Dear Regulator: Be Careful What You Wish For
We have watched and waited for two weeks and now it’s time for The Risk Store to make comment on the ASIC 498 report and the resulting dialogue and to caution both regulators and insurers. There is a groundswell of reaction arising from 498 findings that could lead to actions and outcomes we could all have stopped and didn’t. This, therefore, is our heartfelt warning of specifically what the “decline rates” conversation could lead to if allowed to snowball in its current direction. If anyone else has recognised the dangers, they are not going public with it. So we are.
No beating about the bush: we are extremely concerned about the very real potential for irreversible damage to the sustainability of the industry, if ASIC hang their regulator’s hat on the publishing of decline rates for a perceived benefit to consumers in their decision-making over which insurer to select. These will not contribute to informed decisions – but that’s not the main worry.
Firstly, it isn’t clear how any randomly selected percentage of declines could be drawn in the sand, by anyone, as a benchmark that has reasonableness or comparability or otherwise. Let alone that amid the noise out there, one fact will be obvious to anyone with industry experience but it is not being acknowledged in media releases and commentary: “declines” as a label encompasses a dozen different reasons why claims are not paid – this detail must be understood to be useful to any audience. And while ASIC do say within the report “…it is important to acknowledge that not all claims will be successful…even though they may not be entitled to payment for a loss not covered by the contract, policyholders can (and do) lodge claims in these circumstances”, their subsequent public statements fail to draw this fact into the open. This means ASIC’s media message is coming across as ‘claimants (all) have a right to be paid’. So media outlets have followed suit and bizarrely forgotten that the key principle of any insurance pricing is that if claims are not assessed and deemed to fit (or not) within set terms and conditions, then premiums cannot be sustained at affordable levels. Why is the industry not calling this out?
Secondly, claims data is ridiculously inconsistent in Australia. Even claims causes, which are generally reported elsewhere by using an international code which our collective industry doesn’t use, are impossible to properly collate here. The Risk Store has experienced that first hand for ten years as we have wrestled with gathering and publishing annual industry claims paid and causes statistics, to the best quality we can muster from what we are given.
Thirdly, however, this overall inconsistency is only the tip of an iceberg. Deeper down is the serious danger posed by the apparent contemplation by ASIC of forcing insurers to report publicly on ‘decline’ rates, while there is a blatant inability across the industry to standardise that reporting and make it logical, meaningful and sufficiently educational to allay overreaction to those rates (such as we are seeing now).
Decline rates data is particularly misleading without the right information to go with it. The devil really is in the detail. Insurers, via the FSC – where are you? You don’t seem to be stepping up to educate the public or the media or ASIC (or even advisers, who may also not understand decline rates’ complexity) on this, as far as we can see. There has been one exception as we penned this last week; one insurer briefly went public about the decline record-keeping challenges in claims, in order to ‘out’ and defend their statistics. They were right.
To be fair and reasonable, we note also that ASIC have in a footnote acknowledged the flakiness of the decline rates data, but that didn’t stop them from tossing doubt and cynicism into the baying crowds. We only need to browse the consumer comments attaching to related articles, to confirm that most consumers perceive no claims should go unpaid; where on earth does that come from? Is that the entitlement mentality emerging, perhaps in the wake of pitifully inadequate education of consumers by the industry as a collective?
Do you remember movie star Sam Neill and the ‘eat red meat’ campaign? Not a dozen butchers’ chains competing against each other with individual advertising campaigns but one clear industry message: “red meat isn’t the enemy – it’s good for you”. This year it’s “get some pork on your fork”, another collective campaign. Where is our collaborative ‘it’s good for you’ message? Where is our Sam Neill?
Yes, consumers do ask about decline rates and advisers in turn ask insurers for their decline rates and insurers have in turn not published them, for good reasons. If consumers (and some advisers) were provided with these rates, they have no knowledge by which to judge if they are ‘good’ or not; or where one company’s rate is higher than another, if that has any bearing whatsoever on how a consumer’s actual claim will be handled when and if it occurs.
What is the source of the statistical complexity around decline rates? A true decline is a claim that has been assessed on its merits and deemed not to fit the relevant definition based on medical evidence. So, many ‘declines’ are not assessed-and-rejected claims; rather they are claims that were never going to be claims at all, or that cease being claims for legitimate reasons that do not involve any assessor’s judgement. It’s important to recall that it was claims assessors’ judgement that was questioned in the current affairs debacle that started all this back in March.
Some of the many factual reasons claims are not paid are:
• Policy has lapsed or been cancelled (often by the spouse unbeknownst to the other) n Policy does not include the benefit the insured is seeking to claim on
• Policy they have submitted a claim on is the wrong one (perhaps of several held for personal and business reasons)
• Their condition cannot meet any definition e.g. they have a terminal cancer but they are still working and their prognosis is not immediately dire (they can claim later)
• They have not fulfilled a minimum time off work
• They have returned to work before the claim can be assessed
• They have fallen within an exclusion period, for example, at the beginning of a trauma policy
• They are totally disabled but not yet or will not be established as being permanently disabled – that’s a challenge in TPD that the industry must live with, or change the product
• They are paid under terminal illness instead of TPD, as the event warrants this (yet the claim was captured as TPD initially)
• There has been incontestable non-disclosure uncovered within the legal statute period – meaning a policy never existed
• In group insurance, the member was not eligible for cover due to employment statusor history
• Claim has been withdrawn by the insured.
Most insurers would have these not-paid claims lumped into ‘declines’ at a high level of reporting, such as what ASIC have apparently received from their review.
