Last year the Australian life insurance industry was shaken up by the Trowbridge Report, but regulatory reform is not the only issue shaping the insurance agenda in 2016.
Consumer trends, technological advances and disruption are all set to shape the insurance landscape in the year ahead as the sector continues to evolve and transform in response to internal and external pressures.
Here are the top five trends that are shaping Australian insurance this year:
1. Commission caps on the way
New legislation will take effect in 2016, capping upfront commissions paid on retail insurance sold by financial advisers and direct sales channels where there is a general advice element. This will help advisers uphold their best interest duty to clients, by removing potential conflicts between client needs and adviser rewards.
The legislation reflects the findings of last year’s Trowbridge Report and the Financial Systems Inquiry, and was developed in consultation with the life insurance industry. It will be phased in over three years from 1 July.
From that date, advisers will only be able to receive up to 80 per cent in commissions on the first year of premiums, reducing to 70 per cent in 2017 and 60 per cent in 2018. Ongoing commissions will be capped at 20 per cent.
New mandatory requirements will also apply to clawback amounts. Commissions may be clawed back by an insurer from an advisor where the policy lapses (100 per cent in the first year of the new legislative framework and 60 per cent in the second). ASIC intends to issue regulatory guidance on the calculation of commission and clawback arrangements in April 2016.
2. A rise in income protection claims
Income protection claim ratios have soared in the last three years, causing concern among retail insurers. Not only is the number of claims growing, claim periods are longer as well — and claim costs are especially high among older legacy products.
So why the increase? Two of the major contributing factors appear to be relaxed product definitions and growth in mental health claims.
Some insurers and re-insurers have reached the point where they’re making losses on their income protection products — and many are hiking up their premium rates in response. Market trends have shown rate increases on new policies by roughly five to 10 per cent over the past couple of years and this trends looks likely to continue.
3. Clients are looking to their super
More and more superannuation clients are using their super to fund their life and TPD insurance — for two good reasons.
Firstly, life insurance payments are generally tax deductible within the superannuation environment, where only income protection premiums tend to be tax decutable outside of superannuation. Super-based insurance is also a boon for anyone strapped for cash, as it's one less expense they need to cover from their regular income.
Most retail insurers now allow clients with more than one super fund to transfer money from one fund into another to pay their premiums. And thanks to the recent SuperStream legislation, which requires super funds to transfer money to each other electronically, this process is faster and more reliable than ever before.
4. The brave new world of robo-advice
Providing insurance advice is an expensive business — it can cost firms up to $3,000 to deliver personalised advice to a client over the course of several meetings. And with year-one insurance commissions to be capped at 60 per cent from 2018, advisers may need to charge their clients up to $4,000 just to turn a profit.
Enter robo-advice — an electronic needs assessment tool that helps clients generate much of their own Statement of Advice (SOA).
Robo-advice is a great solution for clients who can’t afford professional advice, and it’s especially appealing to tech-savvy Gen X and Y clients. It’s also good news for insurers and advisers looking for a cheaper way to service ‘mums and dads’ and younger clients who pay lower premiums.
Many advisory firms are embracing the new technology and tailoring their own robo-advice tools for their advisers. But some aren’t so keen, believing they need to make more personal connections to properly meet their clients’ insurance needs.
5. Keeping healthy clients protected
Everyone knows healthier people are less likely to claim on their life insurance — but they’re also more likely to let their cover lapse. While some may feel that they’re not getting value for money out of their cover, others are more inclined to shop around for a better deal, even if it means a medical check.
So why do insurance companies need to work harder to hang on to their healthy clients? If they don’t, their client base will skew to the unhealthy end of the scale, which is likely to result in more claims.
That’s why some insurance companies have developed health and well-being or preferred lives initiatives. By providing services to help clients improve their health — and offering premium discounts to clients who lead healthy lifestyles — insurers can take an important step towards reducing their claim costs.
Gary Bailison is the head of individual insurance product at MetLife.
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