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Parliamentary Joint Committee on Corporations and Financial Services
18/08/2017
Life insurance industry

BEER, Ms Megan, Group Executive, Insurance, AMP Ltd

MELLER, Mr Craig, Chief Executive Officer, AMP Ltd

CHAIR: We reopen this hearing of the Committee on Corporations and Financial Services inquiry on the life insurance industry. The committee welcomes AMP. I remind committee members and witnesses that, while this is a public hearing, care should be taken to protect the privacy of individuals and that arguments should be made without naming individuals. I now invite you to make a short opening statement. At the conclusion of your remarks, I'll invite members of the committee to put questions to you.

Mr Meller : Thank you for the opportunity for us to provide evidence at the inquiry today. I'm joined by Megan Beer, who's got nearly 25 years experience in the insurance industry and runs the insurance business for us here at AMP. In 1849, AMP was founded with a clear company motto, 'amicus certus in re incerta', which, translated, means, 'a sure friend in uncertain times'. With this as a guiding principle for the past 168 years, we've had a proud history of assisting Australians when they face illness or injury—often helping them at the most difficult times in their lives. Last year, we helped over 11,000 customers by paying $1.06 billion in insurance claims.

We firmly believe in the vital role life insurance plays in the wealth and health of all Australians. We also believe in the value of it being provided through superannuation to ensure adequate levels of individual cover and to avoid additional burden on the disability pension. However, the insurance industry is inherently complex and faces a number of challenges, particularly with the interpretation and management of the type of cover that a customer may hold, the continual advances in medical diagnosis and treatment, and downstream impacts from the medical system and adjacent insurance sectors. With this in mind, there will inevitably be occasions where we don't live up to our own standards and expectations. In these instances, when we find we've done something wrong, we seek to fix it quickly and learn from our mistakes to improve our practices and our customers' experiences.

Over three years ago, we recognised the need for fundamental change in our business and decided we needed to take a more human and empathetic approach to how we deal with customers when they are facing illness or injury. This involved designing a new approach to assessing and managing life insurance claims. We introduced new processes, moving away from paper-based to phone-based systems, and this meant that the claims manager could support the customer through the process, helping them determine what type of claim they should lodge and understand the information required to ensure it is processed quickly and efficiently. They can also help the customer through other services, like connecting to support services in the community or working with their doctor and employer to return to work to support recovery. We've made good progress in rolling out our new claims management approach, but of course there's always room for improvement, and we support many of the recent industry-wide developments, including those under discussion at this committee.

As you may be aware, AMP did not lodge its own submission to the committee, as we have actively participated in the development of the FSC submissions, which sought to address many of the issues of concern. These include: genetic testing, approved product lists, mental health and collection of health data. As an industry, we need to face these challenges and develop a response which is both in the customer's best interests and sustainable. Both Megan and I would be pleased to respond to any questions the committee may have in this regard. We've been following the course of the committee's inquiry closely and are conscious that members have many broad-ranging and detailed questions to ask. We'll endeavour to keep our answers as succinct as possible, however, as many of the issues are complex, they may require a more detailed response. We would be pleased to answer any of the committee's questions. Thank you.

CHAIR: Can you give us an overview—or, as you said, a succinct overview—on what your types of insurance are that you market?

Mr Meller : We operate in the retail insurance marketplace, principally through the sale of insurance products through financial advisers. We offer term insurance, total and permanent disability insurance, trauma insurance and income protection. We're also active in the group insurance marketplace, principally providing group insurance to members of AMP superannuation funds, but we also have a small number of external superannuation funds where we're the group insurance provider. We have a total of about $1.9 billion in premiums that we collect each year.

CHAIR: OK. We just had TAL in before. We talked to them about their processes for group insurance claims and the process of going through the actual super fund, trying to get some clarity into the processes and how long that took. If you're running your own insurance through your own super funds, does that speed up the process because you've got, virtually, a double overseeing of that?

Mr Meller : Absolutely. AMP Superannuation Ltd, which is the superannuation trustee for all of our superannuation funds, works hand in glove with Megan's team to ensure that, as far as possible, it's a seamless process when it's an AMP super policy and an AMP life insurance policy.

CHAIR: Do you have shelf-space fees or anything like that?

Mr Meller : We don't pay any shelf-space fees. We have life insurance companies that are part of the approved product and services list of our advice businesses. There are certain fees that they pay for sponsorship and education of our financial advisers, but that's not a requirement to get onto the approved product and services list.

CHAIR: Can you just explain how your operation works with the approved products list?

Mr Meller : Within our advice businesses, we have research departments whose responsibility is to ensure that we make a broad enough range of products available across all of our different product categories, including insurance, so that our advisers have the availability of enough insurance products for them to be able to meet the best interest duty requirements of the FOFA legislation. That typically means that, in our advice businesses, there are between six and eight different insurance companies that are chosen to be on each of the individual approved products and services lists. I've got some confidential information here, if the committee would like to see it, that shows the split of where that business goes. The majority of the business that's written by AMP advisers isn't written into AMP products.

