Life insurance lapse rates continued to rise in the 12 months to 30 June 2014, the Australian Prudential Regulation Authority has reported.
Issuing its latest report on life insurance industry performance, the regulator observed that lapse rates for individual risk business have risen over a number of years, and are significantly higher than those which prevailed several years ago. APRA said there was no sign of any reversal of this trend during the 2013/14 Financial Year.
This increase in lapse rates, combined with deteriorating claims experience, has contributed to another period of profit downturn, as evidenced in the graph below:
According to APRA, the worsening lapse experience has been attributed to a number of factors, including:
- A declining need for risk insurance by ageing ‘baby boomers’
- Stronger competition in the market
- Pressure on household budgets leading to some pruning of discretionary expenditure
- The longer-term impact of premium rates that automatically increase each year with age
‘It is also possible that consumers are recognising that the life insurance cover they hold may no longer meet their changing needs, and that product ‘churn’ by financial advisers in light of the attraction of very high up-front commission rates for new business has contributed to lapse rates,’ APRA said in its report.
… ‘churn’ by financial advisers … has contributed to lapse rates
While the cost of a slow weakening in business and risk management practices over a number of years has crystalised into substantial declines in the performance of risk insurance business, APRA said the industry was well placed to work through the current challenges. But the regulator noted it will take a few years before it is clear that industry actions have achieved sustainable premiums and profits.
In the interim, APRA said it had stepped up its supervisory intensity over the past 12 to 18 months:
‘APRA supervisors have closely monitored developments and taken steps to highlight to boards and management the poor business and risk management practices that have contributed to the current situation. Life insurers have also been urged to analyse claims trends so as to identify and respond to the causes of rising adverse claims. APRA strongly supports the use of industry wide claims studies to this end. It is evident to APRA that the quality of data held by life insurers is mixed, and that a lack of sufficiently detailed, accurate and timely data impedes appropriate analysis in many cases.’
APRA still wants to blame advisers for ‘churning’ insurance. I think it would be interesting to see lapse rates (not net profits) of group, direct and advised life risk insurance. Anecdotal evidence is that the prevalence of direct insurance is the area pushing up lapse rates.
Direct Insurance product floggers, who do not pay commissions, have up to 40% lapse rates in the first 12 months, which equates to a 300 to 400% higher lapse rate than retail advised policies.
Does that not help to clarify that commission is not the main reason for lapses and that other factors are at play.
APRA, ASIC, FSC, and it seems everyone else has over the last couple of years, joined the bandwagon and blamed advisers remuneration as the main cause of all Life Insurers woes, yet they seem hesitant to tell us in a professional way, how they came up with these bold statements.
Attacking advisers is an easy option and I have no problem with critics, as long as their attack is backed up with quantitive research and if they then want to venture down the path of finding a solution for their real or imagined problem, then they need to actually know what they are talking about.
The answer my friend, is not blowing in the wind, it is right in front of you and it amazes me how the bleedingly obvious, seems to be invisible to all the soothsayers who know little, yet tell all.
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