The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which started hearings this week into misconduct by life insurers, has learnt that insurers, through direct sales, sold worthless policies using illegal methods to people who don't understand them and have no hope of making a claim on them anyway, reports the Australian Financial Review.
Among them, ASX-listed ClearView admitted to more than 300,000 criminal breaches of laws banning the sale of financial products during unsolicited meetings or phone calls.
The Commission also heard how another insurer, Freedom Insurance, used hard-sell techniques over the phone, including to a 26- year-old man with Down syndrome who was unable to understand the cover he was buying.
Direct insurance sales were slammed in a report released in August by the Australian Securities and Investments Commission that found three out of every five insurance policies sold via this channel were cancelled within three years in a practice chairman James Shipton said "undermined trust in the industry".
Among those involved in the direct and non-advised life insurance model are CommInsure, Freedom, NobleOak, Suncorp, TAL and OnePath/ANZ, St Andrew's Life Insurance and Hannover Life Re.
ClearView's chief actuary and risk officer Gregory Martin was grilled on Monday over unsolicited calls, aggressive sales tactics and hefty bonuses offered to staff at the company's call centres, which sold life insurance directly to customers until 2017.
The Corporations Act ban the sale of financial products in cold calls. Explaining his company's conduct, Mr Martin described it as a "mistake" and said the company did not understand it was breaching the law at the time.
The inquiry heard ClearView's call centres targeted poorer people, leading to high rates of early cancellations, incorrect bank details being provided and missed payments, but made changes in late 2015 and 2016 to target "mid-market" clients.
Meanwhile, on Monday, Freedom Insurance announced that it would stop selling all products except funeral insurance and loan protection cover. The company had sold six lines of insurance including funeral insurance, life cover, TPD, loan protection, accidental death and accidental injury via outbound phone calls.
Freedom's COO Craig Orton revealed the significant change in the company's business model as well as the scrapping of commissions and non-monetary incentives in a series of amendments to his statement to the Commission.
Mr Orton revealed the changes were made in a discussion between himself, the chief marketing officer and the CEO over the last week.
"My view is that any commission payable by sales agents has the potential to be conflicted. It doesn't matter how big or how small," he said.
Senior counsel assisting Rowena Orr had argued that a programme of incentives for sales staff that included boat trips, Bali holidays and motor scooters as well as penalties that included paying for overheads, contributed to poor outcomes for customers.
Mr Orton also admitted that Freedom employees would often sell accidental death and accidental injury policies as a low-cost alternative to life insurance because the circumstances in which customers can claim on an accidental death policy and an accidental injury policy are much more limited than under a life insurance policy.