CHAIR: We had TAL also tell us that they had a target of settling disputes within 45 days. Does AMP have a target for settling disputes?

Mr Meller : I might ask Megan to cover that one.

Ms Beer : Yes, we actively try to resolve disputes as quickly as possible. We work very closely with the customer in order to understand the dispute and look to resolve it. We have a range of internal review processes, and we do try to do it within that target time frame.

CHAIR: But you don't actually have a set time, date or anything like that?

Ms Beer : We seek to achieve the time frames in the code of practice, which is the 45-day time fame that is set out as a requirement.

CHAIR: At what point do you classify that it's become a dispute? Obviously, there's a refusal. At what point does it become a dispute?

Ms Beer : That's an excellent question. We work very actively with our customers so that we keep lines of communication the whole way through the process. You're correct in that some disputes arise because of a decision to deny a claim. Some disputes also arise because, for example, the time taken to make a decision might be too long. We have internal dispute processes that can be accessed by a customer throughout the claims process so that their dispute can be handled as quickly as possible. We have an internal customer advocate who works in our claims team to represent the customer in resolving any areas of query that they might have about how their claim is progressing.

CHAIR: The committee has heard that AMP do take some time to get disputes and some of the claims done. There's one example, I think, with regard to an ABC News report about—no, it wasn't that. I'm just trying to find it now.

Senator WILLIAMS: It was 7.30, wasn't it?

CHAIR: Was it?

Senator WILLIAMS: That's where I saw it.

CHAIR: It was about four years or something. For me, four years is a long time.

Ms Beer : Yes, and we publicly apologised for the time it took to make a decision on that claim. It was a very complex claim, and we would be happy to share some more details about that claim in camera if that would be of assistance to the committee.

CHAIR: Does the committee want to hear that or not?

Senator WILLIAMS: I think I might've texted you when it was on. That was—I'm trying to think—yesterday. There were a couple of claims of very slow payments. I think it would be valuable for the committee to get the other side of the story. There are two sides to every story.

CHAIR: I think the AMP should have the chance to dispute any false claims that might've been in the report.

Senator WILLIAMS: Chair, why does it have to be in camera? We encourage things to be on a public record. Is there a reason why AMP don't want to discuss the other side of that 7.30 report?

Ms Beer : We take our customers' privacy very seriously, so that's the reason why we'd prefer to be able to share more details in camera.

CHAIR: I think that that's fair to the customer. Are there any other thoughts on this?

Mr KEOGH: The details have already been on 7.30, so this is just putting back the other side. But I would support Senator Williams in the general proposition that we should go so far as we can without needing to go in camera or we should go in camera but note that it might lead to some further questioning post in camera.

Ms BUTLER: Why don't we do that? Why don't we go in camera and then, if there are matters that we think we will ask about outside of the in camera process, we can discuss. Would that be acceptable to you, Wacka?

Senator WILLIAMS: You know how easy I am to get on with—you know that!

Proceed ings suspended from 11:00 to 11 : 23

Senator WILLIAMS: Ms Beer or Mr Meller, tell us where you're up to with your troponin criteria for heart attacks. Tell us how it used to be, what have you changed and when you changed it, please.

Ms Beer : We regularly have reviewed our medical definitions and passed those back to policies where appropriate. So we believe our definitions have remained contemporary over a long period. We've regularly updated our heart attack definition. As you would understand, I think, from previous to the committee, the heart attack definitions contain lots of very complex components. We removed troponins from our policies back in 2012, but prior to that we had added a range of other components into our heart attack definitions so that troponins weren't the only factor that was required to meet a heart attack definition.

Senator WILLIAMS: Was it the case, like in the CommInsure case, where the troponin levels in your blood after a heart attack had to get to something like two milligrams per litre of blood, which was okay under the old measurement, then they became much more specific in how they measured troponin blood levels, and you could not exceed 0.5—you could never get to two? Was that the situation?

Ms Beer : Our definitions of that are not just the troponins component but also a range of other factors that could lead to meeting a definition of heart attacks.

Senator WILLIAMS: That's fine. You explained that. But what I'm saying is: when did this new measuring capability of troponins blood levels came into existence? Was it in 2013 or something like that?

Ms Beer : There has been a progressive change of the definition across many years.

Senator WILLIAMS: Are you saying that when that progressive change came along that you changed your standards as well?

Ms Beer : We have changed the definitions. That is correct. As you would be aware, we have AMP products and we also have products through the National Mutual Life Association, the AXA business we bought in 2013. If we look back on both of those product series, we made changes to definitions of heart attack in the early 2000s, the mid-2000s, late 2010, in 2012 and we made further changes in 2016. So we have a regular process of reviewing our definitions to make sure that they're contemporary and reflecting the latest medical standards and evidence.

