Broad Changes Needed to Sustain Disability Income Market – Report

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An Actuaries Institute Taskforce has made sweeping recommendations for broad changes to Australia’s retail disability income insurance market “…to reset sustainability for a sector under threat”.

Taskforce Convenor Ian Laughlin says, in a statement, that without an overhaul those who need cover may not be able to afford it in the future and life insurance companies selling individual disability income insurance policies will continue to suffer very large losses.

He says this is neither in the interests of customers nor the community at large.

Ian Laughlin..the sector must offer products that provide more certain outcomes…

Laughlin says the sector must offer products that provide more certain outcomes, are more easily understood by consumers with features and prices that better meet their needs.

The statement says that the taskforce recommendations, which are being circulated widely for stakeholders’ consideration, include a review of the law around life insurance, so insurers can better take into account fundamental changes to the way society views disability and returning to work.

It issues a warning that regulators will continue to intervene until the sector shows sustainable improvements in practices and outcomes.

It adds that individual disability income insurance policies provide critical cover for those who may lose their income because of disability. About 850,000 policies are currently on issue, which is an indicator of the importance of the market, it says. But the taskforce formed the view that “…the market is at risk of failure”.

Hoa Bui, President of the Actuaries Institute and a key member of the taskforce says in the statement that the lack of sustainability of the disability insurance market is one of the most pressing issues for life insurers today.

Hoa Bui…one of the most pressing issues for life insurers today…

“We’ve looked at the issues through a consumer lens to find a way forward for all parties,” she says.

The report Disability Insurance Income Provisional Findings and Recommendations states “the product has become more and more complex over time, making it difficult for customers to understand and be satisfied with claims outcomes. At the same time, affordability and accessibility for those needing cover is declining.

…Increasingly, those with cover are finding the cost prohibitive, and the more-healthy policyholders are then likely to not maintain cover…

“Increasingly, those with cover are finding the cost prohibitive, and the more-healthy policyholders are then likely to not maintain cover.”

The report, which includes findings, recommendations, and a paper on the framework for a ‘reference product’ for risk and uncertainty assessment, involved input from more than 40 actuaries, and discussions with regulators ASIC and APRA, Treasury, CEOs, boards, lawyers, consumer advocates, claims and underwriting professionals, doctors and financial advisers.

It follows the release earlier this year of a KPMG research paper, commissioned by the institute, that found life companies lost $3.4 billion over five years by selling complex products to individuals which, ultimately, threaten the viability of the sector (see: New Call for Reform of Disability Insurance Sector).

The statement adds that the taskforce has not taken into account the likely negative impact of Covid-19 on future claims.

Outcomes the taskforce hopes to achieve after further industry input include:

  • Product features, underwriting and claims practices that promote closer alignment between consumers and providers of insurance
  • Stable prices over time
  • Sustainable outcomes for insurers
  • Community confidence around fairness and the enduring value of the insurance

The statement from the institute says that a failure to bring about reform would result in loss of productivity in communities, a rise in demand for community and family-based support, increased social security costs and, for those who need support, a decline in mental health, a loss of confidence and self-worth.

Recommendations include:

  • Insurers gain better insights into customer claims experience
  • Simpler and cheaper products with a focus on return to health and work
  • Strong controls over the level of benefits paid
  • Products that can be updated to allow for advances in medicine, technology and society’s expectations
  • Sustainability heat maps and a review of board composition to ensure risks are understood and managed
  • Clear examples of best interest duty and changes to product ratings
  • Standardised collection of medical information and better underwriting and claims data

“The taskforce strongly believes that the problems are more deep-seated and diverse” than just product terms and conditions, Laughlin says, adding that CEOs believe the product has lost the principle of indemnity, and had said there was too much capital invested in a market with a relatively small base. Boards may not receive the right analysis to allow directors to understand the extent of long-term guarantees and risks.

Laughlin says that loss minimisation, a feature of many other insurance contracts, is not explicitly expressed in disability income insurance contracts. Should those making claims have a duty to return to work as soon as possible to minimise benefits paid to them, especially where a return can aid recovery?

