Speaking to Risk Adviser, GPS Wealth managing director Grahame Evans – a former chief executive of investments for TAL (formerly Tower Australia) – questioned the notion from life insurers that some insurance product premiums need to increase because they are currently unprofitable.
“My argument here is fairly straightforward – if the products are unprofitable at the moment, where is APRA?” Mr Evans questioned. “Why isn’t APRA stopping them writing unprofitable products?
“[The insurers] are saying [they] have the worst claims and disability claims record – well they are selling disability products all the time, so is APRA just ignoring this?
“If [insurers] are selling unprofitable products at the moment, then maybe some of the directors need to actually be conscious of that fact,” Mr Evans said.
Mr Graham continued to argue with the introduction of a three-year clawback period and the reduction of upfront commissions to 60 per cent that insurers should be able to pass a saving onto consumers.
“If you break an insurance premium down, generally 50 per cent of the premium is for the actual risk itself and the other 50 per cent comes down to the cost of commission, the cost of policy issue, the cost of marketing, the cost of underwriting and their cost of administration.
“If you start reducing those costs, in essence you should be able to reduce the actual premium,” Mr Evans said.
Graham the Head of GPS Wealth has an exceptional point.
APRA is absent whilst these new guys in the insurance industry, BT Comminsure Etc, don’t really understand the insurance cycle. New entrants reduce profitability, not sales.
Life industry reform so far is a collusive industry agreement. A handshake, that has not been approved by the ACCC. I will be the first person on the phone to the ACCC if these companies think they can collusively set my compensation and the revenues of my small business.
ACCC have confirmed via email, they are looking into the collusion that has already occurred to date.
Re: which products have viability issues. Outside of Group Insurance TPD, which has been well documented:
1: Profitability issues with Income Protection / Disability Income Insurance across the entire industry are being pointed out in some forums. APRA reports industry profits by IP and lump sum business. A quick look at APRA stats shows the life companies as a whole made massive losses on IP in 2104. Someone pointed out to me that the life industry has made net losses on IP between 2008 – 2014 (the only period APRA has reported IP profit separately), and indeed the APRA stats seem to bear this out.
2: While APRA doesn’t appear to split APRA Lump Sum information into mortality, TPD and Trauma: there have been enough presentations at forums like the actuaries institute’s financial services forum and the like to make it clear that Trauma is also problematic.
Re the Suncorp profitability reference made below, may not be best to focus on the 35.9% increase. I recall Suncorp Life had a large profit reduction last year (I just looked that up to, 30% fall in profit from 2003 to 2014). So one could assume they are coming off a low base. The disclosure of all the banks is actually not too bad – the wealth divisions are split out and usually see some commentary on areas that are going well and not so well. Maybe not at a product level, but across the board over the last few years there is enough to see some of the profitability issues as the life companies see them.
Interesting that we had a BDM from one of the bank-owned insurers in the office last week telling us about the new discount on premiums for their policies.
Asked him how – given the supposed pressure on margins the insurers are allegedly experiencing (you know – because of all the churning adviser do) – the company could afford to reduce premiums.
Also asked him where he thought we would get the business from. He suggested that – when we review existing clients – we would find that their cover was now cheaper and we could rewrite.
Seems to me his bosses would (and have) call this churning and were very much against such behaviour. Apparently it’s only churning when they lose business – not when they gain it.
Finally asked him to leave the premises and not come back.
And yet Suncorp Life makes a massive profit [ up 35.9% on last year ] from their unprofitable insurance products, if they are going to tell lies then they really should get their stories straight!
Profits are down, and the banks need the insurance companies that they own to make up the difference.
Good questions. The whole industry is working on reducing costs, advisers in particular, so the insurers should have to be a part of that. And as discussed, if there are issues with viability I would like to know which products are involved, so I know which providers are not managing their costs appropriately, and may provide a risk to my clients in the future. Full disclosure please.