APRA statistics show the life insurance industry has lost $1.5 billion over the last four years on retail income protection policies.  This has occurred during a period of stable economic and employment conditions – conditions under which these policies ought to be profitable.  The industry has responded by ramping up premium rates by 30% or more, yet the losses continue.  Something must change…

Retail life insurance has always been complex but the past few years have seen a period of proliferation of cover types, features, benefits and pricing options.  Presently 17 life companies sell retail insurance products, each offering up to 13 types of cover and varied coverage (from low cost to premium).  Not counting the complexities of trauma benefits, there are 180 individual benefits making up these cover types.  Then, there are several pricing options available varying by tax structures and payment methods, different commission levels (which are about to change under new legislation) and YRT or level premiums.

Most business is sold through intermediaries who use an Approved Product List (APL).  Life insurers must remain competitive on pricing and product design or their product won’t be chosen.  In recent years, insurers have been in an arms race to release more options and cover variants to the market. The aim has been to meet as many potential customers’ needs as possible. However, this has led to product definitions becoming more lenient and proliferation of benefits without the necessary adjustments to product pricing.

Further, some ailments such as mental illness have increased in duration and led to higher claims.  These factors have had a significant impact on claim rates and, in turn, on profitability.  While this has led to a few years of sharp premium increases, there is no sign that the portfolios are becoming more profitable (or that losses on disability income have been stemmed).

So, we have a complex, unprofitable marketplace with premium rates which are becoming unaffordable for many consumers, particularly older ones.  There is evidence that many people are cancelling their policies due to the premium shocks, so healthier lives leave which can make the overall experience worse.

Again, something must change…

Recently there has been a trend toward developing simplified benefits to try and bring the cost of life policies back to affordable levels.  These simplified offers are having trouble gaining any traction in the market as they are difficult to sell through advisers.  Advisers have a duty to look after the interests of their clients and many are cautious about recommending customers take a simplified product as these products can appear less valuable than the products they replace.  As all products have been signed off by actuaries, and as all life companies are deemed to be safe by APRA, advisers would argue that any product being sold is sustainable.  The experience suggests otherwise.

We keep a database of all life insurance products (retail and group) and supply this data to several adviser platforms. Many advisers rely on this data to assess the relative differences between products.  It would make sense to measure sustainability as the best rated products might have only a short-term advantage if the premiums are going to up later – and consumers should be told this.  However, there is no practical method of working out the threshold of commercial pain before a life company reacts.

A catalyst is needed to break this cycle.  Already, much of life insurance in Australia is provided through superannuation and this share will grow if the retail market does not sort itself out.  Retail premium rates cannot keep rising, or group products will become even more competitive and advisers will be squeezed out.

In the group market, poor profitability fuelled by a price war was addressed relatively quickly through increased premiums and changes in terms.  The retail market has a similar problem but it has been slow to react – constrained by guaranteed renewable terms with the added problem that competition for market share has dominated and overridden the need for sustainable profitability.  Something must change…