He adds the rise in mental health claims and community expectations around return to work rates are not easily accommodated, and Treasury and APRA should review the 1995 Life Insurance Act to test whether it remains fit for purpose.

The next steps include stakeholder and industry feedback. Consultations close on October 31.

Click here to see the full report.

Courtesy of the Actuaries Institute.



11 COMMENTS

  1. Life Insurance companies have somehow become a major factor in personal safety of its policy holders. The grave fears that limiting benefits to a stress claim to 12 or 24 months will lead to self-harm will eventually destroy the industry. A hard line has to be taken before none of us have access to IP ever again.

  2. Five years ago, prior to all the “improvements,” the Life Insurance sector was profitable.

    What has been a major cause of the difficulties facing the Life Insurers today, was the deliberate strategy of using and manipulating limited, vested interest data, to bring about how advisers are paid and regulated.

    This strategy has backfired, as advisers first argued against the clearly tainted, inaccurate data, then upon seeing that the truth was the first casualty in this sorry saga, where upon these vested interest groups having successfully lobbied to create the disaster all Australians face today, were and still are, puzzled as to why advisers refuse to continue working in what is now, a toxic environment.

    The solution is clear and will be easy to fix, though as per usual, the growing army of Education groups, Lawyers and Audit teams will strongly resist making the necessary changes, as it would affect their cozy arrangements.

    For over 150 years, the advised Life Insurance Industry survived world wars, great depressions, recessions, economic and market volatility, yet has not been able to overcome the deliberate lies and mis-truths that allowed this whole fiasco to get to where it is today.

    The situation is still fixable, though looking at the list of potential saviours, we are in for
    more grief before the blindingly obvious will come to light.

    • And what would you suggest would return Income Protection to profitability? Please enlighten the masses, oh wise one.

        • Okay… buckle up.

          Advisers rely on research ratings to fulfill their Best Interest Duty. Understandable, as a PDS is long and overly complex. But this results in two issues: 1) It empowers research houses to drive product design – if an insurer wants to add a product feature but the researcher won’t rate the feature, then what is the point? Advisers won’t recommend based upon a “nothing” feature. You need to remember that research ratings decisions are made by a small handful of people. Which leads to point 2) If a feature is added and it provides an advantage in ratings to an insurer then you will notice the competition plays catch up to have the “best market offering” otherwise the product is arbitrarily rated by the few researchers as lower quality regardless of the actual best interests of the client, which leads to larger PDS. For example: 24 month terminal illness benefit. Really, what is difference between a 98% and a 92% product? Not much, but it appears to be 6% and it looks good on a SOA. This also opens the insurer up to increased claims exposure which could arguably be a large contributor to claims exposure and losses. Yet no insurer or researcher can state that feature x is costing $y in claims because the data doesn’t work that way. It sounds like this is being worked on but it’s a big issue.

          But when products have very little differentiation then an adviser will turn to price because if two products are the same then the clients best interest is price. Since financial services is a special breed and insurers are allowed to sell loss leaders (vs most of the economy) products can be sold at losses and hopefully bundled so the product mix can hopefully be profitable. The problem is a deterioration in any of these products claim experience/profitability can throw the whole bundle out the door and the book will need to be repriced hence advisers will need to explain premium increases which ultimately leads to higher lapses and further losses if the client is relatively new policy holder (due to acquisition costs eg. commission).

          This is the part where churn really kills the whole system. Some of it is driven by greed and some is driven by the price war resulting from lack of product differentiation. If there is a cheaper alternative for a direct substitute then it’s a no brainer for BID – but there is an assumption that the pricing is sustainable at the lower level. Given the exploding claims levels, it has hard to argue that the cheaper offering is sustainable so the increase is almost inevitable. So the policy will likely move… again… and again… and so on.

          Risk advisers have a big influence on sales but risk advisers need insurers to manufacture and for too long insurers have just been absorbing these losses for the sake of marketshare. It is beginning to tell. Client needs are paramount, however adviser interests and insurer interest have not been aligned for a long time.

