The behaviour of life insurance companies is egregious, and regulation won't fix it. Governments must step in and re-establish government insurance companies.

(Image credit: AAP/David Mariuz)

The concept of “life insurance”, as most of us understand it, goes something like this: you pay premiums to an insurance company and, when you die, there’s a payout by the company to your family (or, if you’re living in a film noir, your cheating partner and their lover who killed you). The concept is pretty simple.

Except, at AMP. There, life insurance works like this: you pay premiums, and when you die, you keep on paying. Yes, AMP makes you pay life insurance premiums after you’re dead — which you would think defeats the purpose of life insurance. On Monday the financial services royal commission heard how AMP charged over 4600 dead people, despite knowing about the problem for years.

The big banks might have thought no one would top their “charging dead people fees” scam. Hold my beer, said AMP. We’ll charge them for life insurance.

[‘I charge dead people’ and other horror scenarios for the government]

Not that other insurers have let AMP hog the royal commission spotlight. There was Clearview’s boiler room. Freedom Insurance selling to a young intellectually disabled man. Comminsure playing definitional games to block claims and prevent scrutiny. By Monday we’d moved onto Allianz (the largest foreign-owned company caught up in the commission so far) and its misleading website that offered over 100 false claims about travel insurance, car and boat insurance, home insurance as well as life insurance. Billions of dollars in premiums were taken via the company’s website from late 2015, with some breaches only notified this year to regulators.

But personal insurance is where the big problems are. That’s where people have tried to do the right thing by their families, or the prudent thing for themselves in protecting their income — where people have heeded the insurance industry’s constant whine that Australians are “underinsured” — and been screwed over, or sold a pup, or stolen from. It’s systemic and deliberate. And the perpetrators seem totally unafraid of what passes for the regulators in this space. In fact the performance of ASIC in the insurance space is even more pitiful and shameful than in banking.

Better regulation, or more funding, won’t fix this. Josh Frydenberg’s claim in his end-of-week media blitz that a power to order compensation is just what’s needed to fix consumer finance regulation is laughable. Regulating personal insurance is like trying to regulate sharks.

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The solution is to return to government-owned insurance: make insurance available via a government-owned, independently managed non-profit insurer, one that can take advantage of government credit ratings. Establishing such a public insurer would normally be sufficient by itself — with its lower costs and better reputation it would be able to compete effectively against commercial insurers — but the behaviour of the latter is so egregious and damaging that there may even be a case for banning them. The likes of Clearview and Freedom and AMP Life could be shuttered, or at the very least subjected to such draconian oversight as to make profitable operation problematic.

This of course reverses the trend of the 1980s and 1990s, when government-owned insurers like GIO in NSW (now owned by Suncorp) were privatised in the name of efficiency in sales that made billions for governments, consultants, bankers and shareholders, but removed most of the protections for consumers. And, yes, it creates financial risks for governments. But those risks are lower than the risk of continuing malfeasance in an industry that has scandal in its DNA. And royal commissions don’t come cheap either.

Naturally this would cause fury among investors. The announcement of an aged care royal commission has prompted some vintage whining in (where else?) the Financial Review. “The number one risk is regulation across a wide variety of sectors,” one fund manager told the AFR. “In my view we are in danger of going too far and stifling entrepreneurial activity.” An aged care royal commission “definitely increases the risk premium of regulation,” lamented another.

Let’s look at that thinking from a different perspective: what they’re saying is that industries need to be allowed the freedom to gouge and rip customers off because it’s the price you pay for “entrepreneurship”. It’s exactly the neoliberal thinking that has delivered up yet another industry that so egregiously violates community norms even a conservative government is forced to reach for the blunt instrument of a royal commission.

So stop whingeing. You’ve brought it on yourselves.

Do you think we should nationalise life insurance? Let us know by writing to [email protected].