For 15 years between 1992 and 2007, I – like most advisers – was recommending stepped premiums to my clients for their trauma cover. After all, it was hard enough already to get clients to take out another product on top of their existing income protection, term and TPD cover without raising the bar even higher by increasing the upfront cost.
Then, one day in 2007, I attended a two-day living insurance conference organised by The Risk Store in Sydney. One of the sessions in the first day ended up making a huge difference to myself, my consultancy and my clients in the most positive way possible.
The presenter of the session in question was a gentleman by the name of Nick Kirwan, who was at the time the head of the Association of British Insurers, and he was talking about trauma cover in the UK. He informed us that in the UK, 25 per cent of the working population owned trauma cover. This completely blew me away as only approximately 2.5 per cent of the working population owned trauma cover at that time in Australia. I thought maybe he had gotten the decimal point in the wrong place and decided to confirm what I had heard.
During the morning break, I caught up with Nick and said, “That stat that you gave of 25 per cent of the working population owning trauma cover in the UK … that’s pretty amazing, given it’s only about 2.5 per cent here in Australia. Tell me, what is the status of stepped vs level premiums when it comes to trauma cover in the UK?”
Nick looked at me as if I was from another planet and said, “What’s a stepped premium?” It turned out that they didn’t have stepped premiums in the UK. In fact, they didn’t even have level premiums as we know it. They only had guaranteed premiums i.e. once you had the cover in place, the premium was guaranteed not to increase for the life of the policy.
I immediately thought to myself, “Well, of course 25 per cent of the working population in the UK own trauma cover, because everyone who bought it in their 30s and 40s have still got it in their 50s and 60s as they are still paying the same amount of money for it.”
I realised that from that moment on I would have to recommend level premiums as the preferred mode of premium payment to all of my future clients irrespective of age and, furthermore, I had to go back to all of my existing clients who were paying stepped premiums for their trauma cover and recommend that they switch to level premiums.
As far as the clients I took on after that 2007 light bulb moment are concerned, the majority of them own some or all their trauma cover on a sustainable basis i.e. level premium, and I’m proud to say that all of my existing clients at that time converted at least some, if not all, of their trauma cover to level premiums. How much they converted was only ever a matter of affordability, with many clients opting for a smaller sum, assured that was sustainable to age 65 or 70 rather than a larger sum that they would have to abandon in the short term due to its unaffordability.
Chris Unwin is the founder and chief executive of Chris Unwin Training & Consulting Services
Maybe a dumb question, but why is trauma highlighted? Would not the same apply for mortality, TPD, IP?
My level premium BT policies increased 10%18 months after I purchased them. Unfortunately the “level” premiums sold by Australian insurers are not really level premiums. Rerates are the norm and this only stuffs over the adviser who clients a “level” cover and the consumer who pays for it. Insurers should be more responsible in what they offer and how they offer it. Regardless of what fineprints they have hidden in their PDS, insurers should act in good faith of what a level premium represents and like how their customers pay them premiums in good faith for what they believe they bought.
As a young adviser, with a good mix of ‘younger’ clients, I’m a massive advocate for level premiums. In particular with Income Protection. Slap that with hybrid comms and you’re cheering! What really bothers me are the life companies increasing ‘existing’ level rates. It feels like a medicare system where the young client’s, taking the premium increases to fund the older (not all) claims that are being paying out. It is what it is.
as much as I agree with level premium being necessary for Trauma insurance (for all insurance within affordability for that matter), Australian Level premiums in general are hardly guaranteed and rerates every few years (most often increased). There is a serious mismatch in retail Australian insurance between affordability and cover amounts required, which leads to more under-insurance which in turn becomes a downwards spiral. sad reality.
The one obvious difference between the UK and us is the fact we do not have guaranteed level premium rates. We’ve witnessed IP rates [level & stepped] steadily climbing due to adverse claims experience. The very generous Trauma definitions in the market place today will inevitably lead to the same steady increase in both level & stepped premiums…it’s already happening. Plus there is talk of offering ‘stripped down’ Trauma and IP products in the future to help ‘sustain’ the industry’s ability to continue to offer ‘affordable’ protection to most Australians. Other than one life office offering guaranteed death only level premiums, I prefer to call this premium option ‘fixed rate’. Explaining to clients the underlying ‘fixed rate’ can be increased in the future, but still arguing that over the long term the aggregate cost will be much lower than stepped premiums.
I always recommend level premiums for trauma. Its a more logical conversation, its cheaper in the long run, and clients are much less likely to cancel or switch. My lightbulb moment in that regard was a great session run by Andy Marshall some years ago at AXA. Escalating premiums often prompt cancellation at exactly the time when clients are likely to suffer the critical event. Simple!