Senator WILLIAMS: I must add, the first witness in Melbourne at the airport was a Mr Barnes. Thank you for discussing that issue with me. I appreciate that very much. I just wanted to put that on the record. I want to go now to your financial planners. How many planners do you have in the life insurance industry or are they involved in the investment industry as well? How many planners does AMP have?

Mr Meller : We have about 2,800 advisors in Australia and they'd all be involved in providing advice for life insurance, investments and superannuation.

Senator WILLIAMS: What are you doing to raise the new standards that are coming in, for example, RG146? Have you made any adjustments regarding the training, experience and knowledge of your planners?

Mr Meller : We're working with all of our planners to try and ensure they're meeting the requirements of the industry standards and the future requirements of the industry standards. The vast majority of new advisors joining any AMP advice business these days are already qualified to degree level, but we're very cognisant we have got to progressively increase the standards of the existing advisors to ensure they meet the industry requirements going forward, and that's become a big component of our professional development to date.

Senator WILLIAMS: I think I heard a row with BT, where BT said to the committee they only advise BT products. With AMP advisors, the 2,800, let's look at life insurance. What percentage of life insurance would they sell that are not AMP products? You can take that on notice. I don't expect you to go through every policy and every detail. I have some concerns about when BT advisors only advise BT products. Under the FoFA regulations, obviously BT products must be the most suitable available for the BT clients. Tell us your situation.

Mr Meller : Across our different licensees, we have between six and eight different insurance companies that are on each of the approved product lists for the different licensees. We think that's about the right number for our advisors to have the range of insurance products that would always enable them to be able to offer the right policy to the client that's acting in the client's best interest. I have got data that's commercial-in-confidence—but I'm happy to share that with the committee—that shows the percentage of business that is placed with the different insurers.

I understand AMP is perceived as a vertically integrated company but the plain reality is that the majority of the insurance that our advisors provide to their customers is with other companies, not with AMP.

Senator WILLIAMS: The majority?

Mr Meller : The majority. I'm happy to hand out a table so you'll be able to see the percentages of all the different companies.

Senator WILLIAMS: That's good. I want to take you to direct insurance. You probably heard us questioning a previous witness today. AMP does direct insurance, correct?

Mr Meller : No, we don't do direct insurance.

Senator WILLIAMS: I'm wrong; AMP doesn't do direct insurance. Is all your insurance either through financial planners or superannuation?

Mr Meller : Yes.

Senator WILLIAMS: Do you do group insurance?

Mr Meller : We do group insurance.

Senator WILLIAMS: Talking about group insurance, I asked the previous witness: if I'm a 19-year-old apprentice mechanic living at home with mum and dad, with no debt and not responsible for anyone—no wife or children; no dependants—why would I need life insurance, excluding TPD and income replacement?

Mr Meller : That's a very good question. To me it goes actually to the core of the purpose of life insurance. In my mind, it's one of the only examples in the world of capitalist socialism. Insurance is the many who will never need the insurance paying for the few who will need that insurance at some stage. That's the whole basis and philosophy of insurance. Of course the challenge that you have in a group insurance policy is that the trustee and the insurer don't know whether that 19-year-old has two dependants or no dependants—

Senator WILLIAMS: That's your problem.

Mr Meller : Therefore, the challenge that we have in coming to a conclusion around the default level of cover is: how do we do the best by the 19-year-old with dependants and at the same time do the best by the 19-year-old without any dependants? The judgements involved in that are a critical part of the decision-making processes between the trustee and the insurer. We are very strong proponents of the requirement for life insurance within superannuation. We think it has significant benefits. There would be an even larger underinsurance issue in the country if life insurance were not part of superannuation. If we think about the purpose of life insurance within superannuation, the essence of the purpose of super is that it allows people to enjoy a more prosperous retirement as a result of the savings they have made through their lifetime. For the vast majority of people that arises at a time when they choose—when they choose to retire—but for a small and very important minority it happens at a time not of their choosing, because of sickness and illness. So we think the importance of insurance within super is critical to ensure the ongoing delivery of prosperous retirement to all Australians.

Senator WILLIAMS: So when it comes to group insurance FoFA goes out the door obviously. You are insuring people when it is not really in their best interest. It's not the best product or situation for them. You are giving life insurance to an 18-year-old living at home with mum or dad who has no dependants and no debt. They don't really need life insurance, do they?

Mr Meller : They may do during their life.

Senator WILLIAMS: But you're missing the point. They don't need it then. When they are 30 years old, married with two children and a mortgage, then of course they need life insurance, but they don't need it when they are 18 or 19 years old, in my opinion, and I'm no expert. Mr Van Manen would know a lot more about this than I do, I can assure you. He's a financial planner.

Mr VAN MANEN: And I would disagree with you on this particular point, Senator Williams.

