Reframing the challenge of underinsurance

The insurance industry has a long way to go to convince consumers that their lives are worth insuring, according to Michael Paff.

There is an old statisticians’ anecdote that says “if you stick your head in the oven and feet in the freezer, on average you feel pretty good”.

While Australians have a similar approach to life insurance, the reality of the situation is that we are more at risk of getting burnt.

A new Rice Warner Actuaries report, Underinsurance in Australia, highlights that while the “underinsurance gap” is being addressed in part, the insurance industry still has a long road ahead in raising community awareness and encouraging consumers to take positive action on this issue.

While the industry continues to see a rise in the average sums insured for life insurance, they have yet to emphasise the importance of how the other types of personal insurance - total and permanent disability (TPD), trauma and income protection - need to be effectively packaged with life insurance to provide the best protection solution.

The unfortunate truth is that if consumers don’t understand or haven’t been educated on the relevance of different personal insurance options, they will be even less likely to purchase them.

Rice Warner research shows that life insurance is the most understood form of personal insurance by consumers - resulting in 83 per cent of eligible Australians having their average need met.

However, there is a sharp fall in consumer awareness and take up of other offers, demonstrated by the fact only 22 per cent of Australians have adequate TPD and 24 per cent have income protection cover.

From these figures we can ascertain that the challenge to the industry not only lies with addressing the underinsurance gap, but also considering the needs fulfilled by the ‘living insurances’ - namely TPD, trauma and income protection.

The great news is that Australians are living longer. According to the Australian Bureau of Statistics the average life expectancy for males and females born in 2007-09 will rise to 79.3 and 83.9 years, respectively.

However, Australians are increasingly living with impaired lives - is this any surprise given the increasingly stressful lives each of us live?

One area where these effects continue to emerge is through the increased prevalence of mental health issues.

On average, one in three women and one in five men will suffer an anxiety disorder in their lifetime. AMP estimates that 10 per cent of all their customers disclose some form of mental health condition at underwriting.

This also translates through to the claims experience, with 19 per cent of all income protection claims paid in 2010 due to a mental health condition.

The unfortunate outcome of this is that customers perceive they are covered once they have life insurance, even though it will not protect them in many circumstances.

Addressing customer concerns

AMP recently conducted some research into our current and past customers to better understand how they view life insurance. The following are three key insights we identified:

1. Price per unit – Customers view trauma, TPD and income protection as too expensive in comparison to life insurance. What this means is that we haven’t educated consumers on ‘the cost of risk’. The startling reality is that if all Australians had personal insurance, then for every one death claim we pay before age 65, we expect to pay one and half TPD claims, three trauma claims and thirty one income protection claims. The increased cost represents the relative risk to them.
2. Underestimating the worst case scenario – Customers largely remain ignorant of, or significantly underestimate, the worst case scenario. Many may believe that their savings and family support are appropriate risk mitigation strategies. Illustrating the impact of this is a statistic from AMP’s income protection claims with age 65 benefit periods, where the average period of disablement is five and a half years. Had these customers only taken out a two-year benefit period, they would have remained without an income for an additional three and a half years. More importantly, would their savings have supported them for this period?
3. Creating and maintaining relevance – Where a financial planner is involved, the client attaches a clear and immediate need for cover. However, this relevance can diminish over time as children leave home and the mortgage is paid off. Customers generally don’t re-establish and broaden their view of how the life insurance products can continue to protect them as their needs change, for example protecting their retirement goals or the purchase of an investment property.

Forming a solution

From an AMP perspective, I can see that there are two key ways to address this industry problem. One is to look at existing insurance customers who need to consider the benefits of living insurance, and the second is to look to address Australians who are disengaged and have no personal insurance cover.

Increasing the level of cover for living insurance benefits needs to be achieved through a comprehensive approach to education, advice and improved access. This will help customers make an informed decision, understand its relevance and easily obtain cover.

Through the annual statement, the industry also has numerous opportunities to connect with the customer. Yet how often do we send communications that only reinforce the renewal premium, as opposed to promoting online calculators to re-assess needs, or even stories that bring to life the value of insurance?

It would even help to provide a projection of the income protection monthly benefit to age 65 representing the potential advantage to the customer, easy execution of increases and additions online, or even the promotion of other cover types.

More often than not we make it a simple price based re-buy or cancel decision. The bigger challenge remains with those consumers who are non-users of life insurance products. 

If we contrast against the general insurance industry, they have done a much better job in personalising the insurance offer.

The customer has a tangible representation of what they are protecting, and the concept of selecting an excess for their car or home allows them to rationalise what risk they are willing to take on. 

Interestingly, most car policies have an excess of under $1000, while the average consumer without income protection is essentially carrying an excess of $500,000 for that risk.

As an industry, we have the responsibility to better highlight these risks and educate on the protection value life insurance offers.

The reality is that our biggest competition actually sits outside of our industry, namely the consumption of other goods and services that are a priority purchase.

As an industry that largely distributes our products through financial planners and employers, we have to some degree lost the close contact with our customers and the insight this can provide.

While we know current customers reasonably well, how well do we understand non-users of our products, or even the next generation of consumers?

There is a need to spend increased time understanding the needs of non-users so we can better develop segmented niche products designed and marketed specifically at certain customer groups such as stay at home parents. 

Such offers are going to be critical if as an industry we aspire to address the protection needs of all Australians.

Michael Paff is AMP director of wealth protection products.