The Australian insurance industry should heed the lessons of the 1990s and take action to restore profitability on retail income protection, a leading insurance executive has warned.
Statistics released by APRA have shown that across the industry, income protection products produced a loss of more than $200 million during 2011. Further, reinsurers have sought additional capital from overseas because of the worsening experience on income protection products.
MLC’s General Manager, Advice Products, Sean McCormack, says the industry cannot afford to sustain this sort of loss.
“The most important thing for an insurer is to be sustainable. We need to price sustainably to deliver on our promise to consumers; that is, to pay claims,” he said.
Mr McCormack believes the current market results could be attributed to three key areas:
- Worsening claims experience, with an increase in claim numbers and a lengthening of claim duration
- Widening of terms, without adequate premium adjustment
- Relaxation in medical and financial underwriting levels
He added that the problem was compounded by the fact that insurers had not adjusted their pricing to offset these changes.
“I think there is some reticence to move on price because of the competitive nature of the market,” Mr McCormack said. “This will lead to significant remedial action by those that have been most aggressive. We do not believe this is in consumers or advisers long term best interests.”
… how many no-cost improvements does it take to result in increased claims costs?
Mr McCormack’s concerns were echoed by APRA’s Ian Laughlin, who addressed the Financial Services Council Life Insurance Conference in March. Mr Laughlin said that the poor disability insurance results were being watched closely by the regulator, but that the cause was not immediately obvious.
“It’s not clear why we’re seeing this adverse experience,” Mr Laughlin said. “It might be poor or liberal underwriting, it might be poor claims management. It could be the impact of constant updating of products in an attempt to remain ‘in the top quartile’. It begs the question: how many no-cost improvements does it take to result in increased claims costs?”
Despite the warnings, most insurance companies seem prepared to ‘wait it out’, saying losses in the income protection market are a usual part of the insurance cycle, and to be expected in periods of economic downturn.
Brett Clark, CEO Retail Life at TAL (formerly TOWER Australia), says the statistics are not surprising, especially given the number of company announcements made in recent months which have highlighted that income protection portfolios have been under pressure.
“APRA has really confirmed what the market has been demonstrating and talking about for the last twelve to eighteen months,” he said.
“It’s not the first time we’ve seen a period of weaker performance on income protection portfolios. It’s well documented and well-evidenced that the experience is cyclical in nature, and it does tend to correlate strongly to underlying economic conditions. So I think what we’re seeing is the playing out in the income protection experience of a relatively weaker economy, particularly when you normalise out for the mining sector. So the results in that context are not particularly surprising.
“We need to recognise these cycles and also understand we are in a long term business and behave accordingly. We take a long term view on product sustainability and income protection remains a core part of our offer,” Mr Clark said.
The impact of the economy on disability product performance is also evidenced by an increase in the duration of claims by small business owners, says Sean Carroll, Executive General Manager, Product and Service at Suncorp Life.
“There may be a tendency, in some cases, that if the business you’re in isn’t in great health, you’re less likely to go back to work,” he said.
Mr Carroll also notes the range of claims that tend to arise in periods of poor economic performance: “We often also see some of the more subjective claim types coming through.”
However, he believes that the loss in profit does not mean the industry will stop innovating, citing Asteron Life’s recent reduction in premium rates for some income protection customers as an example.
We need to recognise these cycles and also understand we are in a long term business and behave accordingly
“Our view is that income protection is vital to support people as they recover from accident, illness or injury and we want to support Australians to be able to take IP out,” Mr Carroll said.
OnePath’s Head of Product, Marketing and Reinsurance, Gerard Kerr, agrees. “Income protection is very much a part of the overall insurance portfolio. It’s a really important offer that we continue to support.”
To do this, Mr Kerr says it is important to ‘stay close’ to the claims experience: “The insurers need to be sharing their experiences. That’s a really important part of ensuring we can offer it (income protection).”
“What causes claims changes a lot. Today, the white collar environment is going through a slightly tougher time that it was a few years ago, so you need to keep an eye on that sort of thing,” he adds.
Interestingly, most insurers riskinfo spoke to were quick to point out that they were happy with the performance of their income protection portfolio. In nearly all cases, the companies’ spokespeople pointed to robust underwriting and claims processes as the reason behind their relative success. Similarly, none of the spokespeople indicated their company would be making large scale changes to their business model to address the disability market’s recent fall.
APRA’s next quarterly performance figures are due out in June 2012.
