The ability for insurers to rationalise legacy products is an important issue, says Senator Jane Hume, Minister for Superannuation, Financial Services and the Digital Economy, and one that she will be “..looking at closely.”
She told the FSC Life Insurance Summit 2021 that legacy products were one of the barriers that distract, or prevent, insurers from focussing on innovation.
Hume says that legacy insurance products still impose significant costs on the industry, noting that the FSC has estimated that there are – conservatively – 286 outdated life products, and $22.6 billion of funds under management that are allocated to aged products.
Even a small number of outdated products on an insurer’s books leads to significant dis-economies of scale…
“That is a huge inefficiency. Even a small number of outdated products on an insurer’s books leads to significant dis-economies of scale. Each closed financial product requires a broad range of services to maintain it.”
She understands that these maintenance requirements for old products are not much lower than for current on-sale products, noting they require the maintenance of old technology and specialist services.
When insurers spend too much of their time looking after aged products, they spend too little time thinking about how best to serve their customers, she says, adding that the customers aren’t well served by these products either.
“What’s more, for consumers legacy products can have higher risks, lower returns and higher fees when compared with modern products. They may not have protection from Unfair Contract Terms. They may use outdated definitions, in particular for medical conditions. They may not be internet enabled.
“Currently there is a swathe of legal, consumer and tax issues that prevent insurance providers from rationalising legacy products in an efficient and cost-effective manner.”
A statement from the FSC says the Minister’s acknowledgement of the need to modernise outdated life insurance products is positive news for the millions of Australians who have billions of dollars trapped in legacy products across life insurance, super and managed funds.
FSC CEO Sally Loane says that a product modernisation scheme “…which can utilise a special tribunal to adjudicate on legacy product matters will solve the problem long-term.”
“We look forward to working with the Government to design a scheme that is in the best interests of financial services consumers,” she says.