Call For More Meaningful Life Insurance Reporting

Describing the advised life insurance sector as being in a state of crisis, the FAAA is seeking more meaningful reporting into the sustainability of the life insurance industry across areas including new business volumes and discounting practices.

In its submission to APRA’s consultation on Life Insurance Data Transformation the association has focussed its submission on the challenges faced by the life insurance industry over recent years and says it believes “…it’s essential that APRA’s data collection focus on some of the key factors that provide an insight into the sustainability of the life insurance industry and the trends in the marketplace.”

The FAAA has identified a range of factors that it believes needs to be closely monitored including:

• New business volumes
• Discounting practices
• Premium increases
• Average policyholder age
• Discontinuances
• Underwriting
• Leakage of benefit payments

…The focus should be on new clients into new policies, rather than increases to existing policies…

The submission suggests the key factors that should be considered in defining the future data model include:

• Genuine new business volumes and new policy holder numbers. The focus should be on new clients into new policies, rather than increases to existing policies. The ongoing practice of indexing the level of cover each year, and treating this as new business, can distort the real underlying level of new business. In some cases, the rate of indexing has been much more than CPI.
• The extent of underlying upfront premium discounting, possibly measured in terms of dollars of premiums that have been discounted, relative to standard pricing.
• The extent of premium increases measured in terms of the percentage change in standard rates and the aggregate impact on total in-force premiums.

…Average age of clients … is a good marker to measure the level of risk in the insurance pool…

• Average age of clients. This is a good marker to measure the level of risk in the insurance pool and the extent to which the risk pools are being refreshed with younger lives.
• Lapses or discontinuations, split between those that are partial in order to address affordability challenges, where the client is determined to maintain some level of cover, and complete lapses, where the cover is either no longer needed or the client has elected to discontinue. The FAAA would like to see the availability of data on the reasons for discontinuation. It proposes the establishment of some additional standard discontinuance categories such as ‘moved to more competitive offering’, ‘no longer required’, ‘unaffordable’. It says discontinuances should be measured in terms of total dollars of premiums and number of policyholders.
• Underwriting data, including the level of applications that are rejected outright or subject to exclusions or loadings. “Underwriting is an important control, but also a good indicator of the level of competition in the new business marketplace”.

…We would support the collection of data on what percentage of the benefit is paid to a third party…

• Life insurance is ultimately about getting benefits to those policyholders (or their families) who have suffered a major injury or illness. The FAAA says a measure of this is the percentage of premiums that end up in the hands of claimants. “There can be natural leakage from this system through the costs experienced along the value chain, some of which are well understood, however others are largely unknown. Financial advisers largely do not charge for the management of claims, unless the claim is particularly complex. There are other stakeholders who do play a role to assist claimants, and can charge a significant amount for this service. We would support the collection of data on what percentage of the benefit is paid to a third party when a third party is involved.”

In the context of recent media coverage about unreasonable delays in the payment of death benefits by super funds, the FAAA suggests that tracking the average time to pay a claim would be a useful metric.

Data Made Publicly Available

The association would like to see this data made publicly available and adds it’s aware of the cost involved in the collection of the data, and that what is mandated for collection needs to be able to be efficiently collected.

“Otherwise, it is not likely to deliver the macro level value that we are seeking and will ultimately result in consumers paying more for their life insurance.”

As background in the submission the FAAA laid out the substantial change the life industry and the life insurance advice sector have been subjected to over recent years.

… the direct consequences for advised life insurance have been significant…

It says the consequences of all of these reforms and structural changes have been broad, however the direct consequences for advised life insurance have been significant, including:

• A substantial reduction in the number of financial advisers providing life insurance advice. This is often stated to be at a rate much greater than the 45% overall reduction in adviser numbers since 1 January 2019.
• The exit of advisers from this segment of the market is attributable to the reduction in commissions (LIF), professional standards reforms, increasing compliance obligations and demands of staying up to date with product changes (the IDII reforms resulted in a complete change of the products offered across all life insurers).
• A reduction in life insurance new business volumes of greater than 50% over the last five to seven years. Given increasing premiums, the reduction in new policyholders is expected to be much greater than 50%.

…The reduction in new business has created an increase in price competition with the emergence of sub-optimal practices…

• The reduction in new business has created an increase in price competition with the emergence of sub-optimal practices such as upfront discounting, where a discount applies for the first year or the first few years, which is then quickly removed/reversed. The consequences of this is that premiums rise more rapidly than they otherwise would, which generates great levels of client dissatisfaction and discontinuance in the second and third years.
• Due to reduced commissions and the increased cost of providing life insurance advice, financial advisers are focussing more on higher premium clients. The FAAA says this means that younger Australians, who would expect to pay lower premiums, are typically not the focus of advisers and will struggle to get advice on life insurance. New clients are now typically older and more highly paid, which has substantially changed who the new clients are who are going into the risk pools.
• Significant premium increases across all product types, but particularly with income protection insurance. The consequence of this is that financial advisers are spending substantially more time on the retention of existing clients who are often seeking solutions to address the consequence of large premium increases and the challenge with affordability.
• Significant challenges for Level Premium products, where premium increases have been substantial and often at a greater rate than Stepped Premium products. As a result, this has undermined the long term title of “level” for these products.

…it is easy to conclude that the advised life insurance sector is in crisis…

The FAAA states that in short “…it is easy to conclude that the advised life insurance sector is in crisis.”

However it says this is only part of the story “…as the flow on consequences for life insurance are equally important, with fewer new entrants into the life insurance pools and particularly in terms of younger lives. This will undoubtedly over time push up the average age of insured Australians, which will fundamentally change the economics of the life insurance business model,” it says.