In part two of a two-part series, Greg Bird and Danny Bechara from the Institute’s Disability Insurance Taskforce continue to provide an outline of some of the key provisional findings and recommendations made, discuss some of the initial feedback received and the next steps.
As noted in our prior article, the investigation and findings of the Taskforce were wide ranging, covering all areas of the design, operation and oversight of the IDII product. 45 recommendations were developed across these areas. In Part One of this series, we briefly summarised recommendations in the areas of Customer and Community Interests, Product, and Governance and Management. Brief summaries of some of the key findings and recommendations in other areas are set out below.
Regulation and the Law
Australia has a comprehensive legal framework governing life insurance. This includes in particular the Life Insurance Act, the Insurance Contracts Act, the APRA Act, the Corporations Act, and the Unfair Contracts Act. This legislation is supported by regulators – in particular APRA and ASIC – who impose regulation under the law.
The Taskforce discussed various parts of these frameworks with industry participants. A particular area of feedback was with respect to the operation of ‘Best Interest Duty’ (BID) and there being potential benefit in ASIC and other participants producing BID examples as this may help insurers, ratings house and advisers navigate trade-off of IDII features and price (a Taskforce recommendation was made in respect of this). Furthermore, the Taskforce view was that APRA and ASIC should look to consider all the Taskforce recommendations, and in particular that APRA should maintain its current intervention in the IDII market for the meantime. Some of the legislation relevant to the Life Insurance market was also seen by the Taskforce to be in need of review, particularly the Life Insurance Act 1995.
Financial advice is critical for most IDII customers at the initial purchase, ongoing as policies are renewed and at claim time. Furthermore, in a life insurance distribution context, advisers utilise Rating Houses for selection of products including supporting BID obligations. As noted above, BID examples are seen as particularly important to help advisers navigate the trade-off of IDII features and price. Amendments to the rating house process was an important recommendation of the Taskforce, particularly ensuring proportionality of a rating features to customer value, an increased focus on sustainability in the rating process and guidance issued to insurers on appropriate use of ratings in communication and promotion of products.
Underwriting and Claims Management
Changing social attitudes to disability has changed the nature of IDII claims – away from physical injury and to ailments requiring more judgment to assess, such as mental ill-health. Thus, both underwriting and claims assessment have become more challenging for insurers to complete in a fair, consistent and transparent manner for customers.
The engagement with the medical community and other claims experts was a key focus area for the Taskforce, ensuring clearer sharing of information, more wide-ranging and effective expert engagement and focusing on return to work and rehabilitation. Further development of claims and underwriting management practices and improvement in claims and underwriting data were also viewed by the Taskforce as critical foundations to improving underwriting and claims outcomes.
The Taskforce view is that the introduction of the CRO role in insurers has clearly improved focus on operational risk and management of those and all other risks. To build on this, the Taskforce viewed as critical ensuring adequate support for the breadth of the CRO role regarding the complexities and interdependencies of the IDII product – and furthermore ensuring collaboration within insurers and across the industry with respect to better risk management practice for IDII products.
Actuaries Professional Obligations
Actuaries play several roles in IDII portfolios, covering input to product terms and conditions, pricing, reserving and capital levels supporting the portfolios. They also play a critical role in assessing and managing the financial risk associated with IDII, and in the communication of that risk to CROs, management and Boards. The Taskforce believed that because of the complexity of IDII, the regular changes to features, the lack of adequate data, changes in society’s expectations, and improvements in medical diagnoses and treatment, it can be challenging for actuaries to carry out the above duties. The Taskforce therefore recommend that better actuarial practices should be developed and implemented for this business line.
This includes ensuring actuarial advisors to insurers are more explicit about the uncertainty inherent in the IDII product. From an Appointed Actuary perspective, the Taskforce believes there should be increased oversight of claims and underwriting practices, clearer accountabilities between Appointed Actuaries and CROs, as well as broader training and development to support Appointed Actuaries better influencing insurers as to key areas of focus and attention.
Feedback on findings
The consultation period closed on 31 October 2020. The Taskforce has received considerable feedback from many stakeholders regarding the Taskforce findings and recommendations in the form of submissions. There has been support for many of the findings and recommendations, although as expected there are areas of both partial agreement as well as disagreement with the nature of the findings and recommendations. The Taskforce is working through all the feedback to consider refinements to findings and recommendations as appropriate.
In addition, a survey was distributed to gather feedback – this was available to all market participants. The total number of respondents were 125, noting the majority of respondents were from actuarial practitioners, although there was feedback from other industry participants including claims and underwriting specialists and CROs.
- Overall approximately two-thirds of respondents agreed with the recommendations and findings (varying between 50% and 90% depending on the recommendation).
- Another 25% or so partially agree (varying between 10% and 40% depending on the recommendation).
- Only around 10% disagreed (varying between 3% and 20% depending on the recommendation) – as above, this feedback is being worked through by the taskforce.
At a high level, some key areas of feedback from this survey were as follows:
- The concepts and intent of both the Reference Product and Sustainability Guide had strong support – although wide-ranging feedback was received as to how these tools would operate in practice for insurers, how they would evolve over time and interact with other parts of the value chain.
- There was some support for the various measures improving communication of key concepts, risks and uncertainties with all stakeholders, although again extensive feedback was received as to the need for consistency of various approaches and the complexities of implementing all the recommended changes;
- Findings and recommendations regarding regulatory action and intervention similarly had some support, although feedback received included ensuring such regulation would not result in more complexity or reduce accountability of the industry to addressing problems and issues;
- There was strong support for various claims and underwriting findings and recommendations, particularly with respect to resourcing and data, however feedback was received regarding how best to assess the effectiveness of all claim management practices from a sustainability perspective.
The Taskforce, supported by the Working Groups, are currently in the process of considering the feedback received with the aim of issuing a final set of output (recommendations and findings, sustainability guide and reference product) in Q1 2021.
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