Is risk insurance becoming too risky for insurers?
Judging by the recent reactions from trend-watchers in the insurance industry, it would seem so. Profitability has declined alarmingly in some sectors, they warn, and others appear to be going the same way. Claims experiences are worsening, premiums are rising, and some insurance companies are even expected to flee the business in future, much as they did in the US earlier this decade.
A variety of factors are to blame. Over the past decade or so, strong growth and fierce competition in the personal risk insurance market spurred insurers to grab market share. Consequently, they have bolted on more generous features and definitions to their products, which industry experts have blamed for worsening claims experiences, particularly in areas like disability (see chart).
“The fact of the matter is that our products have become simply far too generous,” says Graham Morrison, general manager of operations at MLC Life’s Protection Business Unit. “More generous than necessary to meet risk needs; more generous than portfolios can sustain over time.”
That deterioration has been fuelled by growing trends on the consumer side over the past decade. Changing work patterns have resulted in more contract and part-time workers and more job changes. That, combined with increasing awareness and diagnosis of some disorders (see table) has also eroded the long-term sustainability of some risk lines.
TABLE:
New mental and nervous disorder claims as % of all new claims
(claim cost including duration)
1984-89 1987-91 1989-93 1991-95
male 9 12 13 (18) 18 (27)
female 12 13 16 (20) 20 (30)
Source: Australian Institute of Actuaries.
As Mark Gallagher, managing director of Swiss Re Life and Health, argues: “some product features have resulted in many more claims than were ever anticipated when these features were introduced.”
These trends have led Morrison to argue that it is virtually impossible for any organisation to build a profitable risk portfolio by orthodox means with market conditions as we currently know them. In fact, he says: “it is becoming increasingly difficult to maintain profitability in an existing portfolio, assuming it is currently profitable.”
He has identified a range of problem signs for insurance companies in the risk market. These include over-insurance; offering lifetime and long-term partial benefits and liberal termination provisions; inexperienced underwriters, claims personnel and product managers; and focusing on market share instead of profit.
Research houses and intermediaries also drive the process. Intermediaries are attracted to risk products with high research-house ratings, but these are often awarded to features and definitions which lead to long-term claim problems. This selling point in turn drives risk product managers to add still more of the offending features and definitions.
This has led John Darwin, managing director of CBD Insurances, to argue that product managers have no role in the future of risk insurance. “They waste time coming up with extra features like free vet cover for your dog while you’re in hospital,” he says. “It’s rubbish.”
He believes that all players in the industry, from intermediary advisers and distributors to life offices, underwriters and re-insurers, to refocus on issues that will lead to greater sustainability in the risk product market.
He says intermediaries must in future develop agreed target markets of people who actually want to buy risk products. They should explain the value of the insurance, ensure it fits the client’s needs and document the whole process.
Morrison says insurers must tighten up underwriting and claims processes as well as cut costs. They also need to accelerate the shift form upfront commission to on-going or “trailing” commissions to make risk business more sustainable.
He says companies should provide difference services to intermediaries to shift the focus away from benefits and premiums and look into offering advisers incentives to sell more “sensible” products.
Making such substantial changes, he argues, will produce better outcomes for consumers by making insurers portfolios “more profitable and robust”.
