PPS Mutual’s Michael Pillemer makes reference to a move by the UK financial services regulator in a continuing debate surrounding the merits of front-loaded premium discounts…

It is with great interest that we have been watching the outcome of a market study undertaken by the UK’s financial regulator, the Financial Conduct Authority (FCA), into the so-called ‘loyalty penalty’ applied by some home and motor insurers when it comes to renewal pricing.

In a practice known as ‘price walking’ the FCA has found that it is common for personal insurers to offer attractive pricing to new customers, before applying gradual increases to their renewals in the following years, despite no change to their risk profile.

…when a customer renews, they cannot be charged more than a new customer buying through the same sales channel

To address the situation, which the regulator has declared “is not working well for consumers”, the FCA is consulting with the industry about introducing a measure to ensure that when a customer renews, they cannot be charged more than a new customer buying through the same sales channel.

It’s a situation that reflects similar practices in the Australian life insurance industry, where a research paper commissioned earlier this year by PPS Mutual and undertaken by Rice Warner found that while up-front – or front-loaded – discounts on new life insurance policies makes them more affordable initially, over the medium to long term they are actually more costly.

In one example, the research found that customers of an insurer that offers a 25% up-front discount could face premium increases of 50% in the second year if age-based increases and indexation are taken into consideration.

This vicious cycle of using first year discounts as loss-leaders to attract new customers only to have them take their business elsewhere when their premiums begin to increase leads to the circular – and unsustainable – situation of having to continue discounting to attract additional new customers to replace those that leave.

But as the short-term quest to satisfy shareholders and increase market share continues unabated, traditional life insurers so far appear unwilling to abandon this practice, despite recording losses of $800 million and policy lapse rates of about 15% in the year ended 30 June 2020.

By contrast, at PPS Mutual, we take a long-term view, valuing customer loyalty and prioritising customer retention, and we question a business model that places new customers ahead of loyal ones.

As a mutual with no shareholders, we exist solely for the benefit of our members and do not offer front-loaded discounts, instead returning profits to our members through an annual profit-share arrangement.  As a result, our lapse rate runs at roughly a quarter of the industry standard, allowing us to increase profits and meaning our current customers are not forced to shoulder the costs of us acquiring new customers.

It is financial advisers who bear the brunt of customer dissatisfaction when they learn of steep premium increases at renewal, so it is not surprising to find that the majority are not in favour of front-loaded discounts. A recent poll of advisers in Riskinfo asked respondents if they were willing to advise their clients to consider taking out a new life insurance policy that offered a front-loaded premium discount.  Sixty-two percent of advisers said “No”, 26% said “It depends” and 11% said “Yes”.

…advisers are under increasing regulatory pressure to ensure they are acting in the best interests of their customers

Aside from facing the dissatisfaction of their customers, advisers are under increasing regulatory pressure to ensure they are acting in the best interests of their customers, and it could be argued that advising a customer to take out a life insurance policy with a front-loaded discount where the premium then increases substantially in the following years may not meet that best interest test. This would be even more pronounced if a customer had experienced a change in their health circumstances in the intervening period that prevented them from taking out a new policy with another life insurance provider.

Whether this mounting adviser pressure will force the industry’s hand to act on front-loaded discounts is something that remains to be seen.

In the case where an industry fails to act, the Australian Prudential Regulation Authority (APRA) has shown that it is willing to intervene, as witnessed in its recent decision to step in and address flaws in pricing and product design in the Australian income protection (IP) insurance market.

With mounting losses now reaching $4.8 billion over the past five years, APRA put life insurers on notice last year over concerns about the ongoing viability of the IP insurance market.  More recently, the regulator announced it would impose an additional capital charge on insurers from October 1 to force the industry to reform, with further measures aimed at addressing riskier products scheduled to begin in October 2021.

When it comes to the future of front-loaded discounts in the Australian life insurance market, the question that remains is not whether addressing this practice will benefit customers.

Instead, it is whether the life insurance market has the will to implement the required changes itself, or whether it will take regulatory intervention – such as that which has occurred in the UK – to bring about a better outcome for Australian customers.

Michael Pillemer is the chief executive of mutual insurance company PPS Mutual.

 

Back to Adviser Focus Main Page… 



5 COMMENTS

  1. Great article Michael.

    The unfortunate position we all face in Australia, is an unwillingness for Life Companies to change the status quo.

    They do not seem capable of articulating and maybe still do not understand that the current LIF and FASEA requirements are the death of a viable advised Life Insurance Industry that has survived 2 centuries of wars, depressions, recessions and everything in between, yet will not survive the lies and mis-truths that allowed the Regulators and the Government to go down the current path to oblivion.

