Submission in response to the FSC Life Insurance Code of Practice
Our views on the amended life insurance code of practice drafted by the Financial Services Council
We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!
January 2019: In this submission we provide feedback on the amendments to the Financial Services Council (FSC) Life Insurance Code of Practice. Visit our government submissions hub for more Finder submissions to government consultations and inquiries.
Personal insurance in Australia is complex, opaque and often difficult to understand for many consumers. This complexity, and remuneration models that value acquisition more than retention, creates risks that can disadvantage consumers.
Finder's mission is to empower Australians to make better decisions. Accordingly, we welcome the work the FSC has done to develop an improved code of practice for its members.
In summary, our understanding of the market and consumer needs underpins the following recommendations:
- For funeral insurance, we think more can be done to prevent sub-optimal consumer outcomes. We think that additional regulation (or effective self-regulation) is needed to ensure better outcomes for the consumer.
- We are pleased by the proposal to provide improved support for consumers with mental health issues, but believe that further refinements are required. We would like consumers to be provided with more clarity on how disclosed conditions will affect their insurance cover, including the likelihood that they'll be able to obtain appropriate cover or be appropriately paid in the event of a claim. We would also like the FSC and its members to publicly commit to a clear and consistent methodology for assessing the severity and type of mental health conditions, as well as the resulting impact on their ability to obtain cover.
- We would like to see the FSC and its members change their language and approach to demonstrate a formal shift in focus from "sales" to "advice". In the wake of the Royal Commission, we submit that the FSC is ideally placed to lead the cultural and industry reforms suggested by the interim report. We believe that mandating for greater clarity will help with this.
- We agree with the principle that consumers should be able to opt out of sharing genetic
testing results. We question whether the proposed dollar thresholds are appropriate and we would like to see further research on the likely consequences, impact and implications of implementing this limit.
Specific feedback on the Code of Practice:
1) Funeral insurance (Chapter 1, Section 3.6)
We welcome the increased protections in the Code for consumers taking out funeral insurance; however, we believe these do not go far enough. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry revealed that two-thirds of new funeral insurance policies were held for less than three years. This suggests that people either don't value their cover or are unable to afford to maintain it.
Further, automatic CPI increases may disproportionately impact people that chose level premiums under the reasonable assumption of a flat premium rate. To address this, we propose that automatic CPI increases should be replaced with an 'opt-in' model.
As for consumers under the age of 40, the draft code suggests that the sales process should disclose "that the appropriateness of funeral insurance depends on a number of factors such as health, lifestyle, age and financial objectives." The Code proposes additional controls, disclaimers and disclosures that should be implemented when 'advising' clients under the age of 40. We do not think this goes far enough and submit that any consumers under the age of 60 should benefit from these protections. In addition, we recommend that insurers should do the following:
- Illustrate the product with examples (e.g. potential payouts and costs).
- Provide clear examples of the type of consumers under 60 that would benefit from a funeral insurance policy.
- Warn about the limitations of the funeral insurance product (e.g. that it is not a savings plan).
- Identify alternative products and strategies (such as personal insurance or saving strategies) that could satisfy those objectives for which Funeral Insurance is recommended.
2) Mental health considerations (Chapter 1, Section 5.3D & 7.1)
Mental health impacts millions of Australians. Medicare data shows that the annual number of GP consultations to prepare mental health plans has been steadily rising since 2012, and mental health issues remain the most common reason that Australians visit the GP. However, the insurance industry has repeatedly come under fire for discriminating against people with a mental health condition. We welcome the proposed refinements for people suffering from mental health issues, however, we think that more can and should be done.
Firstly, we would like to see the industry adopt a consistent methodology or common principles to appropriately assess the "history and severity of the mental health condition" referenced in 5.3D.
One solution could be tiered standards to assist consumers with understanding on what basis, and to what degree, their application for insurance will be impacted by their disclosed medical history. For example, where incidents are infrequent, immaterial or where they are, or demonstrably appear to be, adequately treated and managed, they should be considered to be "Low severity" and there should be little or no impact on the terms, price or provision of the cover. At the next tier, "medium severity" may require some changes to the term, price or provision of the insurance; and, where "high severity" issues are disclosed, the insurer may reasonably refuse cover or make the changes to the terms they think reasonable and appropriate given the disclosed issues.