Senator WILLIAMS: You were in the industry too long!

Mr Meller : I'll take Mr Van Manen's advice.

Senator WILLIAMS: I'm just saying that there seems to be a lot of people who have life insurance and, if you went under the FoFA for retail insurance, you certainly wouldn't give them that policy. That's the point I'm making.

Ms BUTLER: But isn't there a possibility though that getting into life insurance earlier will mean that you get in before you have any pre-existing conditions to disclose and therefore it might cause you to have lower premiums?

Senator WILLIAMS: No, with group insurance it's just one big swipe.

Ms BUTLER: Oh, we're talking about group.

Senator WILLIAMS: We're talking about group insurance.

Mr Meller : Those members also have the opportunity to opt out of that insurance—

Senator WILLIAMS: Exactly.

Mr Meller : and not have it as part of their super.

Senator WILLIAMS: That's if they know they have got it.

Mr Meller : We endeavour to make that as easy as possible.

Senator WILLIAMS: The big problem here is education.

CHAIR: How do you make it possible for people to opt out?

Senator WILLIAMS: You do what I did—you write to them and tell them that you want to get out.

CHAIR: No, I want to know what they do to help.

Ms Beer : Part of our communication to our members through our own trustees is to be very clear about the insurance that they have. We make it available for customers to call us to opt out, so we try to make the process as easy as possible there. We're investigating ways to make that an easier process to occur online. But we do feel it's very important to caution customers when they do opt out to realise what they're opting out of. As Ms Butler said, we do agree that group insurance and being able to be insured early is a very valuable option as your health does change over time, because later on you may not be able to get insurance.

Senator WILLIAMS: And the premiums go up and the pays go down.

Mr FALINSKI: The problem here is that brokers often don't spot the errors until afterwards.

Senator WILLIAMS: This affects other people. Here's my problem: if I went down the street today and I stopped 10 people under the age of 30 who are working and said, 'Are you happy with your life insurance in your superannuation?' I bet you 50 per cent don't even know they've got it and the other 50 per cent would say, 'I know I've got it, but I don't really know what it's costing and I don't really know what my payouts are or anything.' I think the huge majority of people, especially young ones, are totally ignorant when it comes to their group insurance, and that's the serious problem we have.

Ms Beer : I absolutely understand your concerns there. What I would also say from our claims experience—and we've just shared with you some of our statistics on claims that we pay—is that we do pay claims for customers who are under 30. Those claims, more often than not, are salary continuance payments for people who get injured or ill and are unable to work. We also make total and permanent disablement claims for customers who are young. Even if they might have no dependants, the ability to use those insurance payments to fund care, for example, is very important. So we see that all of the arrangements—not just insurance for death but insurance for total and permanent disability and income protection—are also an important part of the debate and the discussion we should be having.

Senator WILLIAMS: That's fine. On the other side of the coin, if a young lady gets married at 24 or 25, has a family and doesn't work again, and she's had some super, unless she takes action her group insurance premiums will probably take all of her super in the years ahead. I've seen it happen, which is another thing that comes back to education.

Mr Meller : That might also be the right thing for her, particularly if she's not working because she has a young family. Were she not able to look after them, the insurance she has within her super could be absolutely appropriate for her. For me, the much bigger issue than the very few who are overinsured in Australia is the even larger number that are underinsured. The plain reality is that the burden of looking after—

Senator WILLIAMS: Mr Meller, who makes that judgement on whether we're underinsured or overinsured? I hope it's not the insurance companies.

Mr Meller : No, it's the individuals.

Senator WILLIAMS: The insurance companies would certainly say we're underinsured. Who makes that decision?

Mr Meller : The decision—

Senator WILLIAMS: I have heard this statement before: Australia is underinsured. Who puts that data together and says Australia's underinsured?

Ms Beer : We have seen various research that looks at that. KPMG publish some research, and they do that on the basis of looking at the impact of illness and injury on people's ability to survive, if you like, and looking from a factual perspective at what the levels of insurance are versus what the gap is. It's generally about the gap. It's not indicating how an individual customer might think about their risk appetite and how much they want to take that risk on themselves, but there are those studies that are not performed by the insurers but are performed externally.

Senator WILLIAMS: I have a final question: if I were a young person of, say, 25 and single, what's going to be my best insurance if I opt out of group insurance, see someone like Mr van Manen and get personal retail advice from a planner? Wouldn't I be able get a policy that may be far more suited to me and even at a cheaper premium?

Mr Meller : Before you opt out of your policy, go and see someone like Mr van Manen, and he'll advise you that staying is the right thing to do.

Senator WILLIAMS: That's what I'm saying. People come to the independent planners, who say, 'For what you're getting in your group insurance, we can give you a better policy, more suited to you, for a smaller premium.'