    APRA has also proven to be inept and totally ignorant of the implications of their proposed actions from July next year.

    We have a situation where the lunatics are running the Asylum.

    The solution is simple and is clear.

    The only problem is the Government are relying on the past ASIC and Royal Commission findings, both of which were flawed and have been proven to be wrong regarding Life Insurance Advice and a flawed process going forward, yet “change fatigue” has set in and no-one in the Regulators offices, the Public Service sectors, the Government and the Life Companies themselves will admit the last 7 years have been a total failure on virtually all fronts and no good has come from it for Advisers, all Australians and for the Government, who will now bear witness to rapidly rising deficits brought on by potentially millions of uninsured and under-insured Australians, who will in the future, need to put their hands out for assistance, that previously the Private sector were able to help.

    Front loaded discounts are just one of the crazy short term gain, for long term pain antics the Australian Life Insurance sector keep doing that benefits no-one.

    If we look closely at the history of Government Intervention, it is usually a long torturous path and if we look at the Private Sector who were, by their actions, instrumental for the Government to feel they needed to step in, then we can see that there is a disparity between the short and long term pursuit of profit and an awareness of the future negative impacts of those decisions.

    What we have is a knowledge and experience gap that has allowed people to be promoted beyond their capabilities, which has led to a world of theory based pursuits and vested interest lobbying, that these Managers in the Private and Government sectors cannot arm themselves against with enough healthy scepticism and strength to ask more questions and demand the full truth.

    • Good points. The life insurance industry has done a lot of actions that looked good on actuarial projections and perhaps even in the short term but the main problem is that claims are increasing at an unprecedented level. If you think that future claims will be $100 and they are $130 you are basically out of business unless you take a host of measures so that you can cover $130.

      The life insurance industry is trying lots of such measures and some of them have made things much worse (LIF) and others may well be working (massively increasing premiums in industry funds) and others work in the short term but will mean massive cancellations early on (big up-front discounts). What surprises me is that advisers actually do these since early cancellations will mean their work was in vain?

    • The unfortunate position we all face in Australia, is an unwillingness for Life Companies to change the status quo.

      Because it is an industry run by dinosaurs for dinosaurs.

      They do not seem capable of articulating and maybe still do not understand that the current LIF and FASEA requirements are the death of a viable advised Life Insurance Industry that has survived 2 centuries of wars, depressions, recessions and everything in between, yet will not survive the lies and mis-truths that allowed the Regulators and the Government to go down the current path to oblivion.

      You must not have heard about Jonathan, the Galapagos tortoise who is 188 this year, is the oldest living land animal in the world. Born circa 1832, five years before Queen Victoria’s inauguration, Jonathan has been through the American Civil War, the Russian Revolution, seven monarchs on the British throne and 39 of the 45 US presidents.

      Sadly, like the advised status quo, Jonathan is destined to die one day too.

      If we look closely at the history of Government Intervention, it is usually a long torturous path and if we look at the Private Sector who were, by their actions, instrumental for the Government to feel they needed to step in, then we can see that there is a disparity between the short and long term pursuit of profit and an awareness of the future negative impacts of those decisions.

      If the industry was healthy and serving the best interests of consumers then the status quo would have been maintained. You keep repeating in every post that somehow everything was working “sustainably” before LIF and FASEA. That is utter nonsense. Stop believing that the life companies and the regulators have it out for advisers, all stakeholders are just trying to survive.

      • Leeroy, All risk advisers wish you well in your endeavour to charge the fee you need to charge to provide people with peace-of-mind and make a living at the same time as complying with outrageously written and poorly worded legislation. It’s not everyday we are referred to as dinosaurs for simply trying to help people purchase risk protection for themselves and their family. There is a legislative lean towards banning commissions including those from insurance. Most if not all people Ive ever met would prefer to pay a commission rather than a fee. Even the experts at Rice Warner have confirmed most people wouldn’t pay more than $500 for risk Àdvice. There is a clear discount which needs to be solved. The problem we have now (which is the same as we’ve have since the GFC) is that the law makers are yet to admit there’s a problem with methodology and data collection samples. No problem means no requirement for a solution. We and any reasonable person would have to admit that Report 413 (where this mess began) was flawed and should have, back then and still now, been challenged, not left unchecked as it has been and will be for eternity. This is not new and seems like crying over spilt milk but at some point, sanity must prevail. If there was initial research that was conducted fairly and reasonably, which resulted in changes, then that’s one thing, but to be forced into changes that most of us knew at the time were excessive, not required and would result in what we have today, based on false and misleading research (Report 413), then that is another matter entirely.

        • Actuarial graduates of 2025 will be asking: “What’s a risk adviser?”

          The answer will be: “legacy portfolio”.

Comments are closed.