The direct insurance market continues to grow substantially, but this is being offset by significant lapses, Plan For Life has reported.
The researcher analysed lump sum sales data from companies that offer both direct and adviser-sold insurance, finding that direct sales are expected to reach $719 million by 2018. In-force direct business is similarly predicted to grow, reaching over $2 billion in the next five years.
Lump sum cover is the main product purchased via the direct channel, outweighing income protection cover by a factor of 16 to 1, the researcher said.
But Plan For Life added that the positive growth is counteracted by substantial lapses in the first twelve months after the sale. The study found that nearly 40% of policies purchased direct were lapsed within the first year. In contrast, retail business recorded an average of 8.4% of policies lapsing in year one.
… in the second year of policy life, advised insurance lapse rates increased to 13.5%
‘There is a wide range of experience in this market… Nonetheless, as one would probably expect, direct sales are much harder to retain than adviser-based business,’ Plan For Life said in its report.
However, in the second year of policy life, advised insurance lapse rates increased to 13.5%, while direct-sold products were slightly lower, at 13%.
Plan For Life suggested the reason for the rise in retail lapses was likely to be due to a combination of annual cases lapsing just after the first renewal date and cases with other frequencies (mainly monthly) also exiting at a fairly high rate. The result also lends weight to the argument for an industry-wide review of responsibility periods.
Hi, Hardly surprising the lapse rate at 40%. So every 1 mil you write 400K goes off the books. Makes good business sense to keep writing this type of business. I am sure the sales consultant has gone within 2 years as well. Leave it to the professionals. On the front line risk adviser.
The amount of times people that come onto my office with these rubbish direct polices paying above normal premiums is mind blowing. The direct market revolves around ” if you throw enough mud something will stick”
The responsibility period on insurance needs to be increased to weed out the those who are in the business of moving business. Its that or commission percentages will need to drop.
I have never put a client in a policy with the intension of moving them in 12-36 month so I have no issue with a 3 year responsibility period.
Moving business increases costs to life companies which is passed on via premiums, not only commission paid but the cost of underwriting and support.
Good advice doesn’t just span 12 month down the track and nor does a good policy.
Whenever I see someone with a direct policy, its automatic new business (for me). Client has no relationship, no advice, no service and no-one to turn to when they need help.
Bring it on (direct sales), keep spending the big bucks on advertising- means more business for us.
With the current lack of meaningful, confirmed data of what is actually deemed to be the “churning” of insurance policies, the embracing of the direct insurance market by insurers in order to gain market share and maximise profits is beginning to backfire with the statistics of the incredible lapse rate of 40% in the first year of the policy’s existence. The commoditisation of the risk insurance market via the direct channels that has been gaining strong momentum over the last few years is resulting in a model whereby the volume is outweighing the fall off or the lapse rates of the new policies. If this model was being operated by advisers, would the enormous first year lapse rate be deemed as “churning” ?.If the consumer who purchases a direct product over the phone or online then cancels the product 3 months later and takes another direct product or in fact seeks the advice of a professional adviser who recommends a replacement contract that provides significant and meaningful advantage to that consumer and is in their best interest, is that considered “churning”?
Not only will the lapse rates of the direct model continue on as has been stated or possibly increase, it is the future claims statistics and the litigation that will the most interesting in terms of industry cost when the consumers who have purchased a direct product believing it would provide a particular benefit when needed, then discovers that either a pre-existing condition clause, the definition of ” Total Disability”, or the deletion of their Trauma Insurance occurs because a Reinstatement Benefit wasn’t recommended, discussed or explained comes to light.
These consumers will also be left to address and process their claim without the assistance of an adviser at a time in their lives when they are suffering financially or medically and do not have the capacity to effectively manage the process.
Would a current insurer be willing to accept the business of an adviser whose first year lapse rate was 40% as long as that adviser continued to outweigh the lapsed policy ratio with large volumes of new business ? Would they be concerned if all the new business was coming from the business of their closest competitor in a bid to increase market share and profitability?
They have in the past, the 80’s and early 90’s was full of it ! Is the chase for market share, profitability and competition now not in existence ? I think not.
When a consumer perceives that their purchase is cheap, quick and immediate, the perception of value, longevity and commitment is then eroded. The relationship is temporary at best and the business is at risk of cancellation or movement based on the slightest perception of a either a minor cost saving or the loss of meaning of why the purchase was made in the first place.
The direct market will continue to grow based on the penetration and saturation method, however, the result will be an ever increasing movement of this business on a short term basis due to the association of the purchase being no different to driving through the Golden Arches.
When you cheapen the quality and delivery of your product in the name of volume, you need to be prepared for a lack of satisfaction because what the customer bought doesn’t look like, smell like or taste like they were expecting.
If a manufacturer of a product (retail Life Insurance Company) takes 7 years to make a profit on production line one, though the same Life Company has a production line two that can build, sell and maintain a similar product ( with less bells and whistles ) though more efficiently, with less red tape, delays and makes it easier for the customer to buy, alter and is cheaper, what product do you think a customer will choose?
If after an adviser has convinced a customer to buy the more expensive, better quality product, though the customer finds it time consuming and confusing to have their product updated or serviced and on top of that, will pay substantially more every year for their product, especially when all their other essential products e.g. electricity, living costs, etc are rising faster than their income, what do you think the customer will choose to do?
We live in a McDonalds Drive through world now, where everyone wants their ‘product’ to be delivered quickly, efficiently, cheaper, with a simple, easy to understand process, so they can get on with their lives with less stress.
The problem we seem to be facing is that people want production line one quality with production line two, ease of use.
It does not help profitability if production line one has a system of do not ask ‘perceived hard questions’ when a customer wants to be given all their money back for the product they purchased and be paid multiple times more, without having sufficient checks and balances (that are inexpensive, quick and efficient) to stop paying the customer when they no longer should be receiving money.
Compare this to production line two where customers can buy the product cheaper, quicker more efficiently, though nearly half of the customers will cancel their order within one year and the other half cannot seem to get decent service when they need to claim, as it turns out that the product does not do what the customer thought it would do.
This is a dilemma the Life Insurance Industry is facing today. It is fixable, though the Life Industry needs to start asking the people who live and breathe the industry and who have vast experience, for their input.
For too long we have had self interest groups, entities with none or little Life Insurance experience, offering advise that has little relevance in a clients mind, coming up with solutions that solve very little, except to increase their own profits at the life industries expense.
The world has gone mad when we continue to ignore experienced and intelligent people who can fix the problems and rather listen to outside entities, who can do no more than play around the edges, charge a fortune, move on to the next Company peddling their wares and not actually achieve what needs to be done to strengthen the Life Industry, which as we all know is facing a dilemma of falling profits.
Look at the city of Detroit which has just filed for bankruptcy as an example of what will happen when you take your eye off the ball.
In response to the last comment ‘Plan for Life’ makes, around “lends weight to the argument for a review of responsibility periods”, that suggestion is like putting your finger in one small hole in a dam wall and saying I have fixed the leak, only to find dozens of other holes and choosing to ignore them
The Direct Insurance Market Equation:
Transactional product + transactional process = transactional relationship.
Do they ever think that based on this model the consumer will be committed to any form of long term relationship to a product they purchased in a majority of cases because it was quick,cheap and easy ?
I propose over time, the first year lapse rates of the direct business will increase to beyond 40% as the direct market continues to develop strategies to encourage consumers to seek more and more comparison data which will ultimately result in a premium price war and further erode profitability in combination with increasing claims rates.
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