Insurer ‘Arms Race’ Causing Sustainability Problem

The retail life insurance market has been slow to respond to issues around sustainability and increasing premiums and risks losing market share to the group life sector, according to Rice Warner.

In a statement it released this week, the researcher said the growing complexity of retail life insurance products has not halted losses of $1.5 billion over the last four years on income protection policies and premium increases of 30 per cent or higher have also failed to do the same.

The group stated “…this has occurred during a period of stable economic and employment conditions – conditions under which these policies ought to be profitable”.

At the same time, insurers had been engaged in an arms race by releasing more options and variants of cover to remain competitive on pricing and product design so that financial advisers would choose their product, the group claimed.

“…competition for market share has dominated and overridden the need for sustainable profitability…”

“The aim has been to meet as many potential customers’ needs as possible. However, this has led to product definitions becoming more lenient and proliferation of benefits without the necessary adjustments to product pricing,” Rice Warner stated.

As a result of these moves, the group wrote that the life insurance market had become complex and unprofitable while premium rates had become unaffordable for many consumers with more cancelling their policies due to the premium shocks.

“In the group market, poor profitability fuelled by a price war was addressed relatively quickly through increased premiums and changes in terms,” Rice Warner stated.

“The retail market has a similar problem but it has been slow to react – constrained by guaranteed renewable terms with the added problem that competition for market share has dominated and overridden the need for sustainable profitability,” the group added.

“Already, much of life insurance in Australia is provided through superannuation and this share will grow if the retail market does not sort itself out.  Retail premium rates cannot keep rising, or group products will become even more competitive and advisers will be squeezed out.”