Direct life insurance is under the ASIC spotlight
Are customers buying wrong, or are insurers selling wrong?
Direct life insurance may be increasingly popular, but it has come under the Australian Securities and Investments Commission (ASIC) spotlight as evidence emerges that customers might be experiencing poorer outcomes with direct life insurance, compared to the other types.
- Direct life insurance - You pick out the policy and cover you want, and buy it online, over the phone or in person. A relatively cost-effective blend of cover, flexibility and cost, but you need to make sure you're getting the right cover.
- Retail life insurance - You buy life insurance with the help of an adviser. It can be very flexible, but will often include an advisor's fee and cost more.
- Group life insurance - You get cover as part of a group, such as through your work or superannuation. Generally a more affordable but less flexible way of getting cover.
Some of the differences, according to ASIC senior executive leader and regional commissioner Michael Saadat, are average claim denial rates of 12% for direct life insurance, compared to only 8% for group insurance life insurance and 7% for retail life insurance, and a lapse rate that approaches 50% for some direct life insurance policies.
Sometimes the exact same policies might be sold as both direct and retail, so it's not as simple as one type of cover being inherently better than the other. Saadat stressed that the main purpose of this ASIC investigation is find out what's behind these differences, rather than pointing the finger.
Buyer beware
The main difference between direct and retail life insurance is in how customers buy them. Or as ASIC might see it, how brands sell them. Part of the investigation will be focused on asking insurers to demonstrate how they incentivise their sales staff, and how they formulate performance benchmarks.
Performance benchmarks based purely on sales numbers, for example, are probably likely to result in more customers buying - or being sold - the wrong type of cover, such as a policy that won't fit their pre-existing conditions. This in turn leads to a higher rate of denied claims.
An incentive scheme that offers policy salespeople a portion of the premiums paid will probably lead to higher prices, which in turn lead to unusually high lapse rates, as well as essentially undoing the price benefits of buying direct, instead of retail.
Why it's an ASIC issue
Underinsurance remains a significant problem in Australia, leaving some people unprotected when they need it most, and others footing the bill. A competitive and effective life insurance market can help, but it's dependent on everyone being able to access and compare a wide range of different life insurance options.
If one type of insurance is underperforming compared to the others, it probably means there's a problem that needs solving.
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