Insurer’s duty to provide reasons

27.64 The Inquiry received a number of submissions expressing the view that the reasons provided by insurers for unfavourable underwriting decisions are, from an applicant’s point of view, generally inadequate. Moreover, the mechanisms for obtaining reasons were seen in some circumstances to be unduly onerous. The Anti-Discrimination Board of NSW stated that:

We strongly disagree with the view … that the current methods of risk assessment using genetic information are sufficiently transparent and accountable to the public because the DDA provides consumers with the capacity to lodge a complaint and this in turn would mean that the insurer may be required to provide evidence in support of their underwriting decision. We do not consider that it is acceptable for insurance companies to require individuals to lodge a complaint before such information is provided to consumers.

In our view, consumers should have the right to access adequate information about the basis for the insurer’s decision and the actuarial or statistical evidence on which the insurer has relied in making that decision. It is only with such information that consumers can determine whether to challenge the decision under anti-discrimination legislation.^[43]

Industry regulation

27.65 The extent to which an applicant is given reasons for an adverse underwriting decision is currently regulated in three ways:

•  s 75 of the Insurance Contracts Act imposes a duty on insurers to give applicants written reasons for an unfavourable underwriting decision, where requested in writing to do so;
• s 107 of the DDA enables the President of HREOC to require an insurer to disclose the source of the actuarial or statistical data on which a discriminatory act was based; and
• IFSA’s Genetic Testing Policy requires members to give reasons in a clear and meaningful way in respect of adverse decisions based on genetic test information.

27.66 The first and second methods apply to underwriting decisions irrespective of whether they use genetic information. The third is specific to genetic information, but is confined to genetic test information to the exclusion of family medical history. Each of these provisions is described in more detail below.

27.67 Section 75(1) of the Insurance Contracts Act currently provides:

Where an insurer:

1. does not accept an offer to enter into a contract of insurance;
2. cancels a contract of insurance;
3. indicates to the insured that the insurer does not propose to renew the insurance cover provided under a contract of insurance; or
4. by reason of some special risk relating to the insured or to the subject-matter of the contract, offers insurance cover to the insured on terms that are less advantageous to the insured than the terms that the insurer would otherwise offer;

the insurer shall, if the insured so requests in writing given to the insurer, give to the insured a statement in writing setting out the insurer’s reasons for not accepting the offer, for cancelling the contract, for not renewing the insurance cover or for offering insurance cover on less advantageous terms, as the case may be.

27.68 Section 107 of the DDA provides a mechanism for HREOC to obtain access to ‘the source of the actuarial and statistical data’ used in assessing an individual’s insurance application. Section 107 provides:

If a person has engaged in an act of discrimination that would, apart from section 46 be unlawful, the President or the Commission may, by notice in writing served on the person as prescribed, require the person within 28 days after service of the notice on the person, to disclose to the President or to the Commission, as the case may be, the source of the actuarial or statistical data on which the act of discrimination was based and, where the President or the Commission, as the case may be, makes such a requirement of a person, the person must not, without reasonable excuse, fail to comply with the requirement.

Penalty: $1,000.

27.69 IFSA’s Genetic Testing Policy addresses the issue of providing reasons to an applicant in the following terms:

11. All underwriting decisions, involving a genetic test, whether or not the test was a significant factor in the decision, should be thoroughly documented, so that adequate information can be provided to the applicant on request. …

12. Insurers will provide reasons for offering modifications or rejections to applicants in relation to either new applications or requests for increases on existing policies.^[44]

27.70 The explanatory notes which accompany the policy state that members will inform applicants ‘in a clear and meaningful way’ of the reasons for the decision; reasons may be given to the applicant’s doctor in appropriate cases; and members will include information on how an applicant can lodge a complaint in relation to the decision.

Submissions and consultations

27.71 A number of submissions were critical of s 75 of the Insurance Contracts Act. Margaret Otlowski noted that:

Under the Insurance Contracts Act — individuals can request in writing that they be given written reasons. There are, however, questions about the scope of this provision and whether it would entitle an individual to details of the actuarial or statistical data (or other data) relied on by the insurance company in reaching its decision.^[45]

27.72 The Institute of Actuaries of Australia accepted that

the wording of the Insurance Contracts Act 1984 needs to be addressed. The [Insurance Contracts Act] does not adequately convey the nature of the material that an insurer should provide where an unfavourable underwriting decision is questioned.^[46]

27.73 The HGSA recommended that the insurance industry be compelled to provide an explanation for loading or refusal of policies in every case:

This explanation should be provided to the individual and any third party nominated by the individual such as their medical practitioner. Any decision to refuse, or to load, an insurance policy based on the genetic test result must be justified by reference to appropriate medical literature, and appropriate peer review studies.^[47]

