Adviser remuneration and direct insurance are two factors which are contributing to the Australian insurance industry’s sustainability woes, the Australian Prudential and Regulatory Authority has warned.
In the latest edition of APRA Insights, which provides an update on the key risks facing the life insurance industry, the regulator highlighted the factors it believes are contributing to higher lapse rates, which, combined with an increasingly poor claims experience, are leading to widespread industry sustainability concerns.
APRA said that because life insurers bear many up-front costs when establishing contracts, including the payment of upfront commissions to advisers, the profitability of business is highly susceptible to the early voluntary discontinuance (lapse). APRA argued that due to the recent trend of increased lapse rates, which grew from 16 to 17% in the 12 months to June 2013, the flow-through impact of these upfront costs on profits was now clearly evident.
In addition, the regulator highlighted that adviser remuneration was tilted towards rewarding new business, rather than the maintenance of existing business, and that this did encourage some advisers to move their clients from one insurer to another.
Historically, life insurers have paid more regard to business acquisition than business retention
‘When such activity becomes excessive, it is referred to as ‘churning’ and, while difficult to identify, its prevalence has become an increasing concern for government and industry bodies,’ APRA said in its report.
‘Historically, life insurers have paid more regard to business acquisition than business retention and APRA would expect some rebalancing of focus in this regard.’
The regulator also warned that ‘…increasing lapses may reflect an increase in the anti-selection effect, in which case the impact on profitability is even worse’.
Similarly, APRA raised concerns about the increasing and ‘now significant prominence’ given by life insurers to the direct market. According to the regulator, this form of business intrinsically suffers from very high lapse rates, especially in the first year of sale (see: Direct Market Suffering From Heavy Lapses). APRA said that while insurers allowed for these lapse rates within their pricing and valuation bases, the direct market experienced more uncertainty over the long-term reliability of lapse assumptions than in the case of products sold through traditional distribution models.
Other reasons for the worsening trend in lapse rates for risk business cited by APRA include:
- Increased disengagement of advisers as they revert to their traditional focus area of investment business
- Increased unaffordability of life insurance, particularly at higher ages, as premiums increase with age and inflation
The regulator has been urging all life insurers to monitor their positions closely and to seek to understand the underlying reasons for their evolving experience, and from this form a robust view on likely long-term experience and appropriate business responses.
APRA’s Insights report also provided commentary on the issues surrounding the group insurance market. Click here to read more.
Eureka !!!!
Movement at the APRA station. There is the distant smell of burning flesh as a regulator wakes up, in response to the cattle prod of reality
These jokers have been asleep at the wheel since 2004
APRA should do what the old ISC successfully did for decades-listen regularly on an informal basis to ALL participants in our industry, including IFA advisers.
The sustainability issue has been hijacked by all and sundry, who give their advice based on theory, heresay, innuendo, self interest and a total lack of understanding.
This car crash has been happening for years and reminds me of groundhog day.
We seem to be overcomplicating what is really a simple lapse problem with simple reasons.
Some of the main causes for lapses are;
1) Substantial premium increases for stepped premiums on each anniversary.
2) Direct, cheap alternative offerings, that are easier to attain, though god help clients when they need to claim.
3) Confusing, Industry jargon in correspondence that does not reinforce the policy benefits, it does the opposite and upsets clients by bamboozling them.
4) Complicated and time consuming administration, new business and alteration processes that drives customers away.
Retail Life Companies still make clients jump through hoops and just one example is their insistence on the completion of a 30+ page application for a simple increase on an existing policy.
Clients cannot believe the amount of paper work and red tape for such a simple thing as increasing a policy.
It seems that the most important part of the lapse problem, being the client who actually pays the premium, is not to be listened to, as what would they know?
Clients have been telling advisers for years why they cancel their policies, yet Insurers seem to prefer to listen to guru’s who have analysed the “cause and effect” while coming up with no workable solutions.
It beggars belief that since 2008, a tidal wave of lapses have occurred and our Industry is still trying to work out why?
That ship ( Titanic ) has left port. Before we crash side on to the next ice berg maybe we should start listening to people who can ACTUALLY fix the problem.
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