Reviving the life insurance sector

Behind closed doors, the nation’s life insurers and friendly societies are adjusting to the latest round of industry reforms introduced in March by the industry watchdog.

The Australian Prudential Regulation Authority (APRA) has implemented a suspension on individual disability income insurance (IDII) contract terms for at least two years after consulting with the Australian Securities and Investments Commission (ASIC). 

The changes to contract terms are being ushered in within a package of reforms which are focused on bolstering the sustainability of the IDII sector. 

The arrangement would have seen new income insurance contracts from October 2022 capped at a maximum term of five years, rather than being guaranteed renewable – typically until the retirement age of the policyholder – as was presently the case. 

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While policyholders would have the option to re-apply for cover, the risk was that new contract terms and conditions may have changed, and policyholders would be underwritten again based on possibly changed income, occupation and pastimes. 

It follows APRA’s decision in May 2021 to defer the implementation of this measure to allow time for the development of solutions that meet its expectations to address the risk of unsustainable contract terms.

The suspension was deemed necessary given that life insurers and life companies have suffered substantial losses from individual disability income insurance in recent years. This has resulted in substantial premium increases, making the product less valuable for policyholders. 

It means that consumers will be protected from buying an insurance product that doesn’t suit their needs as part of a planned package focused on improving the sustainability of the IDII market. 

THE BLACK SHEEP OF THE INDUSTRY

The issue is that IDII experiences a higher claims frequency and greater dispute lodgment ratios than other life insurance products, with the latest APRA figures on life insurance claims and dispute statistics highlighting the problem. 

Figures over the year to 30 June, 2021 reveals that the life insurance industry lost $345.5 million from individual disability income insurance and lost $1.29 billion the year prior. 

APRA has been clear that there is value in life companies having mechanisms other than price to address the risk of unsustainable product terms. The ultimate goal is to improve the sustainability of the individual disability income insurance sector.

In an open letter to life insurers and friendly societies last month, APRA explained that if it was left unaddressed, there was a material risk that IDII cover would no longer be available or affordable, prompting it to step in to introduce a package of measures to address the sustainability of IDII. 

APRA has been quite clear that it expects industry players to demonstrably strengthen customer engagement while the suspension was in place. 

“This includes collecting information on changes to policyholders’ circumstances, including occupational and financial circumstances and dangerous pastimes, to enhance the ability of life companies to understand and manage the risks of their portfolios,” APRA said. 

The industry watchdog has reminded life companies that premiums should be set with the objective of providing policyholders with a reasonable degree of stability over the lifetime of their products. 

APRA’s letter states: “Where upfront premium discounts are applied, the appropriateness and level of these discounts should be carefully considered from a sustainability perspective. The temporary nature of such discounts should also be made clear to policyholders”.

ADAPTING TO CHANGE

There appears to be broad industry acceptance that a stalemate had been reached, and that APRA’s hand was forced to step in and implement a change of some sort. 

But it’s another change that advisers and insurers needs to adapt to, which will take some time to filter through the internal systems and procedures. It’s early days, and industry players are keeping their cards close to their chest as they reshuffle the decks to find a better market fit. 

APRA’s changes have been welcomed by the Financial Planning Association of Australia (FPA) and the Association of Financial Advisers (AFA), which had both been advocating for this change along with ASIC. 

And now, some industry players admit that there had been a reluctance to make a move to change their IDII product, despite a distinct lack of market fit. 

“APRA had to do something to ensure a more sustainable product bubbled to the surface,” Michael Pillemer, chief executive of PPS Mutual, said. 

The intervention has created an environment more conducive to new and better products being designed for the market, which had been suffering from a ‘first move reluctance’ among industry players, he said.

“There’s been an issue of who moves first to bring in change with new product design, and quite frankly, it just wasn’t being resolved,” Pillemer said. 

APRA’s suspension on contract terms gives insurers some breathing space to digest all the changes to IDII that have been made over the last couple of years, he said.  

“There has been a lot of regulatory reform take place in recent years, so this provides the industry and regulator more time to assess the impact.”