Then there are other reasons why one insurer’s decline rates might actually be higher than another insurer’s:
• An intentional weighting of a product/portfolio towards certain occupation classes or types; such portfolio will have been costed accordingly, for an expected claim rate and therefore a commensurate decline rate [that might be higher than others]
• A policyholder/insured response to marketing, meaning that an influx of claims occurs (just as it does when the economy dives): some insurers actively promote their claims expertise and philosophy at every opportunity, as a good news message. It’s known that this type of encouragement, while commendable for its transparency and client relationship benefits, can encourage some ‘non-claims’ to come through the door. They then need to be ‘declined’.
None of this detail can effectively be communicated in simple education programs. And there lies the danger. If, rather than ASIC simply demanding reporting consistency for the regulator’s own monitoring and regulatory purposes, the regulator drives the open publication of a ‘leader board’ on decline rates, the ramifications are dire. A new and unprecedented market force will affect – for all the wrong reasons – on-time competition between insurers, to avoid declining claims. What will happen is that the real claims, those that get assessed and decided on their merits, will get paid too often when they shouldn’t. Why? Because they are the only ones that have any ‘give’ in them. For example, a claim in one of the above ‘non-claim’ categories (say, it was sent to their wrong insurer, or the claimant thinks they have IP and they only have TPD so that is the claim form they complete incorrectly), can never be met, as it is not on risk. So the pressure to reduce claims rates can only be met with the acceptance of on-risk cases. Those borderline claims which really don’t fit the definitions or the terms and conditions that the premium requires to be met to remain sustainable.
In other words, pressure from consumers on one side [to be presented with the ‘best’ decline rates to choose from] plus pressure on claims outgoings [to have the ‘best’ decline rates by paying out more than should be paid] from the other side can only mean one thing rearing its head in the middle for insurers. In order for insurers to keep reserving within prudential requirements and fulfil APRA’s quarterly behave or you’re in trouble exercise, premiums would have to rise. Sustainability would be the victim, and this would snowball into an affordability backlash from advisers and consumers alike.And for what? To create an apparently simple tool for consumers to choose insurers? On what basis is any particular decline rate being judged as unacceptable? Yet that’s the implication of media releases, media commentary and interpretations of the 498 report.
Finally, because constructive commentary shouldn’t just criticise but should suggest solutions, what tool could be given to consumers that would mean something?
ASIC came close when they requested, as part of the recent review, that a period of declined claims be analysed to see if they were handled fairly and reasonably. There is a clear secondary but critical aspect of any scrutiny over claims; one which we have been championing for decades: the stats are meaningless once a claimant is actually on claim. At that point the actual experience is all that matters. How does the industry communicate what we offer when someone claims? At The Risk Store we have always stated that an admitted claim can give a claimant a lousy experience and at the other end of the spectrum, a declined claim can be handled very sensitively. So do we have benchmarking of the actual claimant experience? No.
Declaration of conflict of interest: our C-MAP program would do this if enough insurers opened their doors to it. End of declaration of conflict of interest. Well – not quite. This is exactly why C–MAP was developed. But no-one gets the importance of benchmarking to give consumers a measure of their expected experience; the service levels they can be sure of and the empathy they can appreciate. What if all insurers had an A rating on claimant experience at the coalface? What sort of message would that send?
What’s the alternative to selective decline of claims? There will always be other hypothetical solutions to managing risk in any type of insurance but look at how self-evidently the life insurance ones fail the consumer-friendly and commercially realistic tests. We could:
1. Allow everyone to claim for everything illness or injury related…and charge three or four times the current premiums.
2. Let everyone in to any insurance policy at cheap rates, with no underwriting, then they will understand they take their chances at claim time…and they must.
Will consumers ever be well-informed by their own actions? Here’s an interesting comment from the 498 report: “In ASIC’s view, good claims handling for insurance…is based on the sale of products…that are promoted in a way that facilitates consumer understanding of what is covered and what is not.” This is so unrealistic a view of 21st century consumer behavior as to be unhelpful motherhood fluff. If necessary information can’t be fitted into a smartphone SMS text box visible within one screen, it won’t get read. Canvass any insurer’s call centre to confirm that on the whole, the answers to even the simplest of enquiries are not sought out by reading anything in a document, even online.
Recognising this, does ASIC’s suggestion to publish decline rates help consumers become better informed? Categorically no.
We do promote products “in a way that facilitates consumer understanding of what is covered and what is not” – we have to by law in documents called PDSs that regulators themselves dictated as to content. Further, basic life insurance definitions are mostly pretty simple. That’s why death claims have zero true decline rates. TPD is clearly total and permanent. Lists of trauma events covered are heading towards more clarity than previously. But the tough truth is that we in life insurance are dealing with medical terminology overlaid with necessary medical opinion. By comparison, general insurance policyholders only need to understand, for example, the difference between whether the flooding in their house was (i) ingress from a storm surge or (ii) caused by a burst pipe.
If insurers do not undertake, at the very least, to educate ASIC more assiduously on the above reasons for decline statistics and enable this level of drill-down for ASIC, then we could end up facing the biggest – albeit misdirected – threat in a long time. We congratulate Peter Kell for standing ground so far on the commercial-in-confidence nature of the information provided for the review. He is right to do so. We also assure ASIC that we rely on them to take this letter’s message and use it to argue against any ‘outing’ that politicians might push for as part of a conveniently timed witch-hunt.
Sue Laing
Founder & Technical Manager, The Risk Store