Mr Meller : That should be—

Senator WILLIAMS: Perhaps people need to look at their group insurance and perhaps look at getting some financial planning advice. They might get a far better deal from the latter.

Mr Meller : We would always recommend that, but then we're a financial advice business, so you'd say: we would, wouldn't we?

CHAIR: Thank you, Senator Williams. I'll pass that over to our in-house financial adviser.

Senator WILLIAMS: Yes, I'll leave now.

Mr VAN MANEN: Thank you, Senator Williams, but the short answer to the question is that people should go and get personal advice.

Senator WILLIAMS: I think that's a good idea. This is a good inquiry for planners!

Mr VAN MANEN: Yes, very much so. I would like to go back to an earlier discussion where Senator Williams asked about training and qualifications. I hear this discussion all the time about planners having degrees and appropriate qualifications et cetera. However, there's no substitute for experience. It is great that the new planners you are taking on have their degree qualifications, but what is AMP's process in terms of planning and mentoring those new planners to make sure they develop the appropriate experience to provide quality advice to clients?

Mr Meller : If I give an example of the academy we run for new financial advisers. We call it the Horizons Academy. We've entered into a partnership with a number of universities around Australia, where people coming out with financial planning degrees have an authority to enter the Horizons practice. They will go through a 10-week process of training on a much broader basis than just passing exams to qualify—more in the field of a set of capability developments and, more broadly, allowing them to think about the context of financial planning as a business that they would run as an owner in their own right.

Once they qualify from the Horizons Academy, we move them into the Horizons practice, where for a period of up to two years they work in an AMP office as a financial adviser under close supervision, usually from a more senior adviser who has been in the industry a long time. The senior adviser basically oversights, coaches and mentors so the new planners get the appropriate experience for when they are a planner in their own right and out in the field and have less supervision than a young planner would need. We gradually move them through a process whereby on day 1, 100 per cent of the advice that they provide is vetted, which would be checked by a separate, more experienced adviser to a time when we assess them as fully competent, and only a very small percentage of their advice would need to be audited on a sample basis.

Mr VAN MANEN: From the discussions around the life insurance framework legislation, you would be aware of ASIC's concerns around advisers churning policies et cetera. What work do you do as a licensee to ensure that your advisers are managing that process in the best interests of the client and that churning isn't occurring? If you discover an adviser that is churning product, what are the consequences for that adviser? Equally, as a product manufacturer, you've got external advisers using your product. What steps are taken by AMP as a product manufacturer to deal with external advisers who you view may be churning products?

Mr Meller : Thank you for your questions. I'll try and take them one by one. Within the AMP family of advisers, we have a comprehensive audit process that will review advisers' compliance with our audit requirements, and included in that is obviously giving appropriate advice, but specifically in the context of life insurance advice. Over recent years, we've developed our data management systems and our IT capabilities to increasingly what we would call risk-base those audits, so we can look at particular risk indicators across the portfolio and say, 'This particular risk indicator could be an indication of a problem,' so that we can be much more focused in where we apply those audits. We would define churning—

Mr VAN MANEN: Can you do that at an adviser-client level? Say that you're my adviser and I'm your client: does your system allow you to look through what your adviser is doing at the client level to see what revenue is going through for that particular client?

Mr Meller : We would see all of the commission the adviser is receiving at a policy level, which essentially is at a client level. We would define 'churning' as where an adviser has moved a client from one insurance policy to another where there is no benefit to the client, but a remuneration payment to the adviser. If there is an appropriate benefit to the client then we would regard that as appropriate business, fulfilling the requirements of the best interest duty obligations under FOFA. The consequences for any advisor who we found to be churning are that we would terminate them immediately and, obviously, report that to ASIC under the breach-reporting requirements.

With regard to external advisers, and we do this with internal advisers as well: as a manufacturer we monitor carefully the lapse rates by individual advisers to see where there are elevated lapse rates—so, business moving away from a policy. If we see external advisers with high levels of lapse rates we usually just say, 'We're not prepared to write business with you anymore.'

Mr VAN MANEN: What would you consider to be a high level of lapse rates?

Ms Beer : We look at it depending on an understanding of the business practice—so, the business model that the adviser runs. For example, the age of the book and the level of new business they are writing. We seek to look at it on an individual basis.

When we do see lapse rates that are elevated above the average for similar types of books—that might be 15 per cent or 20 per cent, depending on the nature of the business that an adviser has—our first port of call would be to discuss that with the adviser so that we can seek to understand what is happening there. And then, as appropriate, we would raise that with their licensee also.

We were also working very closely with ASIC, along with the rest of the industry, on developing some standardised reporting so that we could have more confidence as an industry in how we look at this. That is thinking about the definitions in the same way, as an example.