27.74 The Anti-Discrimination Commission of Queensland supported clarification of s 75 on the basis that, if an applicant’s rights under the Insurance Contracts Act were clearer, there would be less need to proceed under anti-discrimination legislation. The Commission expressed the view that the amendment to s 75 should ensure that the obligation to provide reasons arose automatically and that it was not dependent on the applicant requesting reasons in writing. The Commission was of the view that a statement of reasons should explain the statistical and actuarial or other basis for a decision and that supporting documentation should be available on request.^[48]

27.75 IFSA and the Australian Life Underwriters and Claims Association were not opposed in principle to providing clear and meaningful reasons. IFSA, however, expressed a preference for dealing with the issue at industry policy level. IFSA noted that a legal requirement to provide reasons may impose a costly and time consuming burden on insurers and may not necessarily be helpful to consumers. The Australian Life Underwriters and Claims Association noted that, if insurers were required to provide reasons, this may conflict with an applicant’s ‘right not to know’ or may not be of benefit to the applicant in other ways, for example, applicants may be required to disclose this information in subsequent applications for insurance.^[49]

27.76 Other submissions directed criticisms toward s 107 of the DDA. The Centre for Law and Genetics noted the practical need to lodge a complaint with HREOC in order to invoke HREOC’s power under s 107, with the consequence that the desired information may come too late:

At present, the only sure means by which an individual can gain access to relevant actuarial and/or statistical data is by lodging a complaint with the Human Rights and Equal Opportunity Commission under the Disability Discrimination Act 1992 (Cth), thereby invoking the power in the Commission under s 107 of the Act to require a person who is prima facie in breach of the prohibition against unlawful discrimination to disclose to the Commission the source of the actuarial or statistical data on which the act of discrimination was based. This seems an unduly onerous and impractical approach, particularly in view of the fact that the availability of this information may well be influential in deciding whether or not to bring proceedings under the Disability Discrimination Act (or equivalent state or territory legislation).^[50]

27.77 Similarly, the Anti-Discrimination Board of NSW submitted that:

There are some inadequacies with this provision. First, the provision appears to limit disclosure to the source of the data, rather than the data itself. Secondly, the provision only refers to ‘disclosure to the President or to the Commission’. As far as we are aware, the terms of the provision have not been used to prevent disclosure of the information to the complainant. However, in the interests of clarity, it should be made clear that complainants are entitled to access the information disclosed to the President or the Commission.^[51]

27.78 IFSA expressed support for amending the DDA to allow the applicant to gain access to the reasons for decision but was of the view that the provision should remain limited to the ‘source’ of the statistical and actuarial information and not the information itself. IFSA was of the view that the content of the statement of reasons should be regulated by industry policy.^[52]

27.79 The acting Disability Discrimination Commissioner supported clarification of the DDA but noted that s 107

has had limited practical significance in the administration of the DDA to date, and that as indicated above provisions for disclosure of reasons at an earlier stage and not only in the context of a DDA complaint are likely to have greater beneficial effect.^[53]

27.80 There was substantial comment in submissions concerning the content of any statement of reasons provided by insurers. The Centre for Law and Genetics suggested that:

The information provided should include an explanation, in layman’s terms, of the reasons for the unfavourable underwriting judgment and the actuarial basis for that decision. To avoid the feedback to the individual being entirely negative, where possible, it would be desirable if information could be provided about alternative insurance products and or options which may be open to the applicant, notwithstanding the genetic information.^[54]

27.81 Other submissions suggested that it might be difficult to disclose the actuarial or statistical data on which an underwriting decision is based for ‘commercial in confidence’ reasons.^[55]IFSA was of the view that:

If insurers were legally required to explain in every instance the actuarial or statistical basis for unfavourable underwriting decisions based on genetic information, this would be an onerous and costly exercise. It would involve compiling and extracting specific information relevant to each particular decision from large volumes of relevant data and explaining and breaking down the derivation of the actuarial or statistical basis, which may be as a result of lengthy research and extensive historical analysis accumulated over time, in each case.^[56]

27.82 The Institute of Actuaries of Australia noted that

if all this information were to be provided on every request, the applicant would most often receive an overwhelming quantity of data that is incomprehensible except to an expert. Life companies prefer to start by giving a plain English explanation that is consumer friendly.^[57]

27.83 IFSA expressed the view that, in relation to genetic test information, the Genetic Testing Policy makes sufficient provision for clear and meaningful reasons for adverse decisions. In response to the Inquiry’s proposal that reasons should also be provided for decisions based on family medical history information, IFSA remarked:

IFSA is prepared to review current practices in relation to communicating reasons for adverse underwriting decisions based on family medical history with the view to formulating appropriate policies and standards to address relevant concerns. This may involve reviewing IFSA’s existing Genetic Testing Policy and determining the extent to which the provision of reasons model can be expanded to cover unfavourable underwriting decisions based on family medical history. Further, IFSA maintains its commitment to working with the community and relevant bodies such as the proposed HGCA in the development of these policies.^[58]

Inquiry’s views

27.84 The Inquiry is of the view that applicants are entitled to know the reasons for an adverse underwriting decision. Transparency and accountability of decision making has the benefit of building public confidence in the way in which insurers use genetic information in underwriting and is likely to generate a better decision-making process. It also creates checks and balances by providing consumers with the means of ensuring that the discriminatory acts of insurers fall within the terms of the exemptions permitted by law.

