25.6 Insurance in Australia is commonly divided into three categories: life, health and general insurance. Life insurance encompasses a variety of products, including policies that provide payment upon death, continuous disability or trauma. Health insurance provides payment for the provision of hospital and ancillary medical and health services. General insurance covers matters not addressed by either life or health insurance, such as product liability, travel, professional indemnity, sickness and accident.
25.7 Genetic information is likely to be of greatest significance in relation to insurance policies that rely on the collection and use of health information, require an assessment of an applicant’s risk of mortality or morbidity, and are mutually rated. This Report focuses on these kinds of insurance, which include the following:
Term life insurance: provides for the payment of an agreed lump sum in the event of death of the insured. According to the Investment and Financial Services Association (IFSA), the approximate average level of cover for term life insurance in Australia is $235,000.
Income protection (or disability income) insurance: provides for regular sums to be paid while an insured is unable to work due to sickness or injury. According to IFSA, the approximate average level of cover for disability income insurance in Australia is $3,700 per month.
Trauma (or crisis) insurance: provides for the payment of an agreed lump sum if the insured person is diagnosed with one of a list of specified conditions such as a heart attack, cancer or stroke within a specified period. The average level of cover for trauma insurance in Australia is $165,000.
Sickness and accident insurance: a general insurance product that provides for payment of a lump sum or periodic payments to cover losses or expenses incurred as a result of accidental injury or sickness.
Travel insurance: a general insurance product that provides for the payment of agreed sums to cover losses or expenses incurred in the course of travel, including medical expenses.
25.8 The largest part of personal insurance business in Australia is undertaken by the life insurance industry, either as a component of superannuation or as voluntary mutually rated life insurance. There are currently 42 registered life insurers in Australia, of which six are reinsurance companies. Not all registered life insurers are currently active and several do not operate in the mutually rated market.
25.9 Superannuation funds almost always provide insurance cover for their members against death and disability. Premiums collected for insurance provided as a component of superannuation comprise 87% of total insurance premiums collected by life insurers. Generally, in relation to large superannuation funds, this cover is provided on automatic acceptance terms and is not mutually rated. The only entry requirement is that the person covered be fit enough to attend work on the start date. In its submission to the Inquiry, the Australian Life Underwriters and Claims Association explained:
In group life insurance, the necessity for underwriting is less strong because of the law of large numbers and the reduced likelihood of adverse selection. With group life insurance, an insurer can take the bad risks, knowing that there will be enough good risks in the entire pool of lives insured to balance the portfolio and allow profitability.
25.10 However, where a person is self-employed, employed by a small business, or wishes to seek a higher level of insurance cover than that offered on automatic acceptance terms, the insurance component of superannuation may be mutually rated. The discussion in Part G of this Report is intended to cover personal, mutually rated insurance products including, for example, those offered as a component of superannuation. Where these products are offered by organisations that are not specifically addressed in this Report (for example, friendly societies or superannuation funds), and are not members of IFSA or the ICA, the recommendations in this Report are intended to set out foundation principles that can be applied to underwriting by those organisations, as appropriate.
Mutually rated and community rated insurance
25.11 It is important to draw a distinction between mutually rated and community rated insurance. Community rating is the basis of Australia’s public and private health insurance systems. Under the National Health Act 1953 (Cth), private health insurance contracts are required to be community rated: in setting premiums, or paying benefits, funds cannot discriminate on the basis of health status, race, sex, sexuality, use of hospital or medical services, or general claiming history. Although this risk is shared collectively across the entire pool of insureds, actuaries and underwriters still collect health information to determine the overall premium that insurers must charge to sustain the pool.
25.12 Because insurers in this context are prevented from using health information to assess individual risk, the use of genetic information in relation to health insurance does not raise the same issues as the use of genetic information in relation to other personal insurance products. For this reason, the discussion and recommendations in Part G of this Report focus on those sectors of the insurance industry that offer mutually rated products.
25.13 In mutually rated insurance, the particular characteristics of applicants are taken into account when assessing the risk the applicant will bring to the insurance pool. In its submission, IFSA set out four fundamental principles that underlie the provision of voluntary mutually rated insurance in Australia. These are:
spreading risks across large groups;
charging a premium that reflects the risk;
pooling of similar risks; and
equal access to information.
