- Yes (59%)
- No (35%)
- Not sure (6%)
This weeks’ announcement from AIA Australia that it has introduced a new Term Level premium option has prompted us to ask the same question we asked you four years ago – should you be writing more level premium business?
In the four years since we last asked this question, the life insurance industry has witnessed a once-in-a-generation upheaval as it commences its transition to serving an ever-changing consumer world in which (at least) upfront commissions will no longer exist.
Finding a better way to offer level premium solutions is intended to be one of those new options…
This new world places the consumer interest at the centre of all service processes and insurers will be seeking to offer the adviser new options – new tools they can utilise, in order to serve their clients’ best interests. Finding a better way to offer level premium solutions is intended to be one of those new options (see: AIA Australia Rolls Out Term Level Premiums).
We know that level premium policies attract higher retention rates (ie lower lapse rates!) because the policy owner isn’t hit with a price rise every year, especially as the insured life journeys into their 50s and beyond.
For the purpose of this discussion, we’ll make an assumption that future level premium products are intended to be ‘genuine’ or ‘true’ level premium contracts that won’t experience prices rises, eg if it’s a limited 5, 10 or 15-year term, as offered by AIA Australia.
Are you thinking about increasing the level premium mix in your business? The downside is the challenge of convincing the client about paying the higher premium in the earlier years, balanced by the upside of higher retention levels and lower overall premiums paid by the client over the longer-term.
The stepped versus level premium debate, particularly in the Australian market, has yet to be resolved and we welcome any comments you’d like to add to this discussion. We’ll report back next week and will also compare this poll result with the outcome from four years ago.
I have always been an advocate of presenting level term products to my clients where appropriate as an alternative, offering substantial savings (according to the presentation from the relative insurer) to the client if the
product was kept for more than 20 or 25 years.
I and others have done considerable research to establish those companies that offer “true level”, as distinct from those level premium products which are effectively sold in blocks so that the annual CPI increase is added to the client’s policy on a different basis of a level premium.
I have made considerable use in client presentations of some of the projections and graphs made available for by insurers. Some insurers offer excellent graphs and projections which clearly illustrate the potential for savings achieved by using level premiums over the longer term.
But I must admit my faith in offering level premiums to my clients has been severely shaken in recent times. My initial training in this industry, some decades ago, sourced from both the insurers and independent sources of information, was that while it was not true to say that level premiums would never go up, it was more truthful to say that if level premiums were increased for any legitimate reason (other than total business mismanagement), then the relevant stepped premium in the same circumstances would always also increase proportionately.
In other words there was a maintenance of “relativity” between stepped and level premiums for a given set of circumstances.
A month ago AMP quietly announced that as a result of it’s “review” of a book of lump sum and income protection business originally sourced in 2009 from ACL and National Mutual (later AXA), both Stepped and Level premiums were to be massively increased for that book. Risk Info DID NOT cover the story.
What was of particular annoyance is the announcement that some income protection policies would be impacted by a 16% increase on STEPPED premiums but if the same product for the same person had been written as a LEVEL premiums the increase was 30%. AMP offered no explanation for the size of the increases nor the disparity between stepped and level premiums.
A Google search of the financial media between 2009 and 2017 revealed that the financial press were aware that (apparently) management egos had got out of control and AMP had paid too much for the former AXA business,
and had failed to do appropriate due diligence on that particular book of business.
In other words AMP were sitting on a known time bomb but successive AMP management chose to ignore the issue. Now that AMP is under a takeover offer from KKK and the others, and there is a “clearing of the decks” process afoot, there is a well founded suspicion that this particular book of business is about to be made “profitable”, before being on sold to a reinsurer.
AMP is engaging in the traditional tactics of announcing very large increases to a select book of rapidly ageing risk business, hoping that most policyholders, whose health will allow them, will leave that book of business and go elsewhere- a very short sided view. Without a proactive adviser, I suspect many of these clients who may have already been questioning their cover, will just cancel their policies, leaving a book of business that
must soon become “claim city “. Where is the sense in that ?
BTW, those insurer induced “lapses “ will feed into the “churning “ hunt review to be undertaken by ASIC in 3 years, post LIF. And my AFA chooses not to see that danger !