Mr VAN MANEN: Thank you. I have a final question around product design and product cost. My understanding from other discussions I've had with a number of insurers is that the income protection part of your books is becoming very costly both from a premium perspective but also as a cost to your businesses in terms of the claims experience. One of the unique features we have here in Australia is that we have income protection products that have benefit payment periods to age 65, whereas most other jurisdictions overseas normally have two or five years—that is my understanding. Given that you use a range of products from a variety of different companies, if an adviser is doing research on behalf of a client—an existing client who might have an income protection policy, but they have come in at their annual review and say, 'The premiums are no longer affordable, I want to go to something that is more affordable for me,' and the client recommends a product that maybe has a two- or five-year benefit payment period, if that is available—what are the restrictions or difficulties with that in terms of meeting the clients' best interest duty? And, equally, if somebody comes to market with a product of that type, where it only has a five-year benefit payment period; I know it's a bit of a guess, but potentially how is that going to reflect in the research ratings that that product will receive as opposed to the product that is going to provide a benefit payment period to age 65?

And, as a consequence, if the product with the five-year benefit payment period is recommended by the adviser to ensure that it is affordable for the client, what are the risks around the best-interest duty?

I am concerned that people are being provided with products with a 'to age 65' benefit payment period that are becoming very expensive for them and they are dropping out, yet a product that might be more cost effective for them is being overlooked because of either the ratings it gets from a research house or because advisers are opting to recommend a more expensive product purely out of concern for how they are going to meet the client's best interests duty. I know it is a long-winded question and it is a complicated area.

Mr Meller : It is a very good and important question. Within the basis of providing advice to the client, I would expect our advisers to first work through the client's insurance requirements and, say, almost on the basis, 'If money is no object this is the right level of cover for you,' and then have a discussion with the client, which would go along the lines of, 'But, in terms of affordability, is this realistically affordable?' If a full income replacement age 65 income protection policy wasn't affordable for that client, what are the different options for them? Would it be a lower level of cover of the age 65 policy or would it be switching the client to a five-year policy and then understanding the consequences of that and then essentially their reliance potentially on a disability pension thereafter if they were unable to return to work. To meet the best interest duty obligation, the adviser would have to clearly state in the statement of advice: this is the basis of full cover, but based on your personal affordability; this was the discussion that we had, this was the prioritisation and, therefore, this is, if you like, the post-affordability recommendation that I would make for your insurance.

With regard to the research tables, I would have to take it on notice as to whether the policy would score less or whether the research house is sophisticated enough to be able to differentiate between the different characteristics of those two types of policies. Megan, is there anything you would add?

Ms Beer : When customers ring us—and they do from time to time call and say that the premiums are becoming too unaffordable—we also suggest they go back to their adviser to talk about what the options are. Craig outlined the various options when taking out a policy. We also encourage our customers to work with their adviser, before they make any decisions, to make sure that they have worked through the various trade-offs—whether that is increasing their waiting period or reducing their benefit period—so that they really are well-informed before they make a decision just based on total affordability.

Mr VAN MANEN: Given that AMP has been around for 168 years, I am sure you have a significant legacy policy book. How are you managing that and is there something that could be looked at from a legislative perspective to help reduce the complexity and cost of managing that book to create better outcomes for clients?

Mr Meller : Legacy products for a company of our age are certainly a challenge. Our longest-standing policies would be our whole-of-life policies, which, if we sold them today, we would probably be done under trade descriptions, because they actually mature at age 95, but they were sold at times when people were expected to live only to the age of 67, so I guess it was a fair statement then. We still have those policies on our books today so we still receive every year a very small number of hand-written 95-year-old policies that are maturing with fit and healthy 95-year-olds—a cause for celebration, we think! The challenge for us, of course, is that we are on an ongoing basis managing smaller and smaller numbers of these very old policies and they become individually more and more expensive to manage.

The biggest challenges in converting clients onto more contemporary products to allow us to manage more simply are, firstly, that there are usually tax consequences involved in moving the client from one product to another. There would need to be a legislative agreement to allow that transition to happen without a tax consequence and, therefore, there is no way that we could advise a client in an old whole-of-life policy to move, even if it was appropriate, because of the tax issues. Secondly, if you are moving blocks of policies, usually when you do that you have to meet a requirement that every client is better off from the policy they were in to the policy they have moved to. Therefore, the legacy issue has continued without resolution. It is an area in which, frankly, the industry could do with some legislative help to solve.

Senator WILLIAMS: If someone has group insurance and is working and all of a sudden they give up their work and their employer stops paying into their super, would you have a problem if it were compulsory that the superannuation fund were to notify the client, saying, 'We notice you are not paying any more. Do you wish to continue your life insurance? I ask the question on the grounds that I have heard of cases where people have been ignorant—and this comes back to education—and the next thing is that the insurance premiums have just drained all of their superannuation fund. It happened to my wife.

Ms Beer : No. For our own trustee business we actively communicate to the customers about how their insurance does continue.

Senator WILLIAMS: Shouldn't a super fund do it? They are getting a cop out of this, as well.

