Life insurance: the dynamics of change
Globally, the life insurance industry has long been ripe for change. Well before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the winds of change were already blowing.
This started with the inception of the earliest insuretechs in 2010 and since then venture capitalists have been piling billions into insurance technology. Indeed in 2016, Lemonade, the US insurance company, fuelled by artificial intelligence and behavioural economics, raised one of the largest-ever seed rounds in US fundraising history. Modernisation of the life insurance industry has become a global movement, with the Royal Commission expediting this process in Australia.
CHANGE HAS BEEN SLOW
By the time the Royal Commission rolled into town in 2017, the Australian life insurance industry was overdue for disruption, lagging behind our international life insurance peers. From the ashes of the Royal Commission’s findings we are now seeing the industry rebuild, seizing the opportunity to deploy new technology that would allow the industry to respond to Hayne’s demands for simpler, customer-friendly products and processes. New providers, like ourselves, who were in the process of coming to market, were able to launch with a non-conflicted customer-centric proposition, rewriting the rule book and providing the antidote to a battered industry.
CHANGE IS INEVITABLE
This change is far from complete. The Australian life insurance industry will continue to evolve and will be impacted by forces that are going to give rise to a more sustainable industry, more intelligent technology, redefined risk profiles and high levels of responsiveness. The new age of life insurance will be customer-focused, adaptable and technology led. Importantly, this will need to be coupled with an increased focus on the care provided to the insurer’s policyholders, especially at claims time, with transactions being as simple and automated as possible.
1) Sustainable pricing is a sustainable trend
As a key strategy to protect a client’s wealth on an ongoing basis, life insurance is an important purchase. It is, after all, a product ‘for life’. This means that it should be priced on a long-term and sustainable basis. The Year One price discounts that we currently see offered to make life insurance look cheap up-front ignore the enduring nature of life insurance. It is an ongoing contract that must be paid for year after year in order to continue cover. After the initial discount has exhausted comes the ‘sticker shock’ to the client when the real cost of the policy appears in years two, three or four.
For a long time, advisers have found themselves wedged between a rock and a hard place – clients demanded the best upfront price, but it was the adviser who had to explain to disgruntled clients why their premium jumped after a few years.
Although honeymoon discounts are hardly a new tactic, older clients often encounter a particularly nasty sting in the tail. Huge but transient first-year discounts encourage clients to switch providers every few years, but those clients can end up paying more over the life of a policy as they age and are re-costed for coverage. Health problems that arise a few years after a policy is issued may also make it harder for older clients in particular to find a new policy with the same pricing and benefits.
Insurance companies must help advisers deliver what clients need, and short-term incentives are not in line with the need for life insurance to be ‘for life’.
Regulation is also driving this long-term pricing that the general public and advisers alike deserve. The recent intervention by APRA into the Individual Disability Income Insurance market has sounded the death knell for cross-subsidisation and the disentangling of subsidies from income protection and other life insurance products, while ASIC seems intent on making advisers provide greater focus on long-term pricing in making product recommendations to clients.
2) Investment in automation and AI will pay off
Disruption, driven by the uptake of AI integration, will continue unabated, enabling insurers to deliver a more responsive product through better technology.
Insuretechs are helping insurance companies make improvements for consumers as well as creating opportunities for life insurers and advisers to offer a more personalised, digital product for their customers. Internet of Things (IoT) technology allows individuals to use data to inform pricing that accurately reflects the risk profile to the insurer.
The policyholder who improves their health profile, for example, by clocking up steps on their pedometer walking to work, will benefit from lower premiums to reward their better lifestyle choices.
Chatbots will continue to enhance the opportunities for consumers and insurers to engage. Technology is also emerging whereby claims will be submitted online, with medical evidence read and understood by AI engines and claims paid instantly with minimal human intervention.
Insurer’s legacy systems are making it challenging for the older players to adopt the modern, flexible, adaptable systems that are now available through digital underwriting.
The use of legacy systems and paperwork to underwrite means that the final quote an adviser gives a client often fails to match the final underwritten quote. The future promises immediate, unbiased digital underwriting that does not ever have a bad day. This will soon become commonplace across the market as established life insurers upgrade their technology.
In the UK, consumers making life insurance applications can now answer one set of underwriting questions and receive binding quotes from a number of insurers and simply click on a ‘Buy Now’ button to complete their purchase through a data exchange. This has not only made insurance simpler to buy but has enabled insurers to grow their business and ultimately expand the market. Unsurprisingly, such online exchanges have existed for years in motor insurance but are now being used for life insurance.
3) Risk profiles will evolve
Risk has historically been defined by an individual’s weight, age and smoker status but things are about to get more personalised and premiums will soon be calculated using a raft of different data points. A 58-year-old 85kg non-smoking man can have a dramatically different life expectancy depending on factors such as the geographical area they live and their income.
By using larger volumes of data available from new sources, life insurers will be able to predict life expectancy with a higher degree of accuracy, even on an individual basis.
Risk factors such as lifestyle and socioeconomics will be considered and will allow for insurers to apply discounts or loadings and calculate a fairer premium.
The dichotomy of chronological and biological age is no longer a futurist concept. The same data will also help insurers to incentivise people to change their lifestyle if their biological age predicts a shorter life than their chronological age. One example is facial assessment technology. This is already available and can accurately predict a person’s body mass index (BMI) and smoker status from a photograph taken by an app.
4) Dynamic policies will reflect the changing world we live in
Much has been said about two major trends facing the life insurance industry – the ageing population and the rise of the tech-smart people who are largely yet to become engaged with the industry. Future policies will be constructed and sold with a different approach and the customer experience will be key to winning over the younger generation.
It may be the case that insurers focus on one segment to differentiate. In the UK, a report just released by the All Party Parliamentary Group for Longevity found that as the UK population ages there will be very large increases in the number of cases of poor health over the next 15 years.
In 2035 the report predicts that there will be twice as many cases of dementia, arthritis, Type 2 diabetes and cancers in people aged 65 and over as in 2015. It also predicts that in 2030, 70% of people aged over 55 will have at least one obesity-related disease. Our ageing population is subject to changing threats and heightened risks which have an enormous impact on life insurance. New products will emerge to deal with these changing circumstances.
It is not just the demographic groups that will drive change in the way that life insurance is structured. Environmental factors will also mean that products will need to be recalibrated to take their influences into consideration. It will be impossible for life insurers to ignore these trends.
5) Advice takes pole position
Currently, commissions are paid on the sale of products and, as a result, the adviser’s relationship with the customer can be transactional. The future of financial advice lies in providing exceptional personalised advice of the highest quality that ensures customers have the best possible product, or combination of products, to suit their circumstances.
This is being aided by the post-Royal Commission environment where the industry is eager to meet Hayne’s demands for cultural and technological transformation that puts the customer first, simplifies products and makes it easier for people to understand the benefits available to them.
THE LIFE INSURER OF THE FUTURE
For life insurance to be ‘future proof’, it is important that the industry anticipates the forces driving change and invests in solutions to these challenges. Insurers that lead the industry will respond to these challenges with new technology that improves transactional efficiency; with customer-focused products; through an open dialogue with advisers and their clients; and, through having an informed view of changing industry, technology and customer dynamics will solidify their position in the future Australian life insurance market.
Chris Powell is managing director and chief executive at Integrity Life.
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Leading industry experts contribute to the Money Management website and fortnightly magazine, providing insight into a wide range of specialised topics within the financial services industry.
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