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.”

  • John Galt

    Whilst a little ironic that this article is coming from one of the actual drivers of this behaviour, credit to Rice Warner for publicly acknowledging the issue and calling for change. Just a shame that no solutions were proffered.

    So what is the solution?

    Researchers will continue to rate products in terms of likelihood of payment / most favourable terms; Advisers will continue to sell those most highly rated products under the threat of best interests duty – Which APRA and ASIC will continue to scrutinise, change and determine with hindsight as they see fit; Insurer’s will continue competition to the bottom on price and product features/definitions; and the consumer will continue to lose out. What cog in this terrible Thijs Rijker-esque machine must stop, change or be swapped out in order to prevent the inevitable?

    What happens if Insurer’s tighten up product terms for new business?
    – The first to do so – and everyone after that to the last, will sell none because the last to move will remain the highest rated product and reap all the sales. ‘Chicken’ anyone?
    – The in-force policies remain appalling due to guaranteed renewability.
    – Premiums go up on in-force policies creating selective lapse, churn to cheaper new products and customers stuck in old policies with skyrocketing premiums.
    – Creation of another legacy issue.

    What happens if the Insurer’s introduce new simplified product suites?
    – They won’t be comparable to on sale products and so won’t be rated by researchers and therefore won’t be recommended by advisers.
    – They won’t be immediately more affordable to consumers until the current product suites are actually priced correctly.
    – Creation of another legacy issue.

    What happens if researchers stop rating products?
    – Not going to happen.
    – But if it did, how would advisers make recommendations on risk insurance solutions? How would we demonstrate best interests duty compliance (whatever that is nowadays) to the overlords?

    Whilst these aren’t going to solve the problem in its entirety – Here are some things that I think need to change in order to shift the trajectory:

    • Insurer’s to develop new and simple products offerings that meet insurable needs – no more, no less.
    • Products to be simple and easy to understand, limited in junk ‘bells and whistles’, limited in PDS size, restricted replacement ratios.
    • Researchers to include ratings for product sustainability, insurer stability, affordability, real word usefulness or likelihood of claim for each feature and scoring based on insurable need.
    • Researchers to include separate ratings levels for other comparable lines of new products like basic products.
    • Current under-priced products to be priced back to profitability.
    • Appropriate components of design and distribution obligations to apply to advisers so that Rolls Royce products are not sold to kids, Mums and Dads where a simple product would actually be more in their best interests.
    • Insurers to include more optional features and terms so that simple products can be tailored in terms of benefits and features with premium dialled up and down based on selections.
    • Reduction in mandatory underwriting limits and more detailed underwriting in order to provide more surety to policyholders and faster claim turnarounds. Who wouldn’t rather have a faster claims process in exchange for a few more questions at application?
    • Best interests duty to be reviewed and updated to reflect individual and personalised advice for each customer – Flagship products should not be considered satisfactory discharge of best interests duty. Best interests to incorporate new research ratings suggested above.
    • Guarantee of renewability to be reviewed and modified by parliament and regulators to facilitate changes to existing products, passback of policy enhancements/changes and resolution of insurer legacy issues.
    • Following changes to renewability guarantees, legacy products to be updated and/or converted in order to return premiums to affordable levels.
    • Industry regulators to back off on current misguided and self-serving commissions, reviews and investigations and provide real support and guidance to recovery – knowing that they know full well what the issues are and what needs to change.

    I’m sure there is a great deal more that we are all talking about and soap boxing.

    Let’s hear it and let’s do it.

    • JM

      Hi John,
      Agree wholeheartedly with sentiments / issues raised.
      You are right that no-one is gutsy enough to take the lead as the implications are too far reaching. If one leads, the others will not follow but attack to benefit.
      Solutions being tried are trifling and little.
      Without someone new doing something completely different, or the regulator taking more proactive stance, it’s hard to see much change.
      In an environment where many in the industry talk about “putting customer at centre of everything we do”, we’re missing the mark by an awful lot.
      Your ideas that struck a cord:
      > rating products on things like sustainability, affordability, etc (imagine if products were rated on getting people back to meaningful work, for example. Surely just about the most client centric measure available for most claim types – then any bell and whistle that allowed high replacement ratios would draw negative rating).
      > products to meet insurable interest. Could the Appointed Actuary sign-off require mandatory sign-off that the design meets insurable interest (or at least advise the Board that the product doesn’t meet insurable interest)? Now that would throw a cat amongst the pigeons.

      • John Galt

        Excellent suggestions JM – would love to see a return to work success rate scored and a point of competition between insurers.

        Re your second point – something so simple and logical. Surely the boards of insurance companies are asking questions as to what has gone wrong and why things are the way they are, who knew, and why weren’t they given the facts.

