How insurance companies use 'downgrading' to sell cheap policies over the phone

Ian Gavan/Getty Images for Jaeger-LeCoultre
  • The financial services royal commission was told how insurances companies use downgrading to make a sale.
  • Insurance company ClearView would sell accidental death policies if it couldn’t sell life insurance.
  • In 2014, the ratio of claims from accidental death policies paid out to premiums collected was 1%.

The financial services royal commission today played audio of a phone sales person from ClearView pitching a cheap accidental death policy to a woman who worked as a cleaner.

The woman couldn’t be sold a life insurance policy because she had a pre-existing medical condition, a heart problem.

So the sales person used what is called “downgrading”, selling an inferior and cheaper product.

Senior counsel assisting the commission, Rowena Orr, was questioning Gregory Martin, chief risk officer for life insurer ClearView.

This insurance company has already been the subject of the royal commission’s attention because of the questionable sale of policies to indigenous Australians.

And corporate regulator ASIC has found that ClearView used “unfair and high pressure sales practices” when selling life insurance policies by phone.

The commission hearing was played a recording of a phone sales call from ClearView.

“I just wanted life insurance,” says the woman, a cleaner.

Salesman: “Well, at the moment, because you’ve had the problem with the heart, we couldn’t give you life insurance. We can give you accidental death insurance. So if you pass away in an accident we pay money to your family, $60,000.”

Woman: “Okay.”

The conversation continues until the sales person says he can offer $110,000 accidental death cover at $11 a week.

The hearing was told that accidental death policies rarely pay out. Overall, ClearView gets to keep about three-quarters of the premiums it collects.

Few claim on the policies. In 2014, the ratio of claims paid out to premiums collected was 1%.

Orr asked Martin: “You get to hold on to a lot of the money you bring in from accidental death policies, don’t you?”

Martin said the cost of administering the policy tended to absorb more of the premium.

Company policy was to attempt to sell an accidental death policy if someone had been declined life insurance.

Today Martin was asked: “So you proceed to offer them a cheaper, inferior product than the one they applied for?”

Martin: “No I don’t accept that.”

However, Martin agreed the premium was cheaper.

The commission heard that Clearview had at one stage targeted customers from lower socio-economic backgrounds.

However this was dropped when ASIC started looking at insurance. Martin said the market was “gathering more regulatory scrutiny”.

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