Lapse rates have reached their highest level for the past two decades, according to the latest research from Plan For Life.
In September 2013, risk market discontinuances peaked at 16.7%. The discontinuance rate was the same for both retail lump sum and income sectors, with Plan For Life adding that discontinuances have been increasing over the past several years (both in percentage and dollar terms).
The lump sum market recorded its highest rate for 20 years. Above average rates were recorded by CommInsure (20.7%), Macquarie (19.1%), AMP (17.3%) and NAB/MLC (17.2%). In comparison, OnePath (15.6%), Suncorp (13.6%), BT/Westpac and Zurich (both 14.6%) all recorded below average discontinuance rates.
Income lapses are at an 11 year high, with most of the major companies experiencing similar discontinuance rates. However, NAB/MLC recorded a higher than average rate of 20%, while BT/Westpac was below average at 11.8%.
In the group risk market, lapses were subdued at a rate of 8.2%, compared with a long-term average of 14%. Plan For Life noted that group risk discontinuances tend to be much more volatile than those of the individual risk markets, particularly at an individual company level. They reflect the turnover in superannuation fund group risk mandates from ongoing remarketing exercises that are regularly carried out every few years. Consequently any resultant individual mandate losses are often relatively large and sudden, resulting in jumps in the corresponding discontinuance rates.
The figures were contained within Plan For Life’s Risk Market Discontinuances Report. Discontinuances are defined as lapses, surrenders and forfeitures. Discontinuance rates are calculated as a percentage of the average inforce annual premiums for the year.
Plan For Life Senior Manager, Daniel Morris, confirmed that the individual market figures do include direct-sold products as well as retail (advised) insurance. He added that while there is some speculation that direct business is subject to a higher than average lapse rate, and that the growth of direct sales could have impacted the overall lapse rates, the researcher does not yet have specific data to back this up. Plan For Life is preparing another report that will look at the direct market in more detail, and riskinfo will bring this to you when it is made available.
Most of the lapses, we are told from clients, are due to the plethora of cheaper offerings from direct and Industry companies, plus when clients get a premium increase above 5%, they will shop around as they are finding the cost of living very expensive and are looking to save money.
People do not remember or understand the differences in policy benefits and definitions, though they will respond to an avalanche of advertising, offering copious levels of Insurance for $2 a week and 30 second applications with no medicals or paperwork.
It is too late at claim time when they realise they are not going to be paid, to gain an expertise on policy definitions, yet the retail life providers are allowing themselves to be eaten alive with no strategy to effectively combat this epidemic which is not going away.
People will always look for the cheapest option, though if they can be convinced of the benefits of purchasing or retaining their retail life covers, they will do it, if they see value.
The government must force these fly by night, cheap and nasty providers to disclose the differences in their rubbish compared to other offerings that match clients needs.
They should be forced to have a comparison of their offering to superior policies, so clients have sufficient knowledge before they cancel existing cover to take up a cheap alternative.
Could not have said it any better than Jeremy Wright’s statement.
The question is do you think the Government has the intestinal fortitude to make more changes in the near term?
No wonder as a risk adviser for more than 28 years I say FoFA is now having an impact.
In the UK they did the same as we are with FOFA reforms and it had a devastating impact on the industry.
ASIC, well whilst we need a regulator, sooner or latter due to the cost of compliance you might have no Future in financial services at all.
What impact will that have on the Australian public?
The cost of delivering advice in 2000 was $16,000.00 a year now it is well over $65,000.00, the turnover no more just less to work with.
The increased cost of legal advice (The real reason these laws were made) Ive needed to spend near $75,000.00 just to get my head around it.
Im all for getting rid of the rouge adviser, however how about the rouge provider? you have companies such as ZURICH saying that an agreed value IP, They accepted with financial evidence but say is not an agreed value contract, Zurich is seeking the past ten years financial evidence so what does agreed value mean? why pay more for agreed value? who is the rouge?
Jeremy you are correct. BUT while ASIC, who secretly want to get rid of risk advisers, continue their practice of not involving themselves in supervising the direct-sale “no advice ” model, independent advisers are stuffed, and lapses of retail products will skyrocket, particularly as our recession deepens
How the “no advice” model passes the best interests baffles me . Meanwhile, while the direct selling cowboys from overseas, and a few our home-bred fellow travellers, rape and pillage, ASIC imposes on us a regime of heavy-handed SOAs, particularly when replacing contracts.
I fear ASIC might even think of applying an enforceable undertaking on an adviser who replaces a directly sold product with a genuine risk product, just because the replacement is dearer
Not surprised to read this, I know from my own experience. But are these lapsed policies being taken up elsewhere like direct insurance. It is almost a perfect storm for risk advisers at present with the big banks, the big super funds and the on line predators all hammering us. Then on top of that we have FOFA and all the regulatory framework and fear campaign from ASIC. I think in reality our market has shrunk to largely the self employed and small business sector but they are also struggling at present. After 25 + years in this business I honestly don’t know what the answer is to the huge underinsurance problem. All I can say is that thank goodness I am pretty close to a planned retirement. I think I have had enough of this brave new world of advice..
I hear many advisers make the same comment as Bigal about having had enough of the changes. They have made it hard for Baby Boomer FP’s to implement FOFA changes and what happened. Many of them sold their books back into the big players. They will now do the same thing with risk advisers. They’ll come up with something that will mean a lot more work to look after existing clients. They’ll use lapse rates and underinsurance as the reasons and say “you’ve been getting trails for doing nothing all these years”. Many advisers have very large risk books with clients they have never even spoken to. Imagine having to issue each one with an “adviser renewal” notice every year! How fast would your revenue fall and the revenue of the life companies go up (because they would not pass the trail rebate back to the client).
Something is coming.
Gee, i must be living on another planet or maybe the tsunami is about to hit. My clients are mostly self employed. i talk to them about absolute numbers for biomakers in trauma polices. They understand that adjuvant treatment will mean a full benefit payment for carcinoma in situ in some trauma policies and not others. They understand capability clauses for partial disability IP claims. if any of you reading this don’t know what i’m talking about then you deserve to loose your clients to on liners.
OK Mark T, so all your self-employed clients all know about “capability clauses for partial disability” and “adjuvant treatment”. I’m sure that’s all very important but I like to explain the basics without technical confusion and suggest that if they have a change of health and think they can claim to CALL ME. Then we can discuss the detail and check with the relevent claims department or get a medical report. I really don’t think your comment about deserving to lose clients to on liners is very gracious or helpful to the many advisers finding it difficult out there. (By the way for those who don’t know what adjuvant treatment is, I believe it is additional or follow up care and aid after primary treatment.)
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