The Australian Securities and Investments Commission (ASIC) has published a report on total and permanent disability (TPD) insurance in Australia, with the industry in for some changes.
TPD insurance pays a lump sum to a policyholder if they become totally and permanently disabled under the terms of the insurance policy. Rehabilitation, debt repayments and future costs of living can also be part of the TPD benefit.
In Australia, over 13 million people have TPD insurance, with nearly 90 per cent of those holding this type of insurance through superannuation. Premiums equate to $3.5 billion annually with about 26,000 claims per year.
ASIC’s concerns about TPD cover include:
Above-average declined claim rates (65 per cent acceptance rate)
High rates of withdrawn claims
Poor claims processing times
ASIC was concerned that the acceptance rate showed an issue with design (too restrictive) and claims handling. The report - Holes in the safety net: A review of TPD insurance claims - identifies four industry issues that insurers and superannuation fund trustees need to correct, with more likely to be put forward over the coming years.
Top four concerns for TPD cover
#1. Poor consumer outcomes from the activities of daily living disability testing
Many policies have restrictive cover based on a specific disability test that dictates when a person is able to receive benefits if they meet certain criteria, e.g. the ability to feed, dress or wash. ASIC says that these policies are not designed for and don’t meet the needs of the consumers who end up with this sort of cover.
The policies don’t, ASIC says, provide cover for all consumers who are unable to work again. They provide cover only to those who are so severely disabled they cannot care for themselves, which is not the same thing.
#2. Frictions in claims handling that lead to withdrawn claims
Over the review period, 12.5 per cent of TPD claims were withdrawn, which was considered high. The withdrawal rate is usually related to insurers subjecting the vulnerable (newly disabled, ill or injured) policyholder to an often challenging and onerous claims process.
#3. Consumer harm arising from poor data
Life insurance companies had deficiencies in recording and searching for claims data. This means trying to identify and correct problems in products or processes is hard to pin down. ASIC wants insurers to improve data collection to improve consumer outcomes, taking effect from April 2021.
#4. Insurers with higher than predicted declined claim rates
Some types of claims had a higher than predicted declined claim rates, for example, certain occupations or underlying condition. Three insurers had higher than predicted denied claim rates overall.
In addition, it is difficult to compare TPD definitions between policies, and specifically within superannuation bound cover. ASIC has determined that many consumers can’t rely on TPD cover when they need it the most. There are changes afoot, with ASIC expecting providers to step up and correct the glaring deficiencies.
The report notes that those in casual roles or high-risk jobs have only the most narrow cover that will only pay in the direst of circumstances. About 60 per cent of claims in this narrow band is declined - five times higher than the average for all other TPD claims, which is sitting at 12 per cent.
ASIC Commissioner Sean Hughes said, ‘Alarmingly, we found that three TPD claims a day are assessed under the restrictive ‘activities of daily living’ definition, which has a concerningly high decline rate. People that hold this type of automatic cover through superannuation are typically paying the same premium – for what is essentially junk insurance – as people who can access less restrictive definitions under general TPD cover.
'We also find it inexcusable that insurers did not use, or in some cases even collect, data to enable them to identify the very poor consumer outcomes that are being produced because of these restrictive definitions.
The role of superannuation trustees
ASIC has turned the focus to superannuation trustees. Those running our superannuation funds have a responsibility to deliver valuable services to members, with suitable products that meet their needs and protect their superannuation balances.
There are many hurdles that consumers face when trying to make a claim including difficulties with the lodgement process, poor communications, multiple requests for medical assessments, and long delays. Insurance companies weren’t necessarily very aware of the reasons for incomplete or withdrawn claims.
Insurers are now expected to make changes to claims handling procedures and importantly, redesign TPD products so they offer significantly better value for consumers. Data quality is to improve significantly.
ASIC’s report builds on its previous review of life insurance in Life insurance claims: An industry review.
Download the full report Holes in the safety net: A review of TPD insurance claims (PDF)