Our report that a “loyalty tax” appears to be alive and well in Australia’s life insurance industry generated strong reader interest this week…
A “loyalty tax” appears to be alive and well in Australia’s life insurance industry, with those who stay loyal to their insurer likely to be paying higher premiums than new customers, according to new analysis.
Life insurance comparison website, Insurance Watch, says based on its observations of life policies more than five years old “…there could be a substantial saving moving to a new policy.”
The firm explains its analysis found that price is the top concern of life insurance policyholders, with feedback on premiums featuring in more than 35% of customer reviews on its website during the year to June 30, 2024.
Insurance Watch Managing Director, Wally Ripper says the focus on price is probably not surprising given the cost-of-living pressures most consumers are currently facing.
“However, our research also revealed that long term customers were more likely to be dissatisfied with their premiums than newer customers.”
Consumers giving positive feedback on the pricing of their policy had held their policies for an average of only 2.7 years. In contrast, those expressing dissatisfaction with their premiums had held their policies much longer, for more than 8.1 years on average.
Ripper says there are a number of reasons why this might be the case, including stepped premiums, which increase with age, and recent premium increases for some trauma, TPD and IP policies.
…these results …suggest that a loyalty tax exists
“However, these results also suggest that a loyalty tax exists.”
He says this is particularly the case for life insurance policies, where competitive pressures over the last five years have generally pushed retail premiums lower.
A comparison of average premiums over this period indicates there have been large falls in the premiums available to new customers for those aged 45 and over, the firm says.
But, there are a number of reasons why loyal policyholders may not have received the benefit of these lower life insurance premiums:
- Duration-based pricing: According to ASIC, most life insurers have adopted this method of pricing, which assumes that a claim is more likely the longer a policy is in place. As a result, discounts are provided in the early years of a policy and then progressively removed over time. Under this pricing structure a long-term customer can end up paying more than a new customer of the same age.
- First year discounts: Some insurers include upfront discounts in their premiums which are only available to new customers. These discounts generally only apply in the first few years of the policy. When they drop out, premiums revert to the higher “standard” rate.
- Legacy insurance brands: Older brands which are closed to new business, such as CommInsure, BT, Asteron, Resolution Life (formerly AMP) and Integrity, may have higher premiums because they are no longer subject to competitive forces.
The company says existing policyholders may find the only way they can access lower rates is to take out a new policy. However, for those with health issues, switching policies may be difficult, as new applications require health assessments.
Ripper says that based on Insurance Watch’s observations “…if a life insurance policy is more than five years old, there could be a substantial saving moving to a new policy.”
He adds that the best way to identify the size of this saving is to use a comparison website like Insurance Watch, which compares prices from top life insurance providers.
*Average premiums were calculated for insurers available on the Insurance Watch website on both 22nd August 2019 and 22nd August 2024 – AIA, ClearView, MLC, NEOS, OnePath, TAL and Zurich. Premiums for new policies were compared at five year age intervals between the ages of 15 and 70 for $500,000 life insurance cover for male and female non-smokers with an office-based occupation living in Victoria. Health discounts … were not included.
"Duration-based pricing: According to ASIC, most life insurers have adopted this method of pricing, which assumes that a claim is more likely the longer a policy is in place. As a result, discounts are provided in the early years of a policy and then progressively removed over time."
I'd like to contest that statement. We have these people called actuaries, who calculate premiums based on morbidity and mortality tables and increase the premiums as the risk of claim gets higher AS THE CLIENT AGES. That's always been the case.
Duration base pricing is nothing more than a GOUGE by our shareholder-driven life insurers seeking to somehow recover the 60% loss new business revenue that's occurred following the introduction and acceptance of LIF.
ASIC is so far out of touch with the intricacies of the life insurance industry they may as well be on the moon. Their problem is if they tell the truth on why Duration Based Pricing is now rampant across our industry, they are tacitly admitting that LIF has been a disaster. And ASIC never admit to infallibility
Probably at least 18 months ago ASIC In one of their many "warm and fuzzy" media releases announced they would be investigating recent rapid increases with life insurance premiums.
Is this reported comment the best they can do?.