27.85 The Inquiry considers that the reasons provided must be effective for the purposes of consumer understanding and possible review—and they may fail to be so if an insurer provides either too little information or too much. A bare statement that an applicant has been denied insurance because of his or her family history of a particular genetic disorder is unlikely to satisfy a consumer’s wish to understand the basis of an adverse decision. On the other hand, the provision of vast quantities of raw statistical or actuarial data is unlikely to offer an applicant any better understanding.

27.86 The Inquiry regards IFSA’s Genetic Testing Policy as encapsulating the essence of effective reasons: insurers should inform applicants ‘in a clear and meaningful way of the reasons for their decision in relation to the application’.^[59] However, much will depend on how such principles are applied in practice.

27.87 With these considerations in mind, the Inquiry has formed the view that existing legal mechanisms and industry practice fall short of the desired standard in several respects.

•  Section 75 of the Insurance Contracts Act imposes a duty on insurers to ‘give to the insured a statement in writing setting out the insurer’s reasons’ upon request, but it says nothing of the adequacy of those reasons or the statistical or actuarial basis for the decision.
• Section 107 of the DDA enables HREOC to require an insurer to disclose the source of the actuarial or statistical data on which a discriminatory act was based. However, the section does not indicate that an applicant is entitled to the information so obtained; the section is obscure in so far as it requires only the disclosure of the ‘source’ of the data; and disclosure may in any case come too late to be effective.
• IFSA’s Genetic Testing Policy provides a sound model in relation to the giving of reasons, but the policy applies only to genetic test information, not to family medical history. Moreover, the success of the policy ultimately will depend upon how it is implemented in practice by individual insurers.

27.88 In the Inquiry’s view s 75 of the Insurance Contracts Act should be amended to clarify the nature of the information that must be provided to applicants on their request. The reasons provided by insurers should be clear and meaningful and explain the actuarial, statistical or other basis for the decision. In order to ensure that applicants are aware of their right to request reasons, the Inquiry also recommends that IFSA and the ICA develop mandatory policies requiring their members to inform applicants of their statutory entitlement to reasons for an adverse underwriting decision.^[60] This will ensure that an applicant’s right not to know is respected because reasons will not be given to an applicant unless they have been requested. It will also limit the cost to insurers because it is likely that reasons will not be required in every case.

27.89 In relation to the content of statements of reasons, the Inquiry believes that a balance must be found between the provision of adequate information and the provision of too much information. While the level of detail provided in underwriting manuals may not be helpful to an applicant, the Inquiry believes that the insurance industry should develop statements that describe the basis for decisions in a way that is readily understood by applicants.

27.90 The Inquiry notes that, in some cases, the information to be provided to applicants may be sensitive because of the inclusion of data about expected morbidity or mortality. Insurance industry peak bodies should develop policies on appropriate mechanisms for providing reasons to applicants where sensitive information is involved. In some cases it may be appropriate to provide information to the applicant’s nominated medical practitioner rather than directly to the applicant, as is already common practice in the industry.

27.91 The Inquiry notes that, if the insurance industry is required to provide better information about reasons for adverse decisions under s 75 of the Insurance Contracts Act, there will be less need for applicants to seek redress under the DDA. However, in the Inquiry’s view, s 107 of the DDA should also be clarified to ensure that information provided to HREOC is also available to the applicant. The existing requirement to provide the ‘source’ of statistical and actuarial data is, in the Inquiry’s view, too limited. Insurers should be required under the DDA to provide clear and meaningful reasons for their decisions, including the statistical and actuarial data or other information upon which the decision was based. Once a dispute has progressed to the stage of a complaint to HREOC, there is justification for requiring more detailed information to be produced by the insurer to enable HREOC to determine whether the decision was consistent with the terms of the DDA.

27.92 The Inquiry is also of the view that industry policies dealing with the provision of reasons for adverse decisions based on genetic test information should be further developed to cover the provision of reasons for decisions based on family medical history. The Inquiry notes that IFSA has suggested extending the Genetic Testing Policy to cover family medical history and the Inquiry supports this approach. As noted above, the requirements to provide reasons in the Insurance Contracts Act and the DDA already extend to decisions based on family medical history information.

27.93 The interest of consumers in obtaining adequate information about adverse underwriting decisions is not, of course, confined to underwriting based on genetic information. The Anti-Discrimination Board of NSW made this point in its submission when referring to the findings of its report into Hepatitis C related discrimination.^[61] The Board expressed support for legislative amendments that would compel insurers to provide consumers with access to adequate information in relation to all unfavourable decisions, a view shared by the Institute of Actuaries of Australia.^[62] While there is merit in such an approach, in conformity with the Terms of Reference, the Inquiry’s proposals are confined to the situation in which an application has been assessed using a person’s genetic information.