The TPD conundrum

By Anna Game-Lopata | Vol: 43 Issue: 1 | Apr 2020
  • Claims
  • Insurance Broking
  • Life Health and Retirement Income
  • Risk Management

It’s hard to ignore the heart-rending depiction of Queensland stonemason Garry Moratti in the media. Diagnosed with silicosis in 2017 and given four to five years to live, he has been denied a lump-sum benefit under his total and permanent disability (TPD) life insurance policy through Sunsuper.

It’s the latest in a stream of criticism aimed at the Australian not-for-profit super fund. Along with some other funds, it introduced a new TPD product offering six instalment payments accompanied by support with retraining and rehabilitation as an alternative to the traditional lump-sum payment. After the first year, recipients are required to prove their TPD status to be eligible for the next instalment.

TPD is not always permanent. If you dig a little deeper, the complexity around TPD becomes clear. In an in-depth study of members who’d already been paid a TPD claim, Sunsuper found that 36 per cent were working or actively seeking employment within three years.

‘This really highlights that total permanent disability may not always be permanent, and that many of our members who have made a TPD claim want to return to work,’ the fund said in a statement.

The changes to Sunsuper’s TPD product have also reduced premiums by around 30 per cent.

The Australian superannuation system enables more than 15 million people to save for retirement. It also provides insurance to around 12 million Australians, with about 90 per cent of total TPD insurance policies held through super.

High acceptance rate

According to the latest figures from the Australian Prudential Regulation Authority (APRA), 89.5 per cent of finalised TPD claims through group life insurance are admitted – up from 88 per cent in 2018. For retail TPD claims sold through an adviser, 85 per cent are admitted.

John Berrill, director of Berrill & Watson Lawyers, asserts that compared with loss ratios for other insurance lines and products, TPD acceptance rates are robust, especially given the bar for TPD is set intentionally high.

‘It’s not an easy product to deliver, because of its long-term nature,’ says Berrill, one of Australia’s most experienced plaintiff superannuation and insurance lawyers.

‘Ascertaining whether an individual has the ability to work in the future is difficult and complex, so you’d expect lower acceptance rates.’

Berrill says very high loss ratios are indicative of a product that is well-targeted. He’s on record as warning that they might even be unsustainably high.

‘There’s no doubt that there have been affordability issues with TPD, and the way insurers dealt with it was to increase premiums dramatically or narrow their definitions,’ he says.

Design and flexibility could be improved

In response, the Hayne royal commission recommended a Treasury investigation.

‘Commissioner Hayne rightly said that the value of an insurance policy is tied to the breadth of its terms and conditions,’ says Berrill. ‘Evidence before the commission was that these varied widely and members were often in a knowledge vacuum.’

He adds that the Treasury review, which is exploring universal terms and conditions for group policies and how changes could affect premiums, will be useful.

‘Insurers offer policies on set terms with little or no room to negotiate variations,’ he says.

‘Consumers, for their part, have preconceived notions of what is insured and rely on trustees. While trustees should have a more nuanced understanding of life insurance, they have obligations to the membership as a whole and price pressures which may translate to lowest common denominator cover.’

No place for Activities of Daily Living

Currently, the law requires TPD benefits offered through super funds to be consistent with the ‘permanent incapacity’ definition set out by the Superannuation Industry (Supervision) Act 1993. This stipulates a ‘permanent incapacity to do your usual occupation or any other suitable work with your education, training or experience’.

However, in practice, some TPD definitions have adopted much narrower definitions, as highlighted by an October 2019 review of TPD insurance claims by the Australian Securities and Investments Commission (ASIC).

Most worrying, according to ASIC, is the trend towards applying the Activities of Daily Living (ADL) definition. It restricts benefits to members unable to perform two or more activities, such as feeding, bathing, dressing, toileting, walking and transferring from bed.

ASIC estimates that of 13 million TPD policies held by Australians, 500,000 have ADL definitions. In addition, some policies apply the ADL definition to ‘high-risk’ occupations and ‘flip’ members into the ADL definition if they don’t meet ‘at work’ or minimum working hours thresholds.

The report notes that 60 per cent of ADL claims were rejected, compared with just 12 per cent of other TPD claims.

‘Only a handful of superannuation fund members whose working lives are cut short because of injury or illness would satisfy an ADL definition, thereby disenfranchising many from permanent incapacity benefits, usually without any premium differentiation. Hardly value for money,’ says Berrill.

‘What stands out in the [ASIC] report is that the ADL definition has no place in employment-related default insurance cover. These are trauma benefits measured by an inability to self-care, not an incapacity to work and accumulate income for retirement.’

Adapting to the rise of mental health claims

Sandy MacLeod, Sydney-based general manager for insurance solutions at mental health organisation SuperFriend, says the ADL definition has its limitations but points out that ASIC’s report shows such claims represent only 4 per cent of overall claims submitted. 

