Insurance lapses on the rise as risk advisers decline
An annual KPMG study has found there is a rising lapse rate for insurance policies arranged by financial advisers, particularly in the TPD and death cover space.
According to its annual insurance market review, the consultancy firm found lapse rates for individual advised business increased in 2022 across lump sum and individual disability income insurance (IDII).
The lapse rate for individual advised total permanent disability (TPD) increased from 14.5 per cent in Q4 2021 to 15.2 per cent, while the lapse rate for individual advised death cover rose from 12.8 per cent in Q4 2021 to 14.1 per cent.
New business rates for death and disability income insurance (DII) continued to decrease for individual advised business, which KPMG attributed to the decreasing number of independent financial advisers (IFAs), increasing premium rates for legacy individual DII benefits, and cost of living pressures.
“New business and lapse rates continue to be low in 2023 across all product groups although lapses for individual advised products are starting to increase. Lapse and new business rates will be influenced by several factors including the number of registered IFAs continuing to fall,” the report said.
The number of IFAs had fallen from 46k in June 2018 to 15.5k in December 2022. Over the same time period, new business rates of IFAs for disability insurance fell from 8.9 per cent to 2.9 per cent, and from 9.1 per cent to 4.3 per cent in TPD insurance.
Briallen Cummings, KPMG actuarial partner, said: “We can see the impact of the decline in the number of IFAs, with a drop in the amount of people buying death and disability income insurance policies through advisers. The economic pressures on consumers and rise in premium costs has contributed to lapse rates starting to increase.
“Having said that, the lapse rates in 2022 were still lower than in 2019, which shows a resilience in the industry.
“We expect to see an ongoing focus on costs and expenses and embedding business efficiencies to further improve profit levels. We also hope to see innovation in the industry as companies look beyond traditional IFA channels for growth. Overall, after some bleak recent years, the industry will be gratified to have had its second year of profits, especially given the uncertain economic backdrop and ongoing changes in the regulatory environment.”
The five firms with the largest market share based on annual premium are TAL ($5.1 billion), AIA ($3.2 billion), Zurich ($2.6 billion), MLC ($1.8 billion) and Resolution ($1.3 billion). Between them, these firms insure 73 per cent of lives and have 88 per cent of the market premium.
Earlier this year, Adviser Ratings found there are only 150 pure risk advisers in Australia, representing less than 1 per cent of the total retail advisers. Nearly 80 per cent of the adviser profession said they write little to no risk or instead refer to a specialist adviser.
A Deloitte report in August, titled Mind the Gap, found the reduction in risk advice was creating a large gap of underadvised and underinsured consumers. This covered those in the vulnerable, mass and mass affluent consumers, who needed medium complex advice.
“A significant number of advisers selling risk products have exited the Australian market post the royal commission and the recent wave of regulatory change. As such, remaining advisers are moving further up the market and focused on serving high-net-worth individuals. In addition, default cover from group insurance might only fully address the needs of low-income consumers," Deloitte said.