Life Insurance Industry Claims Management Review

Life companies are being asked by ASIC to commit to an independent review of their claims management practices.

In brief

• Life companies are being asked by ASIC to commit to an independent review of their claims management practices.
• The purpose of the review is to identify whether there are systemic issues in the industry.
• Life companies will need to consider how a review can best be designed and implemented to meet this objective.

ASIC letter of 18 April 2016

As life companies will be aware, ASIC recently issued a letter to all life companies outlining its review of insurance claims practices. As part of that review, ASIC is seeking commitments from life companies to undertake an assessment of their claims management systems.

Purpose of Review

The purpose of ASIC’s review is to assess whether there are systemic issues requiring further consideration or regulatory action.

The term ‘systemic’ is not elaborated upon but it is interesting to note the usage of this term in CP247. In that Consultation Paper, ASIC define a systemic issue as one that may have implications beyond the immediate rights of the parties to a complaint or dispute or that may have implications for more than one client.

The objective of the review is to prepare an initial report to Government within approximately 3 months to form a view as to whether further inquiry should be made.

Sources of information

ASIC states that it will have regard to a wide range of sources expressed to include but not be limited to:

• FOS and SCT,1
• Insurers,
• industry benchmarking services, and
• industry experts and relevant stakeholders.

Required scope

ASIC is effectively asking whether insurers have, or intend to undertake work to assess and verify that:

1. consumer claims management practices and procedures are satisfactory,
2. there have not been inappropriately denied claims,
3. claims management does not exhibit any systemic problems.

A recurrent theme is that independent assurance around such a review is desirable.

The claims handling review is expected to cover:

• an independent third party review,
• a review of the integrity of the claims handling system, including policies and procedures and remuneration practices,
• a review of product design processes including the currency of policy definitions,
• a risk-based review of denied or reviewed claims going back at least 5 years, and
• an appropriate review mechanism to have FOS review claims where there are unresolved disputes about denied claims.

It is understood that APRA may also be communicating with life companies.

An initial response to the ASIC letter is sought by Friday, 29 April 2016.

Observations

Basis of Review

This request from ASIC is clearly not surprising. No legislative basis for the request is given although it would seem likely that if a basis was advanced, the efficiently, honestly, fairly requirement under section 912A of the Corporations Act 2001 would be cited.

Concept of Independence

It is interesting that ASIC emphasises the need for an independent review and the desirability of an independent third party reviewer The question for life companies is what form that  independent oversight or review will take.

Again, comparing CP247, ASIC has indicated that all review programs should have a level of independent oversight in developing and operating the program. An independent review will help to give a high level of confidence and comfort about the integrity of the life company’s processes. However, in CP247,  independence may be provided by:

• an independent expert being a person or firm external to the life company that has expertise in overseeing review programs (ie, third party), or
• an person who is internal to the life company but having sufficient independence from the operation of the review program and holding a senior role within the organisation (eg, head of the internal audit team).

CP247 suggests that determining the appropriate level of independent oversight will be influenced by factors such as the scale of the review and business subject to the review and the nature of the issues that have given rise to the need for the review.

Similarly, the extent of the involvement of an independent third party person or organisation is an important consideration. This might involve:

• assistance in the design of the review and testing that it is robust and meets its intended purpose,
• general oversight and checking of operational effectiveness, or
• reviewing samples of the subject matter eg, spot audit of claims reviews to ensure that the assessments are fair and consistent.

The take out from CP247 is that it does not follow automatically that independent third party expertise is necessary for every review but will be desirable  where complex issues are involved and the life company has little or no experience in designing and implementing a review program of this nature. ASIC’s proposal to life companies appears to be that a third party review will be necessary in this case. Nonetheless, the scale of any third party review should be tailored to reflect the scale and nature of a particular life company’s business and it does not follow that a one size fits all approach will work.

As such, we expect that there may well be different responses to this letter. A life company who has recently completed such a review may be well placed to take the view that, provided such review met the ASIC criteria, it would not be necessary to institute a fresh review.

Other Issues

Another key issue to consider is whether the review would be conducted as a legal review or at least as subject to legal professional privilege.

This can be important from the point of view of having a mechanism to deal with any past claims liability in an environment which has some controls and balances.

In light of the comment by ASIC that APRA is likely to  communicate with life companies in relation to similar issues, it will be relevant to consider the extent to which this review should include an assessment of appropriate governance arrangements and  the extent to which claims management processes and policies are captured as part of the life company’s overall risk management framework. The different interests of regulators will likely  need to be factored in the design of any review program.

Finally, it is not clear on what basis ASIC has suggested that a risk review of denied or withdrawn claims should go back at least 5 years and the role it envisages in having FOS review unresolved disputes about denied claims. Clearly it will be important to design a review that is robust enough to confirm whether there are systemic issues or not and have a suitable process to resolve outstanding disputes.

These are matters that can be discussed with ASIC in framing a response to the industry review.

Endnotes

1. Financial Ombudsman Service and Superannuation Complaints Tribunal.

More information

For information regarding possible implications for your business, contact Michael Vrisakis, Claire Machin and Sarah Yu.