25.14 Characteristics such as an applicant’s age and sex will nearly always be considered relevant to assessing risk. Depending on the type of insurance, other factors such as occupation, lifestyle, family medical history, current health condition, and genetic test results may also be relevant. In order to assess fairly the risk that each applicant brings to the pool, insurers require access to all the information known to the applicant that is relevant to the risk. The applicant’s duty of disclosure is discussed further below. In mutually rated insurance, insureds with similar risks are treated in a similar way. The price that insureds pay for insurance is thus proportional to the risk they bring to the insurance pool.
Applicant’s duty of disclosure
25.15 The contract between the insurer and the applicant for insurance is embodied in an insurance policy. Insurance contracts fall into a special category of contracts that are based on the principle of ‘utmost good faith’. One element of this principle is that the applicant has a special duty of disclosure at common law and under legislation. The Insurance Contracts Act 1984 (Cth) largely replaces the common law on the duty of disclosure in relation to the types of insurance of interest to the Inquiry.
25.16 Section 21 of the Insurance Contracts Act requires the applicant to disclose to the insurer all information that is known, or which reasonably ought to be known, to be relevant to the insurer. In practice, disclosure occurs initially when applicants for insurance answer questions posed by insurers in the application form or proposal. The duty may oblige an applicant to give further information to the insurer if the initial answers are insufficient to satisfy the duty. The information disclosed is used for the process of underwriting (or risk rating), in which the insurer assesses whether to accept the insurance application and, if so, on what terms.
25.17 Section 22 of the Insurance Contracts Act requires the insurer to inform the applicant clearly and in writing (usually in the insurance brochure and application) about the general nature and effect of the duty of disclosure.
25.18 The general duty of disclosure requires the applicant to disclose relevant information up to, but not beyond, the moment the contract is entered into. This maybe, and usually is, sometime after the application is completed. An insured is required to disclose matters during the course of the contract only if there is a specific provision in the contract to that effect. Because a contract of life insurance is guaranteed renewable, in practice a life insurance application is risk rated only once—before the contract is entered into. Risk factors, including genetic information, that become known to the insured after the contract has been entered into need not be disclosed. On the other hand, certain insurance policies issued by general insurers, such as sickness and accident policies, must be renewed periodically (usually annually) and there is a duty to disclose relevant information at every renewal.
25.19 Under the Insurance Contracts Act an applicant is notrequired to disclose certain matters such as those that diminish the risk, are of common knowledge, are already known to the insurer, or ought to be known to an insurer in the ordinary course of its business.
25.20 The Insurance Contracts Act also provides that in some cases the insurer can be held to have waived its right to disclosure from the applicant, for example, where the insurer has not taken steps to investigate obviously incomplete or inaccurate answers provided by the applicant.
25.21 The insurer may raise non-disclosure as a defence when an insured makes a claim under an insurance policy. In a contract of life insurance, if the insurer can show that the insured failed to disclose relevant information, the insurer may:
avoid the contract from its inception if the non-disclosure or misrepresentation was made fraudulently;
avoid the contract within three years if the insurer would not have entered into the contract but for the non-disclosure; or
vary the contract within three years by substituting the sum insured (including any bonuses) according to a statutory formula.
25.22 For all other personal insurance contracts, if an insurer can establish that the insured failed to disclose relevant information, the insurer may:
avoid the contract from its inception if the non-disclosure or misrepresentation was made fraudulently; or
reduce the amount paid to the insured to the amount that would place the insurer in the position it would have been in if there had been no failure to disclose or no misrepresentation. This permits the insurer to reduce its liability to zero in appropriate cases.
25.23 Insurers classify applicants into four general risk categories—‘standard’, ‘non-standard’, ‘deferred’ or ‘declined’. These categories are described below.
Accepted on standard terms
25.24 ‘Standard’ is the insurance risk benchmark for a policy. Applicants who fall into the standard risk grouping have no particular adverse risk factors that warrant a premium loading.
