Advisers have an increasingly important role to play in helping the risk insurance market to refocus on long-term sustainability and offering real value to customers, writes Michael Browne.
Insurers may be unable to maintain current terms and conditions for income protection policies because of continuing significant deterioration in the claims experience. This makes it questionable whether companies can maintain the current terms and conditions, which also presents a problem for consumers and intermediaries.
Many of Australia’s insurance companies have taken the first tentative steps to fix the problems in income protection, but there is still a long way to go until the industry can reach a more sustainable position.
To increase market share, insurance companies have cut prices, reduced underwriting standards and designed new products which were far too generous in some areas. As a result, some are experiencing claims blow-outs and profitability declines resulting from both the competitive spiral and an increase in the length of claims.
Statistics from the Institute of Actuaries of Australia show that claims costs increased 91 per cent between 1989 and 1996 for the first three years of benefit – a compound annual deterioration of about 10 per cent.
While claim costs have risen, premium costs have fallen during this time, and herein lies a significant problem.
If Australia mirrors the United States, the wash-up could be dramatic. In 1995, the top nine companies in the US lost about $500 million and about 50 per cent of the market withdrew altogether.
John Butterworth of Life Research says companies have been competing strongly on the number of benefits they can offer for as little cost as possible for the past five years. He believes there has been a “dangerous trend” towards companies changing products to look good on research systems, allowing research houses to drive the market.
He concluded: “I am concerned there may well have been decisions made over the last few years on product design which will have ramifications in the future on sustainability of the product.”
However, Butterworth believes this phase has almost finished and companies are now waiting for each other to make the first move on introducing change over the next 12 months.
There is no doubt that the premium increases of the past year are only the first steps in the process. This could be followed by:
Cutting back on liberal product features and tightening definitions;
Lowering benefit amounts, enforcing longer waiting and shorter benefit periods; and
Introducing stricter underwriting with more stringent medical tests.
Many companies have already made significant inroads. Some have increased premiums by more than 30 per cent, lowered maximum limits for monthly benefits and are toughened-up on previous back and stress disorders at underwriting. On the other hand, we at MLC have resisted following the market on some product changes and are not considering rate increases.
The financial pain is also being felt by reinsurers. Neil Sprackling of Swiss Re Life & Health, Australia’s biggest reinsurance provider, says the three main problems are poor product design, underwriting standards not keeping pace with product changes, and poor claims management. He says the overriding imperative for insurance companies will be a new focus on value – identifying the benefits people really need and what they can afford.
The solution to the industry’s problems is long-term sustainability, not short-term marketability.
Particularly considering that income-protection benefit periods occur over many years and claims run into millions of dollars.
Offering sustainable products is also much better for advisers. By offering quality advice on such products, advisers will forge stronger relationships with their customers by reviewing their needs and developing the most appropriate solution.
And they’ll sleep easier at night.
<I>Michael Browne is general manager of marketing, MLC Protection
