The insurance industry needs to adapt to the changing expectations of consumers, writes Jim Minto.
One of the issues, or risks, the insurance industry will need to focus on increasingly in the future is the changing expectations of consumers.
They will want greater confidence in insurers, and greater openness and accountability will be expected.
The immediate response to this is that life, general and health insurers already work hard to deliver this. A good example in Australia would be the