Is the issue of risk adviser remuneration really the major cause of the pressure on profits in the life risk industry or are there much deeper structural issues at play?
Sustainability of the sector is important to our clients and to all of us who work in the industry, and indeed to all Australians as it is fundamental to supporting economic activity and providing social welfare at a reasonable cost. If the industry cannot restore its sustainability it can only result in the following:
- significant increases in premium
- increased scrutiny on claims and propensity to pay
- inability to sustain products in the long term.
We know from the recent APRA report on the sector that profits are under pressure. We know that group risk portfolios have been under pressure for some time and many have had to dramatically increase premiums.
We know that insurance claims do have some correlation with economic conditions and outlook. We also know the regulatory framework in terms of compulsory group life in employer super funds and the eligibility rules and benefits for workers compensation and disability pensions also have an effect.
But what of the products themselves. What effect do they have?
In this context I thought it would be interesting to do a little desktop research comparing the type of retail life risk policies available here to the US. For this purpose I compared the sort of products available in Australia to those offered in the US by American International Group (AIG), using their website.
Although life risk policies in the US are predominately bundled in contracts like our old whole-of-life and endowment policies, you can still purchase term life and income protection there as standalone contracts.
Even at a glance it becomes clear that Australian retail policies are much less restrictive than those offered in the US. They also have more underwriting and pricing flexibility for preferred or higher risks.
If we are going to seriously consider the issues facing the sector in Australia perhaps it’s time the life companies had a closer look at the nature of the products they provide to ensure they are sustainable over the long term.
Insurers here have competed heavily on expanding cover and benefits, and of course advisers and their clients want the options and flexibility to suit their circumstances. But are the policy conditions too generous?
|
Term Life |
AIG US Retail Policies |
Australian Retail Policies |
|
Policy duration |
17 choices for the term of the policy. 10 years or 15 – 30 year term. The insured chooses the term of the policy capped at a 30-year term. |
To age 99 |
|
Terminal illness benefit |
A terminal illness endorsement to accelerate the lesser of $250,000, or 50% of the policy death benefit, if insured is diagnosed by a qualified physician as having 12 months or less to live. |
Unlimited |
|
Premium options |
Level only |
Stepped & Level |
|
Financial planning benefit |
No |
Yes |
|
Guaranteed future insurability |
Yes |
Yes |
|
Accommodation benefit |
No |
Yes |
|
Funeral benefit |
No |
Yes in advance |
If we are going to seriously consider the issues facing the sector here perhaps it’s time the life companies had a closer look at the nature of the products they provide to ensure they are sustainable over the long term.
|
Income Protection |
AIG |
Australian Retail Policies |
|
Maximum sum insured |
60% of income |
75% of the first $320,000, 50% of the next $240,000, 15% thereafter |
|
Waiting period |
28-, 90- & 180-day waiting period |
14-, 30-, 60-, 90-, 180-days, 1-year, 2-year waiting period |
|
Benefit period |
5 years or to age 65 |
Generally 2-, 5-year to age 65 |
|
Definition of disability |
(A) For the first 27 months, you are considered totally disabled if you are completely unable, due to sickness or bodily injury, to perform the duties of your normal occupation and not performing any other occupation. (B) After the first 27 months, you would be considered totally disabled and benefit eligible if you are unable, due to sickness or bodily injury, to perform any occupation for which you are reasonably suited by education, training or experience. |
Pay an income benefit after the expiry of the waiting period if, solely as a result of a sickness or injury, until the expiry of the waiting period:
|
|
Accommodation benefit |
No |
Yes |
|
Claims escalation benefit |
Yes |
Yes |
|
Guaranteed future insurability |
Yes |
Yes |
|
Relapse feature |
Yes |
Yes |
|
Premium waiver |
No |
Yes |
|
Nursing care benefit |
No |
Yes |
|
Mental illness clause |
2-year mental illness benefit |
No restriction |
|
Rehabilitation benefit |
Yes |
Yes |
|
Death benefit whilst on claim |
No |
Yes |
|
Specified injury event |
No |
Yes |
David Spiteri is national risk manager at Centrepoint Alliance
Looking back at your table reminds me of the bad old days 20+ years ago. I have a slightly different view – I welcome the improvements but I have always asked insurers if they have costed the improved policy to make a profit. BDMs would assure me that was the case.
In the case of Trauma, which started of with the ” 92% ” list of benefits. there was no historical claims data to properly cost the product. Then extra benefits were added.
The insurers blame the researchers. That’s bullshit, because a lot of companies think ALL advisers sell on price. I, for one, never have, never will. The insurers do not need to continually add extra trauma benefits – its about ego !
What drives this attraction to focus only on premium is the introduction in ALL insurers of the type of short-term stinki’n-thinkin bought into the insurance industry ( an industry with a long term focus ) by the short termism and bonus focus of idiots who used to manage credit at the banks
Honest actuaries will tell you the story of insurers who engage actuaries to cost a product. When the costing is provided, and system costs and other costs are added, the insurers seek ways to reduce premiums to be “competitive ” That’s when trauma definitions are toughened up to reduce premiums ( stroke definitions ) or insurers slip a Capability Clause into a Partial Disability definition without telling advisers at the launch. They prefer to dazzle advisers with so-called new features, while kicking the client in the teeth and exposing the adviser to litigation.
Sadly there are still advisers who sell on price, and they deservedly get taken as mugs
Note to Katherine
I sell lots of level premium. But most insurers do not produce a year by year table & graph which allows the client to see the potential savings in a graph
Some insurers pay lip service to level premiums because they pay out too much commission early. Some advisers do not like level because it makes it harder to replace the policy and the value of the renewal is slower to increase because the age factor has been removed
Great article Spitz. The biggest one that stands out for me is only having Level premiums. People aren’t used to stepped premiums, they are effectively Level for all other kinds of insurance – that is, the premiums go up with CPI or with a general increase in risk for the insurer, but not with age. Imagine if health insurance was on stepped premiums! If you have a quality conversation with clients about stepped vs level, a much higher percentage choose level than you would think