What does best interests really mean for disability insurance?

The insurance industry may have misinterpreted the best interest duty applying to financial advisers with respect to making disability insurance product recommendations, according to actuarial research house, Rice Warner.

In an analysis of the current state of the disability insurance sector published his week, Rice Warner noted that advisers were currently bound by the best interest duty which “mandated that they advise customers of the product that will be in their best interests, not just good interests”.

“The market has interpreted this to mean that it must be the best product available – and only that,” the analysis said. “In the wake of the Royal Commission into Misconduct, we are seeing various legal activity around interpreting this duty and the outcomes of this may have significant follow-on impacts.”

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“We have seen high product development over the last ten years, although this has stalled in recent years due to the continuing losses.  Most of the early changes focused on improving benefits, with many ancillary benefits added,” it said. “Whilst these were thought to represent only a very small proportion of the overall DII claim payout, their second order impact on reducing termination rates was probably not well understood at the time, and the additions were under-priced.”

The Rice Warner analysis suggested that there were no overnight fixes for the challenges associated with disability insurance products and that it might take up to a decade for the industry to work its way through the situation.

“Whilst it is critical for insurers and reinsurers to cease writing unprofitable new business, it is important to realise that there are few short-term improvements likely,” it said. “For insurers with established back-books, the unprofitable in-force policies will dominate the Profit & Loss outcomes for the next ten years, until the profitable new business sufficiently grows in relative size”

It said that this left the key question of what could be done with the back-book and pointed to a 2017 Rice Warner survey into retail insurance which found that in force DII policyholders had been hit with over 30 per cent premium increases over the last ten years.

“These individuals have been increased too much, and yet the new premiums are still not enough to cover the emerging claims costs,” the analysis said. “Selective lapsing is notoriously difficult to identify but surely must be already happening, contributing to the worsening claims for closed books. These lessons must be fed through into the new pricing assumptions to ensure this does not become an on-going cycle.”

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You just have to give advice these days, be it insurance or investment, in the knowledge that you will be sued, because everything is arguable now and Best Interests is not defined in law, so get your lawyers prepped for the inevitable. That's where we are as a society.

It's incredibly naive to think that research house ratings have nothing to do with advice and sales of life insurance products. If the rest of the industry seems to have gotten their understanding of best interest duty wrong then why do we not see insurance growth lead by the smaller players with product ratings in the fourth quartile? These products are far more simple, sustainable and cheaper - at least comparative to the top quartile products which do make up the majority of life insurance sales. Affordability, sustainability, simplicity, accessibility should all be front and center in research house product ratings and considerations but they have and continue to remain non-existent in any meaningful form.

Research house ratings have always been about one thing only and that is how generous (unsustainable) a product's terms are and how that compares to alternative options. They have existed as a resource to the advice industry to highlight the most generous products, at a glance, so that I might be able to recommend the best product to my client without researching a dozen 150+ page PDS's myself.

If research houses are truly engaged in seeing the market return to sustainability, the first thing they would do is to stop continually re-balancing product and definition scores so that this years "A" rated product/definition becomes next years "B" rated product/definition. Research houses have for years fueled the industry's 'race to the bottom' and should take accountability rather than deflect and insult us all by suggesting we've all got the best interests duty wrong.

I very much would like to hear the other houses weigh in on APRA's thematic review and constructively let us all know how they intend to support a return to affordable, simple and sustainable life insurance.

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