Junk products, unfair terms and sky-high commissions. Why we need to fix the insurance market.
Say you take out income protection insurance to cover you if you get sick and need time off work. Years later, you’re diagnosed with cancer and make a claim on the policy. The insurer declines to pay out because you failed to tell it that, at same point in your past, you’d been treated for a knee injury.
Sound unfair? No doubt.
Insurers get away with this practice because our outdated laws let them. If you accidentally fail to disclose something the insurer thinks is important – even if it’s unrelated to your claim – the company can refuse to pay, despite the fact you’ve been forking out premiums for years.
We’ve been campaigning for an overhaul of our archaic insurance laws and a review has finally been kicked off by Commerce and Consumer Affairs Minister Kris Faafoi. The review has the potential to drag industry practices into the 21st century and get rid of junk products and unfair terms.
To make that happen, sizable holes in the law need to be fixed.
First up, the issue of disclosure. When you take out or renew a policy, you must tell your insurer anything it considers material in deciding to insure you. This may range from the sports injury you got 10 years ago (if you want health or life insurance) to the speeding ticket you copped in your misspent youth (if you want car insurance).
If you don’t, your insurer could cancel your policy, leaving you stranded. It doesn’t matter if your omission was accidental or deliberate.
But, unless you’re an insurance buff, it’s unlikely you’ll be able to second-guess everything the insurer wants to know – more so when the event is a distant memory. Other countries have already legislated to protect consumers in cases of accidental or innocent non-disclosure and our laws need to catch up.
Just as crucial is dealing to unfair terms. Insurance is the only industry that’s managed to get an exemption from the Fair Trading Act’s ban on unfair terms in consumer contracts.
As a result, it’s no big stretch finding unfair terms lurking in insurance policies. For starters, how about terms allowing the insurer to make wholesale changes to the policy? Or giving it the right to keep your premiums even if you cancel and it’s no longer providing cover?
The industry’s exemption from the unfair terms ban means insurers have effectively got a green light to sell junk products. Because they have little obligation to ensure their policies are fair, terms can be so one-sided the cover you’re getting isn’t worth the cost.
Funeral insurance is a classic case. The terms of these policies mean consumers can pay more in premiums than the cover is worth. Our 2016 review of funeral insurance found five policies required premiums to be paid until the insured died. In one case, this meant a 64-year-old man taking out a $10,000 policy would end up paying $20,000 in premiums by age 84.
The risk of being sold a junk product increases when the person selling it to you is paid a commission. And that’s how many insurance sales reps make their living – the more they sell, the more they earn. If a rep recommends upgrading your life insurance, it may well be because it’s in their best interests, not yours.
Insurance is heavily promoted with ads that convey the impression it’s easy to get and the company will be with you through thick and thin. Insurers claim they’re selling us “peace of mind”.
To attract customers, insurers highlight the most marketable benefits of their policies: “new for old” (contents insurance), “no claims bonus protection” (car insurance). But the advertised features vary from insurer to insurer – and may provide an inaccurate gauge of the quality of cover.
Behind the slick marketing, the reality is you may have to read through lengthy and long-winded policies to find what you’re really getting for your money. Wouldn’t it be easier if insurers had to provide simple one-page summaries of their cover so it’s easier for consumers to compare what’s on offer? That’s what we reckon.
Consumer NZ members agree. In our last insurance survey, 91% of the 7549 members who participated said they wanted simplified policy summaries.
Being able to compare the cost of insurance is just as important, both when you take out a policy and when it’s up for renewal. But research has found the pricing practices of insurers at the time policies are renewed deters consumers from looking for better deals.
The failure of insurers to clearly display premium increases means customers may not realise they're paying more than necessary.
In the UK, insurers must display the past year’s premium in renewal notices. Research by the Financial Conduct Authority found customers presented with a direct comparison between past and future premiums were 11 to 18 percent more likely to switch or haggle with insurers.
Our insurance survey found consumers also want this information. Eighty-four percent of Consumer NZ members who took part said they’d find it useful if renewal notices contained the previous year’s premiums.
By law, insurers are required to be registered with one of four dispute resolution schemes.
If you and your insurer can’t settle a dispute, you can make a complaint to the applicable scheme. But these schemes aren’t required to publish data on which insurers are subject to the most complaints (and which complaints are upheld).
Dispute resolution services in Australia and the UK publish disputes data on individual insurers. Both services say the data encourages insurers to up their game.
We want similar rules here. Eighty-eight percent of Consumer NZ members in our survey agreed this information should be published.
But a lot of life insurance being sold is simply to replace policies consumers already have. Sales reps are incentivised to do this because they’ll earn a tidy commission when they sign you up for a new product. An overseas trip or dinner at a plush hotel could also be thrown in if they meet their sales targets.
In a report released in July 2018, the FMA criticised big insurers for putting their interests before consumers when touting replacement products. The report, which looked at 11 companies, found fewer than half advised consumers that replacing a policy could lead to worse cover.
Replacing life insurance policies comes with the risk you’ll lose benefits you previously had, and that health conditions developed since you first took out a policy won’t be covered. Insurers typically exclude cover for all pre-existing conditions.
As a result of its investigation, the FMA is considering legal action against three insurers.
Getting these changes through is our next task. We’ve put in our submission to the insurance review.
You can help us make the case for change. If you’ve been sold junk insurance, stung by unfair terms or led up the garden path by your insurer, let us know: email@example.com.