Are risk policies too flexible for our own good?

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: life insured’s pre-disability income from his/her usual occupation has reduced by 20 per cent or more life insured is unable to perform one or more income producing duties of his/her usual occupation life insured is unable to perform the income producing duties of his/her usual occupation for more than 10 hours per week.
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