Insurance Sustainability Threatened by Product Enhancements

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Product providers who constantly tweak product benefits and definitions are putting the long-term sustainability of the insurance industry at risk, according to the Australian Prudential Regulation Authority (APRA).

Addressing the Financial Services Council’s (FSC) Life Insurance Conference in Sydney last week, APRA’s Ian Laughlin said that while lapses and appropriate management of risk were key factors in maintaining a sustainable industry, profitability was also important, and in the long-term interest of the policy holders.

“There are other factors at play (in relation to sustainability), that have been around for many years. And one of those is this never ending desire to have more bells and whistles than the next insurer. There is no way that that is driven by customers’ needs. It’s driven by a desire to get a higher score from ratings houses, which in turn gives a rationale for an adviser to move from one company to another. That issue, which has been around for many years, is one that the industry really needs to come to grips with,” Mr Laughlin warned.

L to R: Paul Rayson, Pauline Blight-Johnson, Ian Laughlin

According to CommInsure Managing Director, Paul Rayson, part of the problem is that products have been improving while prices have remained flat.

“If you look back over the last eight or nine years, pricing of insurance has actually been relatively flat,” Mr Rayson said. “Yet over that same period we have increased the benefits, both the type, and the quantum of benefits for that cover, quite dramatically. So it should come as no surprise that if you keep prices flat and benefits increase that profitability suffers.”

He agreed that ratings houses had a significant effect on the product development process, suggesting that the focus should be on core products which are good value and affordable over time.

“At the moment they (ratings houses) rate the highly complex, fully featured products, but they don’t put enough weight on value for money. Ratings houses need to rate products according to the majority of customers’ needs, which are value for money and affordability over a long time.”

I think there is an issue around the way we rate and review products

Mr Rayson also questioned whether advisers may be incorrectly assessing what is in the ‘best interests’ of their clients. “They often interpret ‘best interest’ to be ‘best product’, but it should be a product that’s appropriate for a customer’s needs, at a point in time, not only today but also in eight years’ time, when they really need the product.

“I think there is an issue around the way we rate and review products.”

Mr Laughlin concurred: “That’s the system – unfortunately that’s the world that we live in. But the idea of having nice, simple, easy to understand, basic life insurance products that are a lot cheaper, and better for the customer because they can understand them… is a pretty good notion. How the industry gets itself into that position is another matter.”

To solve the issue, according to Mr Rayson, the industry needs to fundamentally rethink how it builds and delivers products.

“The insurance industry is hurting right now. Our industry and the advice channel work on a client holding an insurance policy for eight years, to make money.  That duration is no longer valid.  That model is not sustainable. We need to rethink our whole offer. We need to design products and offers with customers’ needs in mind, and affordability in mind. It’s going back to the drawing board and redesigning our products.”

 



3 COMMENTS

  1. Could it be that these constant “improvements” to achieve better ratings means that Advisers seeking to do the right thing by their clients sometimes need to change underwriters?

    Would that be defined as companies encouraging churning?

  2. Retail Life Insurance Companies have for many years focused on the “bells and whistles” which has created a myriad of enhancements to products, which of course is attractive, though the danger in this, is that the competition, eg online, phone, television and industry super fund Insurance offerings, are seriously undercutting the retail Life products on price and they make it simple to attain and maintain life insurance products.

    If retail life Insurance companies want sustainability, then they must make it easier for advisers to underwrite and maintain the policies, which at the moment is not being achieved effectively by any of the carriers.

    Customers and advisers main concerns are: Ease of use, Price and Product benefits and may I hasten to say, probably in that order.

    It is no use having a policy that is the best of the best, if it is too difficult to underwrite and keep on the books because the administration is too cumbersome, confusing and does not pass the ‘ease to understand’ test.

    Then if the pricing is high and with indexation and age increases, pushes the premium too high, like the titanic, the inevitable will happen.

    Clients will question the prices and unless the hole is plugged and the remedy is easy to understand, the policy, just like the titanic, will sink and be lost.

    Ratings houses are a factor and increasingly, price and ease of dealing with a Insurance company are becoming bigger factors.

    The reasons we have had from every Insurance company, when we ask for a easier delivery system, that clients can understand and advisers can efficiently use, is that it is too difficult and expensive to make changes to the systems.

    There are too many ‘hands off’’ people who have never dealt with or understand clients or advisers, who make decisions about protocols and where valuable resources should be spent, which is draining profits and cash flow into areas that do not satisfy the core business principals of the retail Life Insurance Industry, which are
    1) Make it easier for customers to buy insurance
    2) Make it easier for customers to maintain and retain their policies
    3) Provide quality insurance products that are superior to online, TV, Phone and industry Super insurance providers which are cheaper to buy.

    All systems, protocols and strategy must pass the 3 point test before any resources are spent on other areas.

  3. The most sustainable IP product will be the cheapest product but which also provides own occupation cover for a few years of disability then harsher cover to retirement.

    We need the product to maneuver people off claim and force retraining when there’s some capacity to work (to keep premiums affordable) but those who have no capacity to work at all, continue to receive benefit. IP should not allow claimants to sit at home to retirement because they can’t do their ‘own’ occupation.

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