Why front-loading discounts on life/risk premiums has failed

The perceived benefits of front-loaded discounts on life/risk premiums may well be illusory and increase lapse rates, according to new research released this week.

The research, conducted by actuarial research house, Rice Waner for PPS Mutual, appears to have confirmed what many life/risk advisers already know – that the front-loaded discounts increase affordability for the first year but simply lead to more cost over the medium to long-term.

It found that front-loaded discount policies with stepped premiums have on average lower premiums in the first policy year, but higher premiums from the third policy year onwards.

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Commenting on the findings, PPS Mutual chief executive, Michael Pillemer said the report confirmed his belief that front-loaded discounts represented poor consumer practices that should be fixed by the retail life risk insurance sector in Australia.

“Increasingly, in a bid to secure market share, the retail insurance industry has adopted initial short term discounts for new business premiums. The research demonstrates how over 5–20 years, policies with front-loaded discounts have significantly higher premium increases relative to the first policy year,” he said.

“By way of example, customers of one insurer who have been offering a 25% upfront discount could face increases of 50% plus in premiums in the second year once you also take into account age-based increases and indexation. The effect that these sharp premium increases have psychologically on a client, and the increased likelihood the client will lapse as a result, should not be underestimated,” Pillemer said.

He claimed that front-loaded discounts were likely to increase lapses for three reasons. Firstly, they encourage customers to switch to a policy with a lower first year premium in the first instance. Secondly, they mostly have higher premiums on average from the third policy year onwards. Lastly, they will also differ even more markedly to new business quotes where the first year discount still applies.

Pillemer said the Rice Warner report also demonstrated the difference between non-true level premiums and true-level premiums in medium and long-term cost. Typically, the premiums are very similar for the first five policy years, but by the eleventh policy year the most affordable non-true level premium is higher than the least affordable true level premium.

“In 2019, life insurers lost $1.3 billion, lapse rates for traditional life insurers remained stubbornly high at about 17% and policyholders have had to endure significant and repeated increases in premiums (in some cases by more than 35% year on year),” he said.

Pillemer claimed that while many of the issues the industry is grappling with were a function of the macro socio-economic environment, an historic and aggressive chase for market share by various insurers has created highly undesirable outcomes for consumers.

“We must also not allow the inevitable criticism for poor risk management and product design to be sheeted back to advisers.  All too often it is financial advisers that bear the brunt of these poor insurer practices,” he said.

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Whilst this research is commendable, it didn't require actuarial analysis.

Insurers have been providing discounts at the front end to new applicants at the same time as they jack up premiums for loyal existing policyholders. This conduct is disgraceful and serves to illustrate the short term focus of the executive teams within the insurance companies.

The detrimental effect in the longer term is apparent for all to see with the exception of those conducting the Royal Commission and the Regulators.

Jacking up existing premiums (and in particular policies with level premiums) undermines consumer trust in advice professionals and personal insurance, leading to chronic underinsurance.

Coupled with the two year responsibility period for clawbacks and you have a systemic conflict of interest for advice professionals when their clients' ask them to review their insurances because their premiums are now too high.

Well done to all concerned... (sarcasm intended)

I objected to one particular company when the first 25% rip off was announced and demanded projections
I also complained that this piece of crap marketing put the adviser in an invidious position.- either recommend a more expensive, like for like policy and loose the business if the client has done research. OR recommend the discounted policy and wear the heat ( " he never told me" ) from the client on second year premium. But there was more-the adviser COULD NOT remove the 25% discount from the quote.

So lets imagine this-in 10 years, if you have survived this maddening business, how do you explain your actions to a "lookback"auditor commissioned by ASIC to look at cases on a list provided by that very same " ädviser friendly"insurer. Your file notes and SOA had better be watertight.Did you warn the client he would be stuck if his health changed?

And I thought the days of an insurer acting in an unconscionable matter towards advisers had stopped. BS !

