Regulators signal more work ahead on sustainable life insurance premiums

Last week, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) released a joint letter regarding its review into life insurance companies’ conduct regarding premium increases and product issues after noting increases in consumer complaints

Following a two-year review, the regulators noted significant progress towards addressing past issues.

Namely, the regulators have previously observed consumers experiencing “repeated, large and unexpected premium increases, particularly in relation to products marketed as featuring ‘level premiums’.”

Part of this issue, the regulators suggested, was that some insurers were increasing premiums “without a clear right to do so”. Following the review, consumers impacted by this have been remunerated.

This latest review found that life insurers have since started to provide greater clarity and transparency regarding how and why they may exercise their right to increase premium rates, a considerable shift from the generic statement – “we reserve the right to increase premium rates” – used in the past.

Another issue raised by the regulators was regarding marketing and disclosure concerns. Addressing this, all life companies have now replaced “stepped” and “level” premium labels with “variable premium” and “variable age-stepped premium”, respectively, as developed by the Council of Australian Life Insurers (CALI).

This is due to the old premium labels leaving many under the mistaken assumption that their premiums would not change – an impression that the regulators said was fed by life companies’ selling practices.

Furthermore, insurers have also introduced more touchpoints with customers prior to policy purchases to ensure they are aware of possible future increases.

On top of this, they are also trialling new ways to communicate premium increases to affected consumers, providing consistent communication materials throughout the life of their policy to educate customers on their policy and the support available to them when affordability becomes an issue.

Where did this all start?

This announcement marks the latest step in the regulators’ review process following ASIC and APRA releasing its initial joint letter to life insurance companies in December 2022 in response to the rising complaints.

At the time, the regulators noted concerns that some life companies:

• Have not appropriately applied premium increases to retail life insurance policies, particularly level premium policies, in accordance with the policy terms.

• Have not acted in accordance with the reasonable expectations created through the relevant disclosure and marketing material.

As a result, ASIC and APRA requested reviews of past premium increases and disclosure and marketing materials from all life insurance companies.

The regulators also requested that life companies consider the design of future products and how their selling practices created misaligned expectations for customers.

In this, they also reached out to CALI separately to request “industry-wide measures to better manage consumer expectations around premium increase”.

A year later, ASIC and APRA released a joint update identifying multiple instances where premium increases were applied to consumers without a clear right to increase premium rates in the underlying policy.

The review also uncovered possible problems with disclosure and marketing materials, with seven areas for improvement identified across such materials.

While some progress had been made, the regulators said in the 2023 letter that “more needs to be done by life companies”.

With several problem areas identified, ASIC and APRA proceeded to monitor the progress of life companies to ensure they were meeting “regulatory, consumer and community expectations of pricing decisions, marketing and disclosure, as well as product design”.

Product design remains an issue

Although the regulator noted considerable effort on the part of insurers to address these pressing issues, the latest joint letter suggested there was still room for improvement. This, it would seem, rings particularly true when it comes to product design.

In 2023, ASIC and APRA raised concerns regarding the lack of transparency when it came to duration-based pricing, noting a failure to explicitly explain in disclosure or marketing materials how this pricing model will impact current and future premiums.

While the use of this pricing model raised concerns for insurers that it may “encourage churning and undermine long-term product sustainability”, according to the regulators at the time, the practice has largely become an industry norm as companies fight to stay competitive in the market.

Speaking with ifa in January, Skye Wealth founder Phil Thompson explained that because financial advisers are usually making product recommendations based on year one premiums, duration discounting essentially does exactly what insurers feared it would, creating an incentive to rewrite policies every 12 months.

Unfortunately, Thompson explained, it then creates a sort of feedback loop that is unsustainable and could “blow up the whole industry”.

As cost-of-living pressures see more Australians thinking of dropping their life policies. This has turned up the pressure for insurers in the new business market, and according to Thompson, “That’s why there is a race to the bottom”.

“Who can have the cheapest year one premiums without, you know, completely blowing up their business?” he said at the time.

While recognising the “competitive pressure” among insurers to garner new business, the regulators noted that the consumer benefit of duration-based pricing models and other temporary discounts do wear off over time with “commensurate premium increases during this period”.

“Our work has seen life companies reflect on whether this pricing model, and the resulting steeper premium curve, is suitable for all consumers,” the joint letter said.

“Some life companies are exploring solutions to balance price competitiveness and premium stability by introducing customisable options, such as a fixed premium period or a flatter pricing option, to ensure different needs can be met.

“We observed that, in response to our joint review, a few life companies launched products in the past year that appear to better promote sustainability and premium stability. However, product innovation across the industry is still limited.”

Reflecting on this, the regulators set the expectation that life companies:

• Only use duration-based pricing where this reflects a reduction in the risk they face.

• Do more at the outset to make consumers aware of duration-based pricing and other temporary discounts and how they unwind over the life of a policy.

One of the key issues when it comes to this pricing model is that consumers are not being adequately informed about how it works in reality, which has led to most life companies updating their product disclosure statements and other communications to ensure clear and transparent explanations are provided regarding the long-term policy and premium expectations.

However, according to ASIC, “simply explaining that the length of time a consumer has held their policy is a factor impacting premiums fails to adequately capture the actual consequences of duration-based pricing”.

“Additionally, a dollar-amount premium projection that incorporates the impact of duration-based pricing with all other variables does not go far enough to explain to consumers the nature and magnitude of its impact on premiums,” it said.

Looking forward, the regulators said that while progress has been made regarding re-rating, marketing and disclosure practices, the industry needs to continue to address issues regarding product design to ensure they are “sustainably designed and priced, with consumers’ needs in mind”.

Furthermore, ASIC and APRA said they intend to address remaining concerns in relation to the review through ongoing supervisions of life companies.