When asked about the changes implemented at PPS Mutual, he said: “We’ve had more of a ‘rebalancing’ in terms of our premium. We’ve had some increases in relation to income protection, and premium reductions in relation to our insurance and TDP products. But it will take a while to see any kind of noticeable uptick in terms of profitability.

“But I think that if you look at the losses as an industry across a whole, the losses will continue to come down quite substantially, Pillemer said. 

INSURERS EVOLVE THEIR PRODUCTS

MLC Life Insurance admits it has been evolving its products for some time in the lead up to the suspension. 

Michael Downey, general manager retail distribution partnerships, said: “Anecdotally, the licensees and advisers we have been speaking to think these products address the key needs of their clients, and/or have focused on the benefits and features that their clients find most valuable.

“We will continue to work closely with advisers who are managing existing client relationships who may prefer to leave their clients in their current product suite and / or where appropriate from an advice perspective to help them transition their clients across to the new on-sale products.  

“More broadly, the changes have had a positive and healthy effect on competition amongst insurers, and everyone should welcome that.”

He added: “We know APRA will be keeping a close eye on how the new products are performing so we will have to keep evolving our new products to ensure premiums are affordable in future. We continue to invest heavily in product innovation, so the new products are just the latest step in this”.

Pillemer hopes that all insurers look to implement more sustainable products are lacking within the sector. “Whenever we make a change to our products, we always consider whether it will be in the best interests of our members. That’s where the process starts, and we end up having very different practices to other insurers in the market”.  

For example, PPS Mutual has never been engaged in front-loaded discounts for first or second year discounts, special deals for advisers. 

“We don’t engage in any of those practices, because it just goes to sustainability, which the regulators are trying to address,” he said. 

A spokesperson from TAL admits the change has created a period of adjustment for the life insurance market and financial advisers. 

“It has also provided an opportunity to reframe the income protection product market to generate greater long-term pricing stability, certainty and value for customers,” the spokesperson said. 

Advisers are adjusting to the new products being rolled out, which have been created after TAL drew upon insights from claims, underwriting, health services, distribution and adviser education to build its product solutions. 

“This approach has enabled us to be well prepared for the changes that would flow through across our business as a result of the new product implementation,” the company said. 

THE PROBLEMS

However, regulatory change means that internal processes, systems and structures need to catch up, which is likely to impact the bottom line in the interim. 

HH Wealth director, Chris Holme, admits that the changes are having an impact on the time it takes to recommend a policy and compare it against other providers.  

“New policies don’t compare very well to policies held within industry super, so we are finding that we are retaining more policies obtained through industry super or default plans,” he admitted.

“There have also been significant cost hikes, which makes it hard to manage client expectations, especially when so-called ‘level premium policies’ have seen increases over 100%.” 

He continued: “We have been finding that insurance companies are becoming stricter on underwriting, particularly mental health. With COVID, world events, cost of living etc, mental health issues are becoming more prevalent, so we are seeing more clients with exclusions. 

“While there’s still a huge need for insurance and we see cover as a value add, it is becoming harder to recommend retail cover.

“We have made the decision to not take insurance commission due to writebacks and uncertainty around revenue. Plus, if we don’t take commission, we’re able to obtain a decent discount for clients.” 

BOLSTERING SUSTAINABILITY 

It’s a shame the industry was unwilling to self-regulate its life insurance products to bolster product sustainability without intervention, Pillemer said. 

“Really, the industry should be required to self-regulate when it comes to product re-design if they aren’t fit for market anymore,” he said. 

Ineffective life insurance policies are equally as unsustainable as the practice of offering front-loaded discounts to lure new customers - also rife in the industry. 

Research commissioned by PPS Mutual conducted by Rice Warner in 2020 revealed that premiums started increasing higher than the industry average after three years among insurers that offered front-loaded discounts, Pillemer said. 

“When the discount comes off after the first year, the client could be facing 40% in their premiums. This has also been a major issue for the industry for large premium increases over the last few years.”

But front-loaded discounts appear to remain fair game for now, at least.