You don’t need me to tell you that life insurers might be hit hard by the coronavirus, potentially leaving millions of Australian families unprotected. We all know that, but it doesn’t have to be the case.
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
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