Accepted on non-standard terms
25.25 This refers to the situation where the application is accepted, but subject to one or more of the following conditions:
Premium loading: the application is accepted but with a higher than standard premium. Premium loadings are imposed as a percentage of the standard premium or as a dollar loading, on a temporary or permanent basis.
Exclusion: the policy includes a term that lists events for which the insurer will not pay. Exclusions may be imposed on a temporary or permanent basis.
Restricted period of coverage: the policy limits the duration of insurance cover, for example, where a person may be at risk for a late-onset disorder.
Reduced sum: the policy reduces the amount that will be paid in the event of a claim.
25.26 A deferred decision means that the insurer has declined the insurance proposal at the time of underwriting, but offers the applicant the opportunity to have the application re-rated at a future date. A deferred decision is given where a risk factor is expected to reduce over time, for example, where an applicant is receiving medical treatment for a condition that may stabilise in due course.
25.27 Insurance is declined when the insurer determines that the risk that the applicant would bring to the pool is too high to accept, at least for a realistically affordable premium. Life insurance is rarely declined but, where it is, it is usually in respect of applicants with serious health impairments or extremely hazardous occupations.
Insurer’s duty to provide reasons
25.28 The Insurance Contracts Act also regulates the information, notices and reasons that insurers must provide to the applicant in certain circumstances. Upon request, an insurer is required to provide reasons where it:
does not accept an offer to enter into a contract of insurance;
cancels a contract of insurance;
refuses to renew a contract of insurance; or
offers insurance cover to the applicant on terms that are less advantageous to the applicant than the terms that the insurer would otherwise offer by reason of some special risk relating to the applicant or to the subject matter of the contract.
25.29 The redress available to applicants in the event of disagreement about the underwriting decision is limited. An applicant may, in the first instance, make an internal complaint to the insurer concerned. If the matter is not resolved, the applicant may lodge a complaint with a relevant agency, such as the Human Rights and Equal Opportunity Commission. There is currently no independent industry based complaints mechanism in Australia with respect to underwriting. The Financial Industry Complaints Service, which deals with complaints in relation to life insurance, and Insurance Enquiries and Complaints Ltd, which handles complaints about general insurance matters, do not currently have jurisdiction to deal with complaints regarding premiums or underwriting. This issue is discussed further in Chapter 27.
Agents and brokers
25.30 The Financial Services Reform Act 2001 (Cth) (FSRA):
brings the life, superannuation, general and securities industries under one licensing regime;
establishes a new disclosure regime for financial products (excluding offers of shares and debentures);
introduces an amended market regulation regime; and
imposes standards of conduct for financial service providers dealing with retail clients.
25.31 The FSRA commenced on 11 March 2002, with a two year period for participants in the industry to make the transition from their current regulatory structure to the single licensing and product disclosure regime required under the Act. The Australian Securities and Investment Commission (ASIC) is responsible for the implementation and supervision of the FSRA.
25.32 Insurance agents and brokers act as intermediaries between the insurer and applicant, advising on and selling insurance products on behalf, or independently, of the insurer. Insurance agents and brokers now come within the single licensing framework for all providers of financial services and advice established by the FSRA. Generally, under the FSRA, every person who advises on or sells financial services, including insurance, must:
hold an Australian Financial Services (AFS) licence; or
represent an entity that holds an AFS licence.
25.33 Insurance agents and brokers provide advice to applicants on a range of matters, including the type of product needed to cover an identified risk, the choice of insurance policy and the interpretation of questions in the application. They may also assist insurers by providing a report on the applicant to the insurer. When advising applicants, agents and brokers often rely on guidelines, provided by the insurer, about the effect of risk factors on underwriting. As intermediaries between insurers and applicants, agents and brokers may be required to provide advice to applicants on the need to provide, and the implications of, genetic information. The regulation of agents and brokers, including in relation to education and training requirements, is discussed further in Chapter 27.
Actuaries and underwriters
25.34 Actuaries and underwriters act as professional financial advisers to life insurers, including in relation to pricing and policy conditions. Actuaries are also key advisers in general insurance, superannuation and investment.
