with our decision, contact FOS". By demanding that Insurers agree to a strict set of standards, particularly in relation to assessing and paying claims before being considered for an "approved list", may help to keep the B's honest, particularly when they know that entry to the approved list can be suspended or terminated for non compliance. As the author pointed out, the flow on effects of being removed from an approved list could be disastrous for any insurer. Well done Col, I'm looking forward to reading part 2.

Great article Col! We are all aware, whether Advisers or Insured, that the reason for purchasing insurance is to allow for a claim if/when required! If this process is falling down somewhere it needs to be rectified & a simple code of conduct is obviously not suitable. The insurers offer the product, they should not be owning/controlling the whole process & should be held accountable. Look forward to part two.

A very thoughtful and insightful article.

An approved insurer list driven by the behavioural commitments of the different insurers and their adherence to those commitments I think is a good thing.

Culture is important in any company and equally applies to insurers. A system that analyses the individual behaviour of the insurers and is open to the public through their adviser will place more scrutiny on the manufactures. Their attitude towards underwriting and especially claims can be judged effectively placing more control with the adviser and resulting in improved consumer experience.
Advisers now are subject to a best interest duty and it is our prime responsibility to ensure that our clients’ interests are being looked after and that includes doing everything we can to ensure that the insurers/manufactures do the right thing by our clients. Any process that assists in this regard has to be a good thing.

Col - a refereshing view on an important issue for our industry. Under best interest duty us advisers, in my experience, design a risk protection strategy tailored to our clients needs and the try to match the appropriate risk solution to meet these needs. But as we all have an APL to adhear to, I thinks its imporant for us to really understand the crieria that our research team uses in order to construct the APL. Once we have our 'shortlist' to choose from, it would be very useful for us to have more real time data with deeper information on more that just the product comparision features that Coin Inc or Xplan or whatever other ratings and comparison software provides us with . The rubber meets the road at claim time - nothing worse than a policy that we have selected, based on great 'features and definitions', to only then get stuffed around and and a claim drawn out due to a lousy claims managment process. I beleive Cols suggestions would help keep insurers more accountable, rather than just the advisers getting hung out to dry when a claim goes pear shaped.

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