In questions on notice to APRA, Senate economic references committee chair and Labor senator Alex Gallacher asked whether it was likely insurers would further raise premiums to cover the cost of losses in the 2020 financial year, which had seen four in 10 life insurers finish the year in the red, according to KPMG data.
“It is important to note that insurers cannot increase prices for current policyholders to cover losses on claims already made,” the regulator said.
“However, insurers will likely expect future claims from current policies to be higher based on recent claims experience and may increase prices on this expectation. APRA has seen some evidence of price increases in the market as a result of higher expected future claim costs, particularly the individual disability income insurance (IDII) product.”
Mr Gallacher also asked if APRA was “concerned about business failure in the life insurance industry”, with the latest statistics from the prudential regulator indicating the sector had seen a 63 per cent drop in revenue for the year to September 2020.
“APRA is satisfied that life companies are currently adequately capitalised and does not have concerns about imminent business failure in the life insurance industry,” the regulator said.
However, the regulator warned the business environment for insurers was likely to get worse before improving, with economists tipping a prolonged recovery from the pandemic that was likely to further exacerbate the claims experience for life insurance companies.
“In the past, there have been correlations between a downturn in the economy and high unemployment rates with deteriorating disability claims experience through increased incidence and, in the case of IDII, increased claim durations,” APRA said.
“The life insurance industry is therefore expecting to see worsening disability claims experience following the economic impact of COVID-19. Generally during economic downturns, policyholders are more incentivised to make disability claims and there also tends to be greater instance of mental health and other issues that increase the volume of claims.”
Record low interest rates, record high compliance costs and record adviser numbers exiting the risk space. Only a bureaucrat, their politician servants and CEO of most life offices would be confused at the the outcome of a perfect storm. Very few in government calling for less regulation to generate economic activity for business, including ours which would help reverse the trend. No doubt Alex Gallacher will be promoting reduced commissions as the solution.
what a mess. Disgusting what all these executives, pollies & regulators/lawyers are responsible for creating.
you reap as you sow. In LIF they were quite happy with the premise that you can’t write every client so the adviser must take a loss on those that don’t convert or change their mind – you know like absorb the failure of the business – even better those new clients you write you should pay the adviser less. Not sure where the architects of LIF came from but they need a reset on economic realities. Further, I am still yet to reconcile anecdotal evidence that a large number of planners that are not risk specialists are continuing to write business. My cohort certainly isn’t. This will, of course, help to contribute to the underinsurance problem in this country and in turn at some point it will lose critical mass. No one saw that coming. On the upside – you can be happy in the knowledge the people that orchestrated this mess are no where to be seen. Never held accountable. Sounds like the pesky advisers need more teams like FASEA. or an ethics course or something worthwhile that adds to the cost inputs for running a business.
Far less advisers like me who no longer write risk business as it is no longer profitable = perfect storm! Many wise heads foresaw all this years ago but some big insurers (TAL, AMP, Comminsure) did not listen and influenced FSC to get ODwyer to introduce LIF. Covid has just exacerbated this shambles and I pity what will happen to clients premiums going forward…
and we know how the big insurers went at the RC – AMP just a bloody mess – and Comminsure openly admitting to denying legit claims.- What is the saying about power corrupts. because you cant get any worse than AMP
Elephant in the room from the regulators, none of them admit LIF was a failure and has led to this mess. Even worse, no one will have the kahunas to revert back to a more sustainable e.g 100%/10% model where all parties win. No volume of inflows, hurts the back end, you must incentivise for new business volume. Simple business.
True. You had to ask why the renewal under LIF was set at 20%. The only possible answer I can see is that the insurers had an understanding with O’Dwyer that eventually LIF would go to 20% first year, and onward-LEVEL COMMISSION, like GI.Your point re huge premium increases resulting in increasing renewal commission is also valid, but that looses its value if your business is copping buckets of lapses because clients can no longer afford the cover, and it costs you unpaid time attempting preservation measures.
The real impact of LIF was that mature advisers with reasonable 10% renewal income chose, in their clients best interests of course, to increase legacy contracts rather than replace, thus avoiding the 2 year claw-back.. That decision lost 40% of genuine NEW risk fully underwritten business, without which Statutory Number 1 funds cannot survive. Don’t believe the APRA bullshit about generous IP contracts- insurers cannot pay claims on legacy policies if new business is down 40%. But APRA will not say that!
“It is important to note that insurers cannot increase prices for current policyholders to cover losses on claims already made,” the regulator said”. Are the pollies now working at APRA. THIS IS SHEAR SOPHISTRY ! Our clients really don’t care for bullshit explanations. they just know the premiums are increasing 15-20% each year on everything other than term life.And not a mention of the impact of LIF on reduced premium input.(63%). Maybe APRA & ASIC have an understanding not to embarrass their fellow regulators for POLICY Failure. Will someone tell trhese idiots, and thier political masters, that the Emperor is without knickers!
Sorry to burst the bubble but LIF didn’t reduce the commission cost it increased it. For a policy that stays on the books for a reasonable length of time the increase in renewal commission exceeds the reduction in upfront commission. And all of those premium rate increases – well they lead to even more commission. You have noted the 63% reduction for which so much noise has been made but failed to mention the 100% increase which more than makes up for it.
Trouble with your point is that there is ZERO commission on a cancelled policy. Let me tell you, there are MANY cancelled policies happening due to these fully unjustifiable (in client’s view) industry wide premium hikes currently occurring. I’ve seen 50% increases in some IP policies. Try telling a loyal client of 25 years that this is in any way justified when they’ve never made a claim. The life companies should be not only embarrassed at this but abjectly ashamed of themselves. This is NOT ‘”client best interest” from the companies that have professed to “be there when you need us” as most clients will not be there – they will have voted on these premium hikes with their feet and wallets.
For arguments sake, let’s say the cost of claims on IP policies has doubled in the last decade? [This is not unrealistic – check out the KPMG analysis on claims costs].
You think it’s not justifiable to allow for that in calculating premiums?
You suggest life companies should not increase premiums and go bust? That’s the other alternative. Where does that leave customers??
Having lived through the Regal Life/Occidental life collapse/insolvency of 1990, I can answer that question. APRA winds up the life office, and the book of risk policies are put on the market. No one wants to buy them ( except perhaps Resolution, not here in 1990). Eventually one life office will take the book, keep policy conditions as they were, and use ALL THAT INCOME to start a term life war. Thats what Merc Life/ING/One Path did in the 1990s. What a little earner-no acquisition costs !
50% increase?? Pfft, that’s not an increase. Try 72%!! On a level premium policy!!!
That’s what BT is slugging some of my clients with now.
BT is about to be sold. Sacked all the BDMs and claims people and now pushing premiums through the roof. Get out while you can.