25.35 As one of their professional roles, actuaries produce ‘standard’ premium rate tables. The rates are based on the best risk statistics available and include loadings for expenses and profit. Informed judgment is required in setting rates as both risk and strategic/competitive factors are involved. The rates set by actuaries for term life insurance are typically a function of age, gender and smoker status. In addition, disability rates are a function of occupational class, for example, ‘white collar’, ‘blue collar’ and so on. The risk characteristics by which premium rate tables vary are called risk classifications. Actuaries rely on various sources of data to determine the pricing appropriate to different risk classifications, including Australian aggregate life insurance industry statistics, a company’s own experience, and medical and overseas statistics.
25.36 Underwriters assess individual applications for insurance and provide advice on whether the application should be accepted and, if so, on what terms. The underwriter first confirms the applicant’s standard premium rate risk classification, for example, ‘age 25, female, non-smoker, white collar’. An insurance agent may have already quoted a standard rate based on the initial classification. The underwriter then ‘underwrites’ the case by assessing other risk factors. The most important area of assessment for the underwriting process is ‘medical’, that is, current and expected future state of health. This may include assessment of an applicant’s genetic information. The other area is ‘non-medical’, which includes the risks associated with hazardous occupations, sports and other pastimes.
25.37 Underwriters base their decisions on underwriting manuals, which are usually supplied by reinsurance companies. Underwriters also rely on informed professional judgment and, in some cases, specialist advice from medical officers and reinsurance companies.
25.38 Most Australian insurance companies do not reinsure policies that fall below a certain monetary limit. However, above these limits, risk is shared between insurers and reinsurers to guard against large fluctuations when insurers are faced with multiple claims in one area, for example, those caused by a natural disaster.
25.39 The underwriting manuals used by Australian actuaries, underwriters and insurers are developed mainly from those compiled by one of the six large international reinsurance companies operating in Australia—the ‘insurers for insurers’. The production and updating of underwriting manuals is a specialist, commercially sensitive and costly task, involving insurance medical specialists, actuaries, underwriters, geneticists and others. Reinsurers play a critical role in formulating basic underwriting manuals because of the large amount of data they obtain through their dealings with many insurance companies globally.
25.40 While Australian insurance companies do not produce their own underwriting manuals, many may make some adjustments using internal guidelines, and all apply overriding industry codes, such as the IFSA Genetic Testing Policy discussed below.
 Mutuality is discussed later in this chapter.
 Investment and Financial Services Association, Submission G049, 14 January 2002.
 Ibid. Critical illness insurance does not provide cover for accidental events.
 Australian Life Underwriters and Claims Association Inc, Submission G300, 10 January 2003.
 For a discussion of the use of genetic information in health insurance, see M Otlowski, Implications of Genetic Testing for Australian Insurance Law and Practice (2001) Centre for Law and Genetics, Hobart, 9–13.
 Investment and Financial Services Association, Submission G244, 19 December 2002.
Carter v Boehm (1766) 3 Burr 1905, 1909 (Mansfield LJ).
Insurance Contracts Act 1984 (Cth) s 21. See also Australian Law Reform Commission, Review of the Marine Insurance Act 1909, Report 91 (2001), ALRC, Sydney Ch 10.
 F Marks and A Balla, Guidebook to Insurance Law in Australia (3rd ed, 1998) CCH Australia Limited, Sydney.
Insurance Contracts Act 1984 (Cth) s 21(2).
 Ibid s 21(2).
 Ibid s 29(4).
 Ibid s 28.
 Ibid s 75.
 Financial Industry Complaints Service, Rules (2002), Melbourne, Rule 15; Insurance Enquiries and Complaints Ltd, The General Insurance Enquiries and Complaints Scheme: Terms of Reference, <www.iecltd.com.au/index2.html>, 20 February 2003 [4.2].
 Australian Securities and Investments Commission, Financial Services Homepage, ASIC, <www.asic.gov.au/asic/asic_polprac.nsf/byheadline/Financial+Services+home+page?openDocument>, 12 February 2003.
 Investment and Financial Services Association and Institute of Actuaries of Australia, Consultation, Sydney, 19 June 2001.
 J Outreville, Theory and Practice of Insurance (1998) Kluwer Academic Publishers, Massachusetts.