        Whilst eerily totalitarian, perhaps the governments proposed executive banning regime might lead to more of these checks and balances being put in place!

  • Leighroy

    Good summary John. Here is another thought. How about legislation is enacted to specify the standard terms of all policies, with a standard cost, at a level which covers the vast majority of claims, without all the bells and whistles. Build in a fixed amount of commission. That will give the consumer confidence that they are getting an adequate policy without bias. The insurers could then offer the bells and whistles as an additional cost, with or without commission, to those who want that and can afford it. These bells and whistles can be priced separately to the base legislated cover so that the premiums on the base cover can be profitable and adjusted if necessary. This creates a level playing field where the major differentiator becomes the cost of the insurer doing business, ie, their efficiency. Competition will clean out the insurers who are not efficient, as well as the advisers who are not providing best practice service to clients. Economics 101.

  • Old Risky

    Interesting line of argument from Rice Warner

    Essentially what Rice Warner seems to be arguing is the
    competition in income protection has driven “complexity” resulting in reduced

    At the base of that “problem” is that retail insurers still
    believe that most risk advisers recommend products primarily on the basis of
    price to the client. To advisers, the insurers argue it is not possible to
    reduce the basic price to the client because of claims experiences, so the
    solution has been to add additional features and benefits the policies without
    reducing the price, so as to still be in the top quartile premium wise.

    Adding features without increasing premium is common. For
    example the development of the so-called “TPD option” a decade ago, where an
    ongoing income protection benefit could be commuted to a tax free lump sum when
    the claimant became fully TPD, somehow never increased the premiums of the base
    product. It eventually catches – the insurer who originally promoted that idea has
    watered it down so it is no longer of any real value, rather than increase the
    premium commensurately. I have had two clients in the last decade who really
    appreciated that feature.

    Premium should not be a problem. Those advisers who have undertaken
    the effort to thoroughly educate themselves as to the meaning of policy features
    and definitions in life risk products, and are then able to demonstrate that
    value to potential clients, are able to eliminate the issue of premium per se
    by educating the client. It’s not rocket science!

    There are no longer any industry wide income protection training courses, thanks to the AFA abandoning those courses in the early 2000s. And so-called educational
    qualifications the government has foisted upon us do not, and cannot, give any
    assistance in adviser understanding of the technicalities of complex contracts,
    such as income protection, to allow that adviser to illustrate the value of a
    particular feature to a client while discussing premium.

    Almost 25 years ago insurers introduced presumptive disability benefits, payable in the waiting period for broken bones and serious illnesses, without disability. Insurers confirmed that adding such a feature to a “professional level” income protection contract would only result in an increase of some 5% or 7% in premium. Receiving presumptive payments may be the only time the client will ever claim on an income protection policy, but the question remains were those extra benefits ever accurately priced, by actuaries.

    Then there is the issue of life research houses. Most advisers are aware that all life insurers have someone in their organisation whose sole purpose is to seek to improve the rating of their particular product in any life research ratings chart. To this observer, ratings are apparently improved by either berating the research house with arguments against a low rating OR going back to the drawing board to tinker with the product, while
    keeping the premium at its previous level.

    As to “premium shocks”, I would argue that actuarial profession has a lot to answer for – are they really, fearlessly and professionally, “doing their job “of accurately costing insurance products at all times, and not succumbing to pressures from the marketers in a life insurer who fears a non-competitive ( premium wise ) “offering” in the market.

    How else can actuaries explain how it was that the former National Mutual Life income protection policies taken out in the 1990s, and acquired by AMP in 2009 with the departure of AXA, were so under-priced that, 20 years later, stepped premiums were increased by AMP by 16%, and level premiums for the same contracts were increased by 29%. Yes there have been foreseeable increases in claims experience over the last 20 years but nothing justifies that massive error of judgement, in my opinion.

    That increase of nearly 30% for a retail level premium contract caused life risk
    Specialists to query the whole concept of offering an initially more expensive
    policy (level premiums) justified by the possibility of long-term premium
    savings if the policy is held for 20 years or more. Advisers acted in good faith,
    and that faith was attacked.

    As to an “arms race “ to more “featured “ policies reducing profitability, try this. Rather than adding severity, why not have the kahunas to reduce premiums by deleting ancillary features and benefits, rather than being “mean and tricky” and unfairly tightening capacity to claim by adding severity.

    This year’s release by one insurer of a new series of policies, marketed as attempting “to make premiums more affordable”, failed this fairness test when close examination revealed that the price to be paid by clients for those claimed “affordable premiums”
    was introducing more severity throughout the product offering, rather than a reduction in expensive features per se.

    Here’s a starting point – delete bed care benefits, 3 day accident, Crisis benefits etc in return for no “capability” clauses.