MacLeod would like to see some allowances made for mental illness claims, where the insured person is deemed ineligible to be assessed under the education, training and experience (ETE) definition. According to research by the Financial Services Council and KPMG Australia, mental health conditions account for almost a quarter of all TPD insurance claims paid.

‘It’s typically very difficult for an insured person to meet the ADL definition when he or she is suffering from even the most severe psychological impairment,’ says MacLeod.

He argues this issue could potentially be resolved by adopting a single sum-insured or hybrid-style policy that pays a benefit regardless of the severity of a person’s health condition affecting their ability to work.

‘Under this style of policy, benefits would be paid in a similar manner to an income protection policy until the sum insured has been exhausted. Lump-sum payments would only be paid for death, terminal illness or a specified medical condition as day-one TPD, such as paralysis, cardiomyopathy or dementia. 

‘This would remove some of the complications of insurance policy design while also introducing a rehabilitation opportunity where previously this was disincentivised due to lump-sum benefits already paid.’

Addressing premiums

To address the issue of high premiums, MacLeod would rather see a different strategy to the one-day active employment test eligibility criteria. He says it would be more reasonable for cover to be limited for a period of 12 months followed by a 30-day active employment test.

‘This would mean that no benefit would be payable for a condition which was present prior to the commencement of cover during this initial period and, to me, strikes the right balance between accessibility of benefits and risk mitigation.’

He adds that it’s appropriate for group policies to have some exclusions. For example, all policies should adopt an illegal activities exclusion where a claim arises as the result of a serious breach in the law.

Time to account for retraining

Berrill believes it would be a retrograde step to remove automatic acceptance default cover. However, he agrees with MacLeod that a key improvement to TPD would be the introduction of clauses and accompanying legislation that allow for retraining options if a person is likely to resume the accumulation of superannuation at work.

‘It would be important for a retraining clause to be subject to a “reasonableness test” to ensure the retraining is within the person’s abilities and is reasonably available,’ says Berrill. ‘It could also be accompanied by a limited offer of assistance to ensure retraining is a practical assessment and not purely theoretical.’

MacLeod suggests introducing an initial period of income replacement benefits to be paid while the insurer and treating medical professions assess all possibilities and avenues for recovery.

This could be aided by changes to legislation to allow life insurers to pay for medical treatment of mutual benefit to assist with the insured person’s return to active employment and a higher quality of life.

‘Once reasonable rehabilitation options have been exhausted, the insured would be eligible for a lump sum.

Spotlight on the TPD claims process

According to ASIC’s October 2019 review of TPD insurance in Australia, poor claims handling processes contribute to some consumers withdrawing their claims. One in eight, or 12 per cent, of claims lodged with insurers did not proceed to a decision.

‘We consider that this high withdrawal rate is, at least, partially due to insurers subjecting consumers who are vulnerable (due to life-altering illness or injury) to a claims process that is often unnecessarily challenging and onerous,’ the report states.

‘Frictions’ identified included poor communication, excessive delays, potentially threatening surveillance and desktop surveillance.

Insurers also lacked key claims data to help them effectively manage the risk of consumer harm, including being able to identify the value of products to consumers and key friction points in their claims handling processes.

For over 50 per cent of withdrawn claims, ASIC found the reason given by the insurer was ‘lack of response by the consumer to a request for information’. The second most common reason was the consumer withdrawing for reasons other than eligibility or return to work (31 per cent). However, insurers did not record the actual reason for these active withdrawals.

APRA research released in December 2019 found timeframes for TPD claims have dropped to 5.2 months. Dispute processing timeframes have also dropped, but still exceed the 45-day Code of Practice time limit.

Lawyer John Berrill expects further drops to be incremental, as the updated Life Insurance Code of Practice and Superannuation Code of Practice start to have an effect.

TPD in New Zealand

TPD policies in New Zealand can’t be readily compared with those in Australia, as different definitions apply. TPD cover is also not offered to customers through superannuation funds, as it is in Australia.

According to Kath Johnson, chief operating officer at Fidelity Life, most retail TPD definitions relate to customers ‘no longer being able to work in their own occupation and/or any occupation’.

Johnson says TPD policies make up a small part of the award-winning life insurer’s business, so the number of claims accepted is very low and can vary significantly.

Notable TPD policy initiatives at Fidelity Life include the ability to cover people who aren’t in paid employment, such as homemakers or students, the availability of a partial benefit for the loss of the use of a limb or sight in one eye, and offering cover as an additional option with trauma policies.

However, Johnson adds that regardless of the type of cover or policy the customer has, there’s always room for improvement in the way insurers help the customer understand what to expect during the claims process. ‘Customers can be under significant stress at claims time, so this is an area the whole industry can improve on.’

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