The life insurance industry has made irrational decisions borne out of the competitive nature of insurers and shorter income protection benefit periods are needed to reduce premium increases and uncertainty, according to a panel.
Speaking on a panel at the Association of Financial Advisers (AFA), PFS Consulting principal, Ian Laughlin said the changes being made to premiums “had” to work if the industry wanted to survive and thrive.
“As we all know, this industry has a competitive streak, which can drive it to do rather, I'd say irrational things, and one of the things it has to be alert to is the possibility that will happen again,” he said.
“Everybody will behave sensibly for a little while but then we'll start to see some changes that are not rational.
“I think a combination of APRA [the Australian Prudential Regulation Authority] and ASIC [Australian Securities and Investments Commission], and maybe the Actuaries Institute will be needed to wave the flag when that starts to happen to keep us everybody on the straight and arrow.”
Integrity Life Australia managing director and chief executive, Sean McCormack said no one was winning in the life insurance ecosystem and that for level premiums it was the longer benefit periods that caused greater uncertainty.
“The greater the benefit period, the greater the uncertainty with respect to occupational societal changes, therefore, the greater the risk of future premium rate increases. It's just really hard to predict how those changes will impact experience over a 20, 30 or 40 year policy duration,” he said.
“For level premiums for me, I think it will depend in part on the outcome of this five-year term review, which we know is that the third phase of these changes which will come in in a year's time. I think it's going to be really challenging for an adviser to recommend a level premium product, when the policy may be only held for that five-year period.
“Having said that, there's still a huge need to protect clients long-term needs with level premiums. But I think what we're probably going to see is the evolution of more fixed term premiums if this five-year term comes in, and as we work towards the implementation of the five-year term, having greater premium rate certainty for that period will become more important.”
He noted the industry needed to consider shorter-term benefit periods such as two or five years for income protection and couple it with total and permanent disability (TPD) insurance given to reduce the benefit uncertainty.
“That will give the client protection against future premium rate increases whilst also giving them protection for what's most important here, which is that when sickness, illness, accidents and injuries strike that their insurance product is there to help them through that significantly life changing event,” McCormack said.
“That’s complex but for me the really important point here is this has to work for you for it to work. All parties in the ecosystem need to operate a little bit differently.”
McCormack agreed with Laughlin and said the industry needed to make sure it did not fall into the same trap of the past with insurers taking different risk appetites and turning it irrational practices in the quest for new business market share.
“At the same time, healthy competition is a good thing so we've got to protect that as well. I think that we also need to be appreciative that the way we've done things in the past won't work in the future,” he said.