In a statement, the ratings house said the creditworthiness of Australia’s life insurance industry should remain stable in the next year, despite a short-term risk of consumers reducing or withdrawing their life insurance cover as a result of the CommInsure scandal.
A more substantive risk, however, lies in what may follow from ASIC’s recently announced probe into the life insurance industry.
“The eventual outcome of the myriad of life insurance reviews is difficult to determine. In fact, more demanding inquiries for the industry could also ensue,” the statement said.
“As such, the main risk to the industry lies in the medium term in relation to potential for changes in the industry’s structure and regulation. While it is clear cut there will be more, not less, regulation, how much more and at what cost to margins remains a significant unknown.”
Meanwhile, while lapse rates have been high for policies sold through financial planners, proposed reductions to upfront commissions are expected to improve these rates.
“A key question is whether this initiative will reduce sales as a result of financial planners exiting the industry given the loss of income and more onerous requirements in relation to education, sales practices, and disclosure,” S&P said.
“We suggest there is unlikely to be a mass exodus based on the lack of such a trend when some licensed advisers had their commissions cut pre-emptively by their insurer to a similar extent in 2015.”
Further, S&P predicts claims are likely to stabilise over the next two years, yet remain at heightened levels.
“Over recent years, industry players have reacted to the challenging operating environment with numerous measures designed to improve claims performance, with more substantial change occurring for group life risk given the extent of policy losses in 2013,” the statement said.
“While such initiatives can be made with immediate effect on new business, the impact on the existing policies will necessarily take longer to translate into meaningful improvement.”
The reduction in 2015 mentioned above was short term, not to the extent of the proposed 60/20 figure (you can add GST if you like but it isn’t kept) and also for only one licensee (I am assuming they are referring to AMP). A mass exodus may not happen over night but it will happen over a period of time. My question is why would you enter the industry at present from a risk / return perspective?
“Meanwhile, while lapse rates have been high for policies sold through financial planners, proposed reductions to upfront commissions are expected to improve these rates”.
This statement has already been refuted in actual evidence supplied in the LIF submissions showing that lapse rates for advised risk insurance have remained constant but risk sold directly being upwards of 40%.
As an adviser a 10% lapse rate is common due to clients cancelling. Products sold directly by the insurers are the cause of high lapse rates not planners where lapse rates are considerably lower.
Churning is purely an excuse used by the FSC for implementing changes to increase profits at the expense of customers and independent advisers. If we also look at the cause of lapses we can again direct this to members of the FSC. The insurers recent rate increase of between 15%-85% and the Comminsure scandal will obviously cause lapses.
S&P are also incorrect in their statement about a mass exodus of advisers for one simple reason. Many advisers already use a hybrid model however you simply cannot make any profit on the proposed lower commission structure with a higher clawback period unless you charge a fee. 95% of customers won’t pay a fee for risk advice and therefore you have a mass exodus because advisers will not work for free! I suggest S&P do some proper research into these statements.
Lapse rates for policies are [u][b]LOWER [/b][/u]when sold by Financial Planners not higher as reported. APRA released figures earlier stating the FP lapse rate is 8.4% whereas Institutional-FP lapse rate is a whopping 40% !! How about the true lapse rate by non-institutional FPs be correctly reported for a change?