Well frankly it is the best they can do, UNLESS they admit that LIF was a total disaster for the industry, advisers and the people that ASIC claim to represent, consumers.
You couldn't write a script that beats this tail of regulator stupidity
Amazing how often I have heard the CEOs of insurers talk about not wanting a loyalty tax on existing customers, to then see their company release a new NB discount to market. This is in addition to many insurers now basing large sum insured discounts on the amount of cover at inception meaning that as indexation increases take customers through discount bands they also end up paying a higher premium than a NB client with the same sum insured (on top of the NB discount the customer gets)
This is a problem that needs addressing. A few thoughts:
1: Technically, the life companies (or actuaries if you will) can 'justify' the reduction in early years on the basis that underwriting causes lower claims cost for the first few years. This is a proven effect, that can sometime last for up to 5 years (in Australia it is nil for trauma products and arguably up to 5 years for death).
2: It is also a fact that the claim experience on DI products across the industry is that claim rates continue to increase by policy duration for at least 10 years. And by quite a significant margin.
3: The lower price for new business encourages people to change policies. Because of the underwriting, this is only available to healthier people. The more healthy people that take out a new policy, the worse the experience of the policies who do not/ cannot take out a new policy. Which means those policies need a price increase. And then more people are tempted to take out a new policy. It is a cycle that will get worse and worse.
4: Advisers are not immune from this debate. Market share of sales changes immediately when a life company introduces a short term discount. That is, advisers are essentially voting to support it by their actions. As the first few companies did it and got big sales boost, others were left with little choice but to follow. This is just pure markets in action.
So, my question is, what can the advice community do? At one level, it's really easy: don't support it. Put your business in products that do not have a discount.
I get that "best interests duty" may be a barrier, but maybe this is where the advice bodies can get together and determine that it not in the bests interest of all customers in the long run and take things from there?
You raise some very interesting points sir
Point 1: there most certainly is an "underwriting effect". It's why some insurers, such as Comminsure, used to offer the rewriting of an existing policy AFTER 7 YEARS ,subject to limited multi-factored three-question proposals. They then paid commission at full rate again to give the adviser encouragement. However the geniuses at ASIC failed to realise that the insurer had already calculated that repaying commission had a value because it allowed the insurer to have a "fresh look at the book "and then perhaps renegotiate a more favourable reinsurer treaty.
Point 3: the encouragement to change policies comes from the clients in my experience. And you are correct, this is a vicious downward spiral and it will end in a total disaster unless it's jumped on by our regulators. When you find out who they are you might let me know!
4: I've been on this hobbyhorse for over three years and it's very difficult to get detailed information but I managed to get something that fell off the back of a truck. You will also note that the biggest offenders make absolutely no mention of it in the PDSs and advisers, should they think to ask, are always put off by BDM's. These BDMs use the tacit acknowledgement that "they all do it ( not true) but we really can't tell you what it's about". Advisers are to stay in the Mushroom Club!
And your comments about early adoption are spot on. But in a recent Zürich webinar reference was made to the practice of Duration Based Pricing (actuary speak) and this seemed to be an indication that the matter may be included in the wording of the next Zurich PDS to be issued on 1 October. If that happens then the pressure will be on those other insurers to disclose their calculations on duration based pricing
However that will only be effective for consumersin my view if all insurers are required to publish a table in the PDSs showing when and where the 25/30% upfront discount is to be recovered.
The motive for insurers jumping on this bandwagon of upfront discounts is that they still believe, perhaps correctly, that most advisers sell on price, not quality. That's not hard to do when ASIC require you to insert a table in your SOA showing at least three product alternatives, and if you haven't recommended the cheapest product, you better have a few paragraphs saying why.
I openly discuss this matter with my clients and I believe that is the ethical approach to take. And I'm hindered in that practice because the projections you obtain from insurer quotation software are of no help whatsoever in determining impositions on the premiums down the track which are totally unrelated to age-based increases and CPI-based increases that are normal with stepped premium policies.
Again, the regulators should have been all over this but have totally failed.Both are reactionary and not proactive and both choose not to talk to one of the primary stakeholders – life risk specialists!
But for the regulators to actually contemplate doing something about duration based pricing would first require admission that LIF has been a total disaster. Anyone see any pigs?
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