I have been arguing for years with Life Insurance companies that is it simply incorrect and wrong to name premiums "Level" and show comparisons against Stepped premiums when there is every likelihood the Level premiums will be increased possibly several times over the life of a policy....it is misleading and it is wrong, despite placing a small disclaimer in the document noting they could increase if done for all level policy holders at one time etc etc.
This is simply wrong.
From an advisers perspective , recommending a level premium basis is fraught with danger unless the adviser makes specific and very clear commentary that the long term cost advantage of the Level option may never be realised in the event the insurer elects to increase the rates.The adviser would also need to state that it may be more beneficial to have elected a Stepped premium basis if this were to occur.
Previously, Level premium projections use to cross over the Stepped option at about 5 years with a break even cost point of approx 7-8 years.
In the last 5-10 years, it now can take up to 14-15 years to gain a cost advantage using Level premiums and that is if the insurer does not elect to increase the Level premiums !!
If the insurer does increase the Level premiums by 10%, 15% or 20%, the policyholder will never realise the long term advantage of the Level premium option and would have have been better off electing to take Stepped premiums perhaps across 2 or 3 insurers to offset the potential rate increase risk.
Level premiums should not be allowed to be called Level unless the insurer can guarantee that other than CPI or deliberate and requested increases in the insured benefits, the premium rate is struck at the persons age at commencement.
If the insurers and re-insurers cannot and will not guarantee this to ensure security for the policyholder and the adviser then Level premium options should be banned immediately as in the current form they are deceptive and misleading. and present an advice risk.

Fine in theory Max, but the big driver of increases to both level and stepped premiums has been an unanticipated explosion in mental health claims. If in force level premiums weren't increased to cope with this huge increase in claims, then the burden would fall disproportionately on in force stepped premiums and new clients.

The problems of the personal insurance industry cannot be fixed until mental health is excluded from all policies and responsibility for it is given to government. Mental health issues are too easy to fake and too easily manipulated by pressure groups for private companies to manage it effectively.

Firstly, Level premiums should never be able to be increased by the insurer other than for automatic CPI or client requested increases in cover.
This is an actuarial calculation based on age at commencement date, and life expectancy factors.
If the insurers will not guarantee the Level premium rate will not be increased then they must cease in using the term Level premium, because they are not "Level" in the eyes of the client who cannot recall the disclaimer 7 years later.
In addition, I cannot see how mental illness could possibly be excluded from all policies other than prior medical history as it would be a public relations disaster and the industry would be accused of being discriminatory or selective.

The discounting is nothing more than the waiving of a carrot to the client by the insurer to obtain new business.
The long game for the insurer is not a consideration when pushing for volume.
For years, insurers have always carried on about the length of time it takes to make any profit on a Life Insurance policy stating it can be up to 4-5 years before they may see any gain....blah blah blah.
So, they " buy" the business with an upfront discount they know will end soon and the client will not be able to accommodate the premium increase.
The business may then be cancelled after only a year or 2 through no fault of the adviser and not recommended by the adviser.
So, the pricing models,the insurer's behaviour and the lack of quality projections for long term sustainability has resulted in the current climate and claw backs for advisers.
Why buy business with a 15-25% upfront discount ??
Why not factor in that discount over the first 5 years of the policy existence so there is some long term certainty.?
The utter mess that currently exists in the Life Insurance advice space has almost exclusively been caused by the overwhelming compliance requirements, the reduced commission rates and the cost of providing advice and the Life Insurance companies corporate models destroying long term pricing security.

The insurers whinge and whine about losing money, then on the other hand discount new business. A sustainable business prices its products according to risk. Its been a race to the bottom for a while now. Why they dont just price new business at a level that is sustainable beats me. Clients are happy to pay more for certianty, Id much rather recommend policies that may not be the cheapest but offer pricing sustainability. Its not hard to understand why they are in this mess, the managers are a bunch of greedy people only caring about thier bonuses that are of course based on new business inflows.

The point of discounting new business is more sinister. Since the LIF was passed through very corrupt means the FSC members have seen new business plummet because advisers cant afford to write new business on half the commission and a two year clawback. So the insurers have been increasing existing customers premiums at record levels (they say because of claims experience). But for the very same products they can afford to discount new business rates. The FSC members are simply trying to encourage a churn issue that was not there in the first place. They thought the LIF would increase their profits and advisers would just suck it up but its imploded on them. Nobody has benefited from the LIF, least of all the poor customers.

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