While the Quality of Advice Review decision was the biggest news this week, our story on a new and very different way of considering life insurance performance was adjudged to be the Riskinfo Story of the Week…
The life insurance industry is being challenged to reconsider the manner in which its performance should be assessed, to maximise returns for insured lives.
Not for the first time, specialist insurance risk firm Retender is presenting the market with a new perspective, which in this case explores how key stakeholders might approach the assessment of life insurance performance if it were considered as an asset class – as an investment – rather than as a cost associated with risk protection.
In its just-released paper entitled Life insurance as an Investment, Retender suggests that an asset management-style lens could be applied to investigating past life insurance pricing changes “…which, although not a guide to the future, is the best available information to form a starting point.” In doing so, it lays down a challenge to the sector around why and how industry stakeholders including retail life companies, trustees, dealer groups, and advisers might utilise an entirely different approach to determine the best outcome for insured lives not only today, but in the future.
Retender Legacy Rate Index
Included in this new set of proposed performance markers is analysis of legacy business to which a significant proportion of all insured lives are currently tied.
Called the Retender Legacy Rate Index, the firm’s co-author of the paper, Kim Clough, believes cost pressures on life insurance premiums will continue, and that this index is one way to monitor and benchmark pricing trends applying to each life company’s historic books of business, thereby providing a starting point for analysts to project future pricing trends that may apply to these legacy cohorts.
The paper continues the analogy of applying an investment analysis lens to life insurance in discussing diversification, asset allocation and the volatility of the underlying ‘asset’ or insurance pool, such as when comparing the sometimes huge premium differentials offered to insured lives within super funds in particular.
The ability to move consumers between insurance products, a form of rebalancing, is another problematic topic considered in this paper, where its authors effectively call for greater opportunities for advisers to actively manage insured lives to consider transfers between different insurance pools subject to their historic performance benchmarks and their projected future performance.
The paper asks the reader to come to the table with an open mind as to what may be possible in a future where life insurance performance is considered through an asset management lens, and offers much food for thought.
Click here to access the paper Life Insurance as an Investment.
Peter many thanks for finding this article and for directing us to some of the other articles on the Retender website.
It’s a provocative article but I can’t help thinking there is a bit of a hidden marketing agenda as it appears that many of the authors are associated with the reinsurance industry in particular. I also checked we are past 1 April
As you have recently identified in publication of the Plan for Life report, insurers are putting their heads in the sand as to WHY they’re actually getting 60% less new business than 5 years ago. Their answer is to GOUGE the legacy policyholders, many of whom can’t move cover for health reasons, as referred to in this report. Premium inflows UP, shareholder value UP and CEO bonuses maintained – all short term “stinkin’ thinkin”. Result – lapses and a smaller pool, full of clients more likely to claim. This reaction seems to occur particularly where one bank-owned insurer’s book of business has been sold, and the purchasing insurer is keen to recover the cost of the purchase. Reference the matter in the Retender paper concerning Resolution Life and AMP super trustees. Very interesting that the super trustees have suddenly found some kahunas and re-visited their fund best interest obligations
it’s a provocative article but in my mind it has one great flaw: It is offering a solution to ever increasing legacy-premiums “symptom” , but has ignored the underlying illness – the reasons as to WHY new business is so drastically reduced. Advisers know: the principal reasons for that reduction are manifest but obvious – FASEA and its exam, LIF, ASIC compliance and, recently ,the manic APRA IP changes. That’s one hell of a double-double whammy! CALI has the power to argue to change LIF, BUT NOT YET! There is only a passing reference to the reasons for the shrinkage of the adviser force
The FSC, and ASIC, wondered why risk advisers started adding fees to the now-reduced commission under LIF to compensate for lost income, just to cope with the extra cost of the ASIC-induced ever increasing compliance load, only to experience client resistance to fees for risk advice. And illustrating how actuaries remain out-of-touch with advisers, the Retender paper also contends that ” fee for service ( in risk advice) is becoming an increasingly appealing approach for advisers”. Business clients yes, but not mum & dads.
Retenders proposal, which I suspect is somewhat tongue in cheek, is that firstly advisers not place all of the clients products with the one insurer, thus eliminating the risk of poor insurer behavior applying across a client program. Try telling that to the risk research providers who bundle up IP, term and trauma recommendations into the one package with one insurer and expect the adviser to follow that recommendation. Needless to say, individual consideration of the merits of a product is a practice I have followed for many years, based on the capacity to recommend to clients policies, based on my “additional reasonable enquiries”, that I consider to have the least amount of discretion in favor of the insurer and thus provide the most contractual right to claim. I do not think I’m alone in that approach but I can see the attraction of less admin in policy implementation.
It’s the second part of the Retender proposition that will be seen to be somewhat contentious: for advisers to advise clients to stay in a risk pool that is underperforming, and will continue to one perform, with no reputation constraints” is increasing the risk of more premium rate increases. The solution obviously is to engage a business like Retender to consult to advisers to tell them which risk pools are underperforming, and more importantly, will continue to put underperform. That’s a cost to advisers that can never be recovered. It would be also very interesting to get the reaction to this proposition from the PI insurer’s and AFCA, particularly where the resulting shift of a product resulted in less contractual-right-to-claim and ultimately the failure of a claim. For example, moving a client from an AGREED VALUE legacy IP contract, just to save on premium, when it is blatantly obvious the client has a business were income varies from year to year, if not month-to-month, and a long-term benefit period is attached to the claim.
Retender contend by citing RG 175 that there is no “retrospective testing when a new investment loses money” but tell that to the Courts. Yet still ASIC will insist on a projection of premiums into the near future, but what adviser today would trust any projections of life risk premiums from any insurer. For an adviser to make such a statement on projections they would to engage an actuary to make such projections and there is no certainty in that solution. Again, to make such a projection even with reference to an actuarial examination, would attract the attention of AFCA and the actuaries (again) who calculate PI premiums.
There is one blatantly obvious answer to the current reductions in life new business – life risk commissions must go back to 88/22 to make risk advice profitable. That move alone, along with lessening of the odious compliance requirements imposed by ASIC on what should be a simple process, may encourage some of the “holistic” advice businesses to come back into risk
Nice try, but no cigar!
Comments are closed.