Insurers launch product design offensive to offset wholesale price hikes

While annual premium income in Australia’s group insurance market has grown over the past year from $4.1 billion to $5.0 billion at 30 June 2014, prices have shown a strong reversal to a downward trend over previous years.

This pricing pressure trend has sparked a revival of insurance product innovation, along with some redesign trends beginning to emerge.  Over the past 12 months, Rice Warner has observed key changes in terms and conditions. These have included:

• Increased default cover coverage, either to personal members or high risk occupations, and enhancements to income protection.  Rice Warner survey results suggest that the proportion of members in industry and public sector funds with default income protection cover has increased from 43% to 52% over the last year.
• Funds changing the default death and TPD cover scale to a ‘life stages’ shape, or increasing the default number of units but changing (reducing) the sum insured per unit.
• Tightening of definitions and eligibility criteria, such as introduction of pre-existing condition exclusions for additional cover and life-events cover, and TPD changes for permanent incapacity, addition of rehabilitation/retraining clauses and moving from definition of ‘unlikely to work’ to ‘unable ever to work’.

The core issue, well documented in the sector, is that prices for the death, TPD and Income Protection product segments have spiked, over the past year by 15%, 26% and 19% respectively, on average, across the market.

These numbers mask a much larger underlying upward shift in prices.  This is because funds typically review their insurance arrangements only every three years, so only one-third of prices will change in any one year.  In fact, over the past year, a handful of funds have more than doubled their insurance premium rates.

The price hikes are also linked to profitability issues. Over the 12 months to June 2014, based on APRA data, overall group insurance profit margins (after tax) were -8.5%.

Other causes of these significant price increases have been well publicised. They include:

• Poor claims experience, particularly for TPD, together with increased member awareness, resulting in a greater number of claims often with late notification.
• Historical price reductions and generous benefits in terms of automatic acceptance limits and relaxed definitions.
• Increased insurer capital requirements and lack of reinsurer support in the Australian market.
• Poor data standards giving rise to more uncertainty in assumption setting for pricing.
• Involvement of lawyers in claims.

On this last point, Rice Warner recently surveyed funds on lawyer involvement.  Data has only recently started to be captured by funds so results are preliminary.  However, of the funds surveyed, none believe the trend of lawyer involvement is decreasing, nor that more claims are being accepted.  This raises the question of how much value lawyer intervention is ultimately bringing members, particularly when lawyer fees are brought into consideration.

Raymond Chow, Consultant