Ms Beer : I am not sure what you mean—

Mr Meller : Where it is the AMP super fund that is doing it, we will communicate—

Senator WILLIAMS: Sorry, let's go back. With group insurance—it might be AustralianSuper or it might be AMP carrying out the group insurance of AustralianSuper—AustralianSuper gets a cop out of the insurance.

Mr Meller : Yes.

Senator WILLIAMS: Shouldn't AustralianSuper notify their client that their client is no longer paying into their super fund. They may have changed employment and taken on another super fund, which would be silly. They may have lost their job or got sick or whatever or they may have got married and no longer need to work. Shouldn't that super fund notify that client and say, 'We notice you are not paying into your super fund any more. Do you want to continue with your life insurance?'

Mr Meller : The point we are trying to get across is we do that already for all of the AMP super funds?

Senator WILLIAMS: Including the group?

Mr Meller : Yes, for all of our corporate super schemes where we cease to receive the employer contributions, we will write to the clients to say, 'It looks like you have left this company. What do you want to do with your super? What do you want to do with your insurance?'

Senator WILLIAMS: Would every insurance company do that?

Ms Beer : We are not able to comment on that.

Senator WILLIAMS: Chair, we need to consider a recommendation so that people don't have their super eaten away. They might have three super funds and they have changed jobs three times and they have three lots of life insurance and they don't even know they have it. Then, if one TPD claim comes along only one company pays it, but they have been charged for three premiums. It is quite confusing.

Mr Meller : One of the services that we provide for all new customers to what we call corporate super—that is employer funds—is an offer to help them automatically to consolidate all of their super into AMP. We are very clear when we are doing that on behalf of the clients to ensure that if it is consolidating from a fund where they have insurance in place, they are actively making a decision either to cancel the insurance by moving the super to AMP or choosing to keep it in place.

Mr VAN MANEN: Isn't there a risk in that that they are going to lose the quality of the insurance cover?

Mr Meller : Absolutely, which is why we are very clear we wouldn't consolidated a client's super where there is an insurance policy in place.

Mr VAN MANEN: Will you take the existing insurance cover over on takeover terms?

Ms Beer : That depends on the individual circumstances. In some circumstances we do. In some circumstances we don't.

CHAIR: There have been a number of calls for unfair contract term laws to be extended to the life insurance industry. Does your company have any views on that? Second—I am happy for you to take this on notice—does your company have any terms in its contracts that it would have to remove if the unfair contract term laws were to apply to life insurance?

Ms Beer : We understand that there is an active review on unfair contract terms—the act—right at this moment and we are participating in that through the FSC. It is a complex issue because of all the special arrangements, particularly under the Insurance Contracts Act, that already apply for life insurance. To give you an example of one of those, with life insurance contracts generally, the consumer who is purchasing the cover may not be the beneficiary and may not be the life insured, so there are some additional complications that we think the Insurance Contracts Act already deals with. However, we do want to make sure that we're being fair, so we're very happy to actively participate in that review. The second question we would have to take on notice.

CHAIR: I will appoint Mr van Manen the acting chair for five minutes while I'm out of the room.

Mr KEOGH: We've heard a little bit about the issue of legacy policies. Can you give a very short description of the issue that legacy policies cause for an insurer and the costs that can be associated with that for an insurer.

Ms Beer : From an issues perspective, as Craig mentioned earlier, for a company of 168 years, we probably are well able and have processes in place to manage our customers on a day-to-day basis when they ring us to make changes, inquiries, claims and so forth. One of the issues that arise with that, though, is that sometimes it might take a little bit longer. For example, our claims assessor would need to work through some of the details of the contract to make sure that they are assessing the customer's claim against the very particular terms in that contract. But we have systems and processes in place to make that as easy as we can for our case managers.

In terms of some of the costs, we have a number of systems that we use to administer many of our legacy products. We continuously review those, and we upgrade and consolidate those systems where that makes sense. We would welcome any moves that might help us to rationalise some of our existing products and that we think would have customer benefits for making it easier and quicker to deal with their policies, and particularly their claims, and also reduce some of the costs in our business.

Mr KEOGH: When you say it takes longer for a claims assessor to assess a claim against a legacy or an older policy, are we talking an extra half-hour or weeks?

Ms Beer : Based on the work that the claims assessors do, when a claim comes in, it takes about two hours for them to read each policy and really understand how that policy will work against the customer's conditions. A smaller number of policies means that there is some ability to do that on a more expedited basis, but we want to enable our case managers to take the time that it does take, because we want to be fair and make sure that we're paying all rightful claims.

Mr KEOGH: Is the additional cost—'additional' might not be the right word. When you have claims against older policies which an assessor may not be as familiar with, over the business, is that a cost of any significance or is it pretty minor?