We would also like to see more clarity for consumers on what needs to be disclosed at the time of application. In our opinion, the reference to "time off work" in Examples 10 and 11 are unhelpful. Finder research from October 2018 found that 1.9 million Australians had taken at least one sick leave day for "mental health reasons" in the last 12 months (see Appendix 1 for details). Accordingly, we think that "time off work" alone is an unreliable indicator of severity for mental health issues.
We support the inclusion of those with a mental health condition as potentially vulnerable parties. However, we question how sales staff will be adequately trained to ensure they recognise 'vulnerable persons', how they should act and how they are to avoid 'selling' to vulnerable populations, particularly in an environment that encourages and rewards product sales. Insurers, and other Licensees, already have an obligation to "act efficiently, honestly and fairly" and avoid unconscionable conduct. Considering that the FSC recognises that vulnerable populations have unique needs and specific challenges, we would like to propose that when a person is identified as being 'vulnerable', they are required to be referred to an advisor, who can provide personal advice, rather than to a salesperson providing general advice or factual information. In our view, the adviser's increased levels of education and competency will, in addition to their obligation to act in their clients' best interests, increase the likelihood that the vulnerable person's interests will be given priority.
3) Sales practices and advertising (Chapter 1, Section 4)
We are pleased to see updates in this section and believe that this will help to improve consumer outcomes. However, we think there is a flaw in the framing of the whole section. Personal risk insurance is opaque, confusing and intimidating for most consumers. Loadings, exclusions, ambiguous terms and conditions, challenging claims processes and unpredictable pricing models can create overly complex solutions. Our position is that consumers should be "advised" on strategies and solutions first, rather than simply being "sold" products. This is not just a matter of semantics. We believe that "advice" leads to better consumer outcomes while "sales" that is divorced of individual context prioritises the interests of the insurer or their agents.
Reviewing staff remuneration to align with consumer outcomes will help with this, and we are pleased to see a stronger definition of pressure selling. We await the updated text in section 4.3A but believe the "anti-hawking provisions" should be sufficient to reduce the worst kind of coerced selling if they are enforced correctly. We would, however, recommend that the FSC encourage their members to remove or more effectively mitigate the impact of this conflict.
More broadly, we believe that requiring the insurer to clearly and specifically define the target audience for their individual products will be a big step forward. It will allow distributors to properly assess when, and for whom, a specific product is suitable. As this approach is likely to be required under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, we would like to see the FSC lead the industry to publish similar or better requirements in the updated Code.
4) Genetic tests in underwriting (Chapter 1, Section 5.2A)
Finder undertook specific consumer research on this topic in April 2018 and found that 91% of Australians did not know that genetic testing could affect life insurance premiums. Our research also found that 13% of Australians had already taken a genetic test, generally as genealogical research (see Appendix 2 and Appendix 3 for more details).
As a result, we support The Moratorium on Genetics Tests in Life Insurance, allowing customers to access life insurance without having to disclose the result of an adverse genetic test. Further, we would like to see more comprehensive research into a suitable dollar figure for the level of cover for which genetic tests do not need to be considered. The current figure of $500,000 for lump sum death cover seems somewhat arbitrary. We would like to see evidence that this would be high enough to prevent a sub-optimal public policy outcome. We also submit that before an individual is asked to disclose test results, they must be clearly advised about the consequences and implications of this choice - including the risk that it may affect insurance offered to their children or other relatives. Finally, we submit that consumers should be proactively informed of the rules outlined in the Moratorium and the date on which it comes into effect (1 July 2019).
More guides on Finder
Life insurance for asthma sufferers
Learn how to get life insurance if you have asthma.
Life insurance for coma patients
How to get life insurance if you have been in a coma.
Life insurance for stroke patients
How to get life insurance if you’ve had a stroke.
Life insurance for women
How to get life insurance for women.
Life insurance for people with dementia or Alzheimer’s
It’s possible to get life insurance if you or a loved one has been diagnosed with dementia and Alzheimer's. Find out how.
How to buy life insurance for your parents
It’s possible to buy life insurance for your parents. We’ll show you how.
Life insurance for 35-year-olds
Compare life insurance policies for 35-year-olds
Life insurance for new parents
We talk you through life insurance options for new parents.
What is life insurance?
Not sure what life insurance is? We take you through the basics of life insurance with our easy to understand guide.
Life insurance for medical workers
Find life insurance for medical workers. Insurance that covers the unique risks faced by frontline medical professionals.
Ask an Expert