The question burning away inside me is that why the LEVEL premiums for those products, sold a decade and a half ago or more by companies associated with National Mutual, and supposedly priced accurately by actuaries
employed by the insurer( and it’s reinsurer) could, a decade later, be found to be so wildly inaccurate as to require a 30% increase.
Were those actuaries so appallingly bad at their jobs they failed to properly price the level premium products or was this a case where the marketing people, examining their latest “offer” after the latest product redesign, decided to ignore actuarial advice and issue the products on an unsustainable premium base to remain “competitive”. That’s called market failure !
And was APRA asleep at the wheel in not closely supervising the basis of declared premiums as their Act requires, or where they limiting their “supervision “ to just looking at half-yearly “sign-offs” on Capital Adequacy and Solvency.
There are no guarantees in life, and there sure as **** are no guarantees in any level premium promise. I suggest advisers have another look at the description of Level premiums in their PDS of choice.
How did you come up with this statement. “This new world places the consumer interest at the centre of all service processes”.
Consumer best interest was always at the centre of the service process for all boutique and independent advisers. The only time this is not at the centre is in the banking, direct insurance and big corporate advice houses where there is incredible pressure to hit targets no matter what.
The new world is forcing independent advisers to retire or join the banks so the “new world” will actually leaves the consumer high and dry without access to independent advice and more importantly – independent help with claims. Even if they do get independent advice it will have to be general advice only for clients with premiums under $5k pa as no one can give proper advice for Risk with all the compliance rubbish that we have to do.
The reason advisers don’t recommend Level Premiums is due to the insurers constant price gouging of their existing customers. How can you justify locking a client in long term when an insurer can make a decision to raise all level premiums by 30% one year to increase profits, then do so again 2 years later.
True Level does not mean that the insurer cannot price gouge and raise premiums for reasons of profitability.
How many clients hold their policies for more than 12 years which is roughly the time it takes to break square and start to have a policy that is truely cheaper than its stepped premium brother ??
With all the changes ( not to mention huge premium increase) there become several very viable option to alter the cover or indeed ( shock and horror!) move to a more competitive insurer The only winners at this are the insurers who constantly ” gouge ” out more money from the client in the name of “bad claims experience” but still manage to pay a dividend to their share holders
Simply speaking there is no such thing as a level premium they all go up for one reason or another
What a well articulated comment Old Risky and it does seem one set of rules and guidelines apply to Advisers and another set of opaque guidelines construed as rules, applies to the Big end of town, with the end result that Australians are sadly let down and are given little protection from behaviour that would fail any best interest duty.
There are many problems in relation to stepped v’s level premiums.
On a general basis it takes approximately 8 years for stepped premiums to catch up to present day level rates.
The problem is that to address client needs, most don’t have enough disposable income to pay 80.0% more for level premiums above the cost of stepped ones.
In previous times before direct computer quoting, life actuaries calculated that stepped premiums would rise for those between the ages16-25 and then fall for those between 25-35 before beginning to rise again.
You don’t see that on any quote system any more,… WHY ?
The answer is simple.
The greed of life companies has changed those parameters where all premiums can rise, even so called level premiums.
Of course there was the age old arrangement, where a particular stepped rate was offered by many life companies to their existing client base, but say 3-4 years later a client’s twin brother could approach the same life company, apply for the same amount of insurance but the new policy would be priced at a 40.0% discount to his twin brothers.
Herein lies the lack of morality of life companies where they will shaft a loyal client and offer the same contract with the same sum insured at a 40.0% discount,.. just to attract new business.
I’ve had many arguments with Reinsurers who couldn’t grasp the concept that if I didn’t look after my existing client and possibly move him/her because they were being speared by their existing insurer,….. another adviser would.
Until life companies start to underwrite in a professional way that actually understands the business they are in, and doesn’t consider a “wet behind the ears” underwriter with 2 years experience as a senior underwriter, the industry will suffer at the client and advisers expense..
Hi Alleycat,
The reason that stepped rates no longer go down in ages 25-35 is because the old ‘accident hump’ of young men dying due to accidents (especially) car has disappeared. So, there is a change in the underlying mortality rates of the population.
Comments are closed.