Ms Beer : No, I don't think it's a cost of particular significance in an operational cost perspective, but we are increasingly talking to our customers more and more over the phone. One of the things we would love to be able to do is to effectively work with a customer over the phone and say, 'Yes, your claim will be paid, and we'll process the money as fast as we can.' That is the state that we would love to be in, because we think that that's meeting our customer's expectations. The quicker that we're able to understand the customer situation, the more we can work to support them in returning to work or, if it's a bereaved family, support them with those services. That's where we'd really like our focus to be. Customers would love us to be able to deliver that level of service, so I think it's more about meeting customer outcomes.

Mr KEOGH: In achieving that, you're saying it will be beneficial to have a more harmonised policy base. As I understand it, the issue that arises—especially in the life insurance industry—is that some policies are very old. They may have been taken out when someone entered the workforce and they're now towards the end of their working career, so policies can be 40 years old, for example. In order to change the terms of a policy, you need to have each insured's express agreement to change those terms. We've heard from others—and I think you effectively alluded to it—that you would see it as desirable if there were a different process to allow you to, if you like, upgrade and harmonise legacy policies to a modern text form, have modern terms upgraded or have harmonised definitions et cetera. Is that correct?

Ms Beer : Yes, we would welcome the moves in order to simplify business. We believe that that is in customers' best interests. The more they can understand and have confidence that their products are contemporary, we think that that will only help to build trust in the industry.

Mr KEOGH: Suppose there was an external and independent process that you as an insurer could access, where you could take legacy policies and bring forward independent advice, expert evidence for example, that would say, 'We want to take these terms and turn them into these terms, a modern policy with modern definitions, and all our evidence is to the effect that no insureds would be worse off—in fact they probably would be better off because of A, B and C—and they don't lose any cover and their premiums would not increase as a result of this change.' If you had that signed off in bulk, if you like, instead of having to get each individual insured, would you see that as a positive introduction or change to the law, if there was a process that allowed that?

Ms Beer : Yes, I think we'd welcome mechanisms like that in order to manage legacy business better. As Craig mentioned earlier, though, we think there are broader considerations, such as tax, that also would need to be taken into account.

Mr KEOGH: How so?

Mr Meller : For AMP it gets a bit more complex because we're such an old business. Historically, life insurance and investments were sold as a packaged product. Many of our old life insurance products, the whole of life insurance products, have an investment component as well as a life insurance component. You pay a premium every year and a surrender value starts accruing for the policy. So it's like an old endowment policy. We have many policies like those where it's not just a straight 'If you die you receive a payment.' If the policy matures you might get your money back or a certain percentage, as well as having the life cover through the existence of the policy. That's where the tax issues become particularly relevant.

Mr KEOGH: Putting those to one side, which is probably almost unique to you and maybe one or two other providers that are still in the market, for the vast majority of life insurance policies in the market—not yours—what I have just described would be beneficial?

Mr Meller : Yes.

Mr KEOGH: But you'd have the problem as it may apply to those older-style type of investments?

Mr Meller : Yes. The only point I'd make, which is a challenge for the industry to try and resolve, is that if you moved from the old terms to a set of new terms that essentially meant the claims rate for that pool was going to be higher, then you'd have to look at it and say, 'What does that mean for pricing for that pool?'

Mr KEOGH: That is a very interesting point you just raised. The general proposition I raised before, though—Ms Beer was nodding—

Mr Meller : We agree with that.

Mr KEOGH: The point you were making is that with these legacy policies—I'm not talking about policies that are that combined investment thing, but just legacy policies generally—you have them sitting in separate insurance pools so they're pricing themselves differently.

Mr Meller : Yes.

Mr KEOGH: So if you were to change the terms, you would also merge the pools, which may have a pricing impact.

Mr Meller : Yes.

Mr KEOGH: That being said, conceptually, though, you could still go that way. It may be that not many of your policies would successfully get through the process, but conceptually, some may, and it would be useful for you to be able to do that.

Mr Meller : It would be very useful for us to do it, but we would also want to apply an economic lens to it as well.

Mr KEOGH: Of course you would look at it from the point of view of your best interests, but the point I was making was that there would need to be a process to look at the insured's best interests, as well.

Mr Meller : Absolutely.

Mr KEOGH: We heard this morning from TAL that apparently a method for doing this has previously been suggested by industry to government over the last decade or so, but government has never moved forward. Do you have any comment on what that is or why that is?

Ms Beer : We could take that on notice. I would just point out that the FSI also made a recommendation that this was an area to explore.

Mr KEOGH: Hence I'm exploring it.

Ms Beer : We'd be happy to explore it, but I think there's a lot of detail to work through.

Mr KEOGH: We're a committee of the parliament. We like detail sometimes.

CHAIR: We're out of time. Thank you for appearing today. If you took any questions on notice, can you reply to the committee secretariat by 1 September. Thank you for your evidence today.

Proceedings suspended from 12:10 to 13:02