Adviser remuneration and direct insurance are two factors which are contributing to the Australian insurance industry\u2019s sustainability woes, the Australian Prudential and Regulatory Authority has warned.<\/p>\n
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In the latest edition of APRA Insights, which provides an update on the key risks facing the life insurance industry, the regulator highlighted the factors it believes are contributing to higher lapse rates, which, combined with an increasingly poor claims experience, are leading to widespread industry sustainability concerns.<\/p>\n
APRA said that because life insurers bear many up-front costs when establishing contracts, including the payment of upfront commissions to advisers, the profitability of business is highly susceptible to the early voluntary discontinuance (lapse). APRA argued that due to the recent trend of increased lapse rates, which grew from 16 to 17% in the 12 months to June 2013, the flow-through impact of these upfront costs on profits was now clearly evident.<\/p>\n
In addition, the regulator highlighted that adviser remuneration was tilted towards rewarding new business, rather than the maintenance of existing business, and that this did encourage some advisers to move their clients from one insurer to another.<\/p>\n
\u2018When such activity becomes excessive, it is referred to as \u2018churning\u2019 and, while difficult to identify, its prevalence has become an increasing concern for government and industry bodies,\u2019 APRA said in its report.<\/p>\n
\u2018Historically, life insurers have paid more regard to business acquisition than business retention and APRA would expect some rebalancing of focus in this regard.\u2019<\/p>\n
The regulator also warned that \u2018\u2026increasing lapses may reflect an increase in the anti-selection effect, in which case the impact on profitability is even worse\u2019.<\/p>\n
Similarly, APRA raised concerns about the increasing and \u2018now significant prominence\u2019 given by life insurers to the direct market. According to the regulator, this form of business intrinsically suffers from very high lapse rates, especially in the first year of sale (see: Direct Market Suffering From Heavy Lapses<\/a>). APRA said that while insurers allowed for these lapse rates within their pricing and valuation bases, the direct market experienced more uncertainty over the long-term reliability of lapse assumptions than in the case of products sold through traditional distribution models.<\/p>\n Other reasons for the worsening trend in lapse rates for risk business cited by APRA include:<\/p>\n The regulator has been urging all life insurers to monitor their positions closely and to seek to understand the underlying reasons for their evolving experience, and from this form a robust view on likely long-term experience and appropriate business responses.<\/p>\n\n