          The answer lies somewhere in that mess. I know what I think but it’s certainly not raising commissions back to flat 80-120% as per pre-LIF.

          • Thankfully i did buckle up as i may have vomited if not. Thank you for a monologue where you have re-articulated the issues with the industry that everybody knows. The one thing you didnt do is answer the question in any way, shape or form. You have provided nothing by way of a suggestion.

            You have mentioned churn a couple of times in your comments which leads me to think you are a neophyte to financial advice. Churn has been verifiably proven to not be an issue with respect to insurers profitability.

          • So if you know about the issues then why are you in trouble? Because you’re a vested interest with a bias, but I guess experience will do that to someone.

            Edit: as for the answer? You’re not paying me to save your business but of course advisers always expect a free lunch.

  3. 2 things:
    Not one mention of the impact the low volumes of new business placed by advisers is having on the profitability of this sector and why this is occurring and the suggested “review” of the 1995 Life Insurance Act is all about seeing whether it can be altered in order to force
    unwell people back to work earlier because the sector has been mismanaged.
    If the appropriate incentives for quality advisers to place quality individual business had been retained and managed, there would have been significantly greater volumes of new risk business including Income Protection Insurance in the last few years and would still be continuing now.
    This has been a systemic failure and now existing clients have been left to fund the grossly manipulated strategy of reducing adviser remuneration in order to enhance the quality of advice and to increase the affordability of risk insurance.
    Well, there is now less and less advice being given and the cost of advice and the product pricing is now resulting in it being out of reach for the vast majority of Australians.
    This has been a futile and highly destructive exercise.
    Advisers repeatedly called for common sense and emphasized the future impact of the forced changes and nothing was listened to.
    Absolute disaster.

    • “Not one mention of the impact the low volumes of new business placed by advisers is having on the profitability of this sector … If the appropriate incentives for quality advisers to place quality individual business had been retained and managed, there would have been significantly greater volumes of new risk business including Income Protection Insurance in the last few years and would still be continuing now.”

      A business model that relies on new business to remain profitable or sustainable is quite literally the definition of a ponzi scheme. Insurers take a loss on new business for the first few years (commission etc.) which is why churn is a problem.

      • Your interpretation of a ponzi scheme is incorrect and juvenile. A ponzi scheme would refer to the insurers ability to pay claims without new business, there is no threat to that at the moment.

        Do you understand how insurance works? Insurers often do not make a material loss in the first few years. Insurers generally receive a reinusrance commission that is more than sufficient to meet the first years commission, in addition to the clip they take on top. Reinsurers, sure, they make a loss in the short term. Theres absolutely no issue in this. No different to many other aspects of finance.
        If a book is in run off, the pricing and operations relating to that book shift dramatically. This shift allows a book in run off to be profitable, at the expense of those insured – see AMP/Resolution. New business drives profit for all insurers that are not in run off.

        New customers drive many businesses profitability. It really is quite rudimentary. Many advice businesses would make a loss if they brought in no new clients. Many other businesses in many different sectors would make a loss if they had no new customers or if their new customers dropped by 50%+.

        • Chronologically:

          Your interpretation of a ponzi scheme is incorrect and juvenile. A ponzi scheme would refer to the insurers ability to pay claims without new business, there is no threat to that at the moment.

          I didn’t call life insurance a ponzi scheme, I stated that relying on new business is not how life insurance works.

          Do you understand how insurance works? Insurers often do not make a material loss in the first few years. Insurers generally receive a reinusrance commission that is more than sufficient to meet the first years commission, in addition to the clip they take on top.

          This is incorrect but okay… FYI reinsurance is not a net inflow. That would be similar to an insurer paying a customer in order to take on the risk.

          New customers drive many businesses profitability. It really is quite rudimentary. Many advice businesses would make a loss if they brought in no new clients. Many other businesses in many different sectors would make a loss if they had no new customers or if their new customers dropped by 50%+.

          And yet somehow this magical formula is falling over.

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