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Inappropriate Sales Practices

Freedom is the second company in the box at the ongoing Royal Commission into the Banking, superannuation and Financial Services Industry to be questioned about misconduct in insurance sales practices.

Senior Assisting QC, Rowena Orr, began proceedings on the second day by interviewing Grant Stewart, the father of an individual with Downs Syndrome who had been sold insurance over the phone by Freedom.

The insurance package included an accidental death policy of $50,000, an accidental injury policy with a benefit amount of $50,000, and a final expenses cashback policy with a benefit amount of $10,000. The fortnightly charge of the policy was to be $10.60, which was to commence 12 days after his son received the letter confirming the policy in writing.

Stewart said his son did not understand that he had purchased an insurance policy.

It took two years for Freedom Insurance to apologise for the distress they caused Mr Stewart’s son for selling him this policy.

As part of his evidence, Mr Stewart noted his concern regarding Freedom’s aggressive ‘cold calling’ process and said others like his son could easily be targeted in the same way.

Sales practices changes

Freedom have made substantial changes to their sales model.

During the hearing, it was noted that Craig Orton, Freedom’s Chief Operating Officer, had been appointed specifically to address change management. It was recognised that this represented a determined effort on Freedom’s part to change its sales practice systems and to put an end to non-compliant sales calls with poor consumer outcomes.

Freedom also implemented remuneration structures and as of this month, there are no longer commissions for sales.

Orton stated that he had been employed to address quality assurance issues on sales calls, and maintained there has been training on how to manage vulnerable customer situations to ensure better outcomes.

An additional change has been the recent cutting of the majority of outbound sales calls, which will now only involve the selling of funeral insurance.

“We want to ensure that we are working on any regulator concerns in the market, particularly around accidental death and accidental injury,” Orton explained. “We want to change the sales process so that, for all of our products, there is a 12-month period, so that customers can understand their purchase decision. As part of that, we have ceased taking banking details on the first call.”

Orton did state that the four policies that have been discontinued in outbound sales calls makes up only 15 per cent of the business, while funeral insurance, which they will continue sell in this manner, makes up 85 per cent. Orton said Freedom are working with Australian Securities and Investments Commission (ASIC) to create an appropriate business model—and this includes meeting and addressing ASIC’s concerns about outbound sales.

Remuneration challenges and narrow definitions

At the hearing, it was noted that Freedom sales staff were under pressure to stop customers from closing their policies by selling them alternative policies. One example given was that if customers were calling to cancel their life insurance policy, they were being offered an accidental death policy; however, this is a challenge, since the two are not equitable and customers might not understand that they are not getting equivalent cover. The sales team had key point indicators to address when it came to saving policies.

According to Orr, the report into the matter highlighted concerns about the value of the accidental death policies providing very little actual benefit to customers.

It was also noted that Freedom staff receive an upfront commission and trial commission for accidental death sales.

ASIC’s Direct Life Insurance Report contains concerns about the value of those products. The analysis of the claims ration did not include Freedom; however, from those that were analysed from the 2015 to 2017 financial year periods, the claims ratio was only 16.1 per cent, meaning that only 16 cents of claims were paid out by insurers.

Accidental death had the lowest rate of claims, Orr pointed out.

Freedom data on accidental death Insurance

In 2015, Freedom sold 9,611 accidental cover policies. In 2016, they sold 19,282 accidental cover policies, and in 2017, they sold 21,079. Orr highlighted that, according to the data, halfway through 2018 Freedom have already sold 12,011 policies—a figure that looks set to eclipse the total sold in 2017.

Freedom’s total annual premiums for 2014 were $366,000, with only four claims that were allowed in full. The ratio or premiums paid out that year was 55 per cent. In 2016, the figure was $1.1 million, with 10 policy claims and eight allowed—at 46 per cent.

2017 saw the annual premiums figure rise to $2.1 million, with 10 of 22 claims allowed. That number, however, is still pending, and Orr pointed out that Freedom made an ex gratia payment with one claim. Six claims are still pending. This dropped the ratio to 14 per cent.

In 2018, Freedom has made $1.6 million to date, with 18 claims and three allowed. Ten remain pending, a rate of 25 per cent.

Orr raised the question of the low rate of claims as a possible indication of the low value of the policy itself and a very narrow accident definition, despite the aggressive sales tactics.

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