In the wake of COVID-19, more and more Australians are becoming unemployed by the minute, through no fault of their own. As a result of this and the necessary measures the government is taking to try to contain the virus, these people will be thinking about how they can reduce expenses. They are likely to be rethinking their life insurance policies and whether they can afford to keep them going – and the hard fact is, many of them won’t.
This will cause a number of serious problems:
1. The client will no longer have protection for their family during a global pandemic – a time when they need cover more than ever. Not since 1919 have Australians needed life insurance more;
2. The government will incur an even greater social security problem, on top of the social security problem created by coronavirus and the resultant escalation in unemployment;
3. Life insurance companies will suffer higher than usual lapse rates, and lose a lot of customers; and
4. Financial advice businesses will run into financial difficulties when policies lapse due to the write-back of commissions received from policies written in the past two years.
While the challenge is with all of us, the solution lies with the life insurance companies. The way I see it, life insurance companies can do one of three things:
Option 1: Nothing
The situation will play out as above, thousands and thousands of life insurance policies, including term, income protection, TPD etc will lapse, the insurance industry will go to hell in a hand-basket and we all suffer the consequences.
Many more Australians will have to rely on unemployment benefits, insurance companies will lose a huge number of customers, advisers will lose a huge number of clients and endure the write-back of commissions, and as a result possibly lose their businesses. This will mean there will be even fewer advisers to help people through the financial issues created by this pandemic.
Option 2: Introduce non-forfeiture provisions
Simply put, non-forfeiture provisions mean the life insurance company ‘lends’ the cost of premiums to a customer who can’t temporarily afford to pay them due to the COVID-19 pandemic. When the pandemic ends, the customer repays the ‘loan’ via increased premiums.
With non-forfeiture provisions in place, people are still protected, their families are less likely to have to rely on government benefits if a breadwinner dies; life insurance companies still have customers on their books and advisers won’t experience writebacks, so they are more likely to be able to stay in business.
The one practical challenge with this approach is that once people get back on their feet, they forget that they were lent the money and when more expensive premiums kick in they will shop around for cheaper policies. To guard against that outcome, they would need to enter into a formal loan agreement with the insurance company that says they will pay back the costs on friendly terms.
Option 3: Suspend premiums and cover
Another solution is to totally suspend premiums and cover for the duration of the coronavirus, or a specified period of time. Once the pandemic is over and people are back on their feet, allow them to reinstate the policy without any further evidence of health and without having to pay back the missed premiums.
With this approach the customer doesn’t lose the policy – although they do of course temporarily lose the cover. The customer also doesn’t have the burden of paying back a ‘loan’ via increased premiums once the suspension is lifted and they have the bonus of not having to go through health screening again to reinstate the policy.
In the long term, the customer will be insured again once the pandemic is over and there will be less risk to the government of the customer and/or the customer’s family having to rely on social security benefits if a breadwinner suffers an illness, injury or death in the future. The insurance company doesn’t lose the customer but doesn’t have to pay a claim if a customer dies during the suspension, and the adviser doesn’t have to write back the commissions.
The first option, to do nothing, is obviously a pretty ordinary option for consumers, the government, the country, the insurers and the adviser community. Option two probably makes the most sense – but perhaps insurers could offer their customers either option two or option three.
Life insurers now have a powerful opportunity to step up to the challenges arising out of COVID-19, to do something meaningful, something that makes a difference. Something that, firstly and most importantly, protects consumers but something that, in the process of protecting consumers also protects the country and the industry. Something that, in this era of great uncertainty, offers a degree of certainty.
Don Trapnell, director, Synchron
[quote=Realist]Absolute wishful thinking, I wonder if any of you actually how to run a P&L?
Premiums pay claims, insurers don’t. If clients don’t pay and you expect cover to continue you live in a dream land. The net effect of that would be less affordable insurance in the future whilst insurers recoup the losses you want them to make.
C’mon people, you also need to be realistic here. [/quote][quote=Realist]Absolute wishful thinking, I wonder if any of you actually how to run a P&L?
Premiums pay claims, insurers don’t. If clients don’t pay and you expect cover to continue you live in a dream land. The net effect of that would be less affordable insurance in the future whilst insurers recoup the losses you want them to make.
C’mon people, you also need to be realistic here. [/quote] Yes Realist, in general terms, premiums pay claims. Yet this self-serving bunch of idiots we call insurers went along with the bank-requested LIF which resulted in a 40% reduction in genuine new business PREMIUMS – right on cue for reduced earning rates. They sat on their hands when the banks sold LIF to O’Dwyer, attracted by what they could see as short term gains. Ask any 20 year plus adviser how much new business they wrote off NEW clients at LIF rates over the last 3 years. Better to service existing clients at 115%. Trouble for the insurers is those existing clients were not fresh young meat with a low potential to claim.
Absolute wishful thinking, I wonder if any of you actually how to run a P&L?
Premiums pay claims, insurers don’t. If clients don’t pay and you expect cover to continue you live in a dream land. The net effect of that would be less affordable insurance in the future whilst insurers recoup the losses you want them to make.
C’mon people, you also need to be realistic here.
[i]Premiums pay claims, insurers don’t. [/i][i][/i]An excellent point that is frequently forgotten. You are aptly named Realist.
A big source of premium increases in recent years has been insurers paying questionable claims to prevent potential negative publicity. Insurers have been badly beaten up by media distortion and misrepresentation of rejected claims. At the end of the day it’s easier for them to just pay dubious claims and pass on the cost via higher premiums. A process otherwise known as the “Adele Ferguson tax”.
Spoken like an accountant and not like an entrpreneur…Goodwill generates business and this leads to increased profitability in the long run….Bad-will (for want of a term) is passed on by word of mount 17x over (according to research) and will decimate a business for many years…if it lasts that long. Now let me check which type of business I want to be in…
Um, Insurer’s don’t pay ALL claims. They are required to have re-insurance which covers for large one-off events and then a number of claims from one event, ie, coronavirus. If they don’t have this cover, they are naked and accepting all the risk. And neither their actuaries or APRA will let them get away with under-reinsurance as that will cause a life company to collapse.
It’s no point asking for money when people don’t have it. People who lose their jobs will simply cancel policies. Ignoring the problem will see lapse rates hit the roof; and then comes the ugly capitalisation of acquisition cost write-down that sees profits destroyed.
It is actually better to have a pause in premiums for a few months than a spike in lapse rates, due to the costs of acquiring new business.
Please also note APRA recently intervened in the DII market by:
1. ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies;
2. avoiding offering DII policies with fixed terms and conditions of more than five years; and
3. ensuring effective controls are in place to manage the risks associated with longer benefit periods.
Insurers control their destiny; either lose business and write down the capitalised acquisition costs or take a cut in premiums for a short while to keep lapse rates low.
OFF COURSE OPTION 1 BUT FOR MOST PEOPLE THAT MAY NOT BE THE CASE SO THE OPTION 3 IS IN THE BEST INTEREST OF BOTH THE CLIENT AND THE INSURER,
They are essentially banks, in my view. Suspend repayment for six months, and catch up after this is over, once clients have secured new jobs.
Bravo Don, well done for initiating this conversation. You’re ahead of the curve as usual and a true leader. Hopefully the people at the insurers who can do this are reading and smart enough to credit you with knowing what you’re talking about – for their own good and everyone else’s.
Yes Don I agree that Option 2 would be the go..
The insurance company by lending the premium cost (interest free) to the client while the pandemic is on would prevent a huge potential disaster. The client should be reminded every 6 months of the interest free debt against the policy.
In the event of a claim the premium debt (interest free) would then be deducted from the benefit payable to the client.
This would be a win-win situation to all parties involved. There may be some legal hitches but nothing that the insurance companies legal teams wouldn’t be able to deal with.
Excellent point, John, and it’s what I’ve been saying in respect of this dilemma.
option 2 seems a better solution
Thanks Don. I assume that the insurance industry is already discussing this. Possiby not. A life insurer that takes this approach will likely retain more premium paying customers in the long run
Well opined Don
Many insurers have offered premium waivers during recent natural disaster events so hopefully they are all on the drawing board as we speak considering same or like options ( & other than your option one!)
Well said Don. It’s great to see some insurers already stepping up to the plate with three month premium waivers, whilst the insured still remains covered in some instances. Communication is key and we all have to do our part to help clients retain the security they felt when first taking their cover out.
As a nation we are being asked to make sacrifices. Many small businesses have been forced to shut down, staff have lost their jobs & families are under enormous financial stress. Surely now, more than any other time in history, it is opportune for our insurance companies & other financial institutions to show leadership. My ideal solution is for insurers to offer one of a number of options for the client to choose: 1) Suspend client’s premiums for up to 3 months whilst retaining their cover (for those who are now unemployed); 2) Offer a reduction in sum insured for 3-6 months with the guarantee of a return to 100% of their original sum insured without requiring underwriting; 3) freeze premiums for 6-12 months with full reinstatement after this period (the client would not be covered during the freeze.
Whilst I was not around in 1919, the “recession we had to have” in 1993 was less than favorable for my clients and my advisory business at the time. 2020 and corona, makes 1993 look like a walk in the park. Hopefully a workable solution can be developed.
did not know that Don had this in him, well said INTELLIGENT
Important issue Don, it would be good to know what the FSC and the insurances company are considering at the moment. it would help with keeping clients informed. last thing they need is to loose their cover.
Good article Don but can I suggest Option 4, Suspend the premiums for the duration of COVID-19 but retain the cover.
This would show whether or not the Life Insurers actually care for their policyholders and show them the loyalty that they have requested whist increasing the premiums over the past few years. We will all suffer financially from COVID-19 bit the public [ and the advisers that survive it ] will remember which insurers stood by them in their time of need.
Good comment, Mark. That said, how will the insurers balance the books? One way would be to pay the claim, as you suggested yes, but have the missed premiums deducted from the payout.
Only for those that can’t pay their premiums due to loss of income for example otherwise insurers could be gamed by those that still can afford to pay…
What a great insurance leader Don, when you do finally retire it will be a sad day for our industry.
An excellent and very timely article … if insurers don’t step up and help customers overcome the covid19 crisis, the losses could potentially extend far and wide … this is also an opportunity for insurers to gain some much needed credibility by being empathetic and supporting their customers through such difficult and unprecedented times.
Well done, Don. It’s true that these times are when clients should be hanging on to their policies rather than ending them due to budgetary issues caused by the forced economic shutdown. Premium holidays won’t be helpful as clients can’t claim during the period. In the event of infection, they will be in deep trouble too. I believe the 2nd option is best for all parties. Here’s hoping they listen.
Great proposals there Don! Clients, Advisers and iIsurers are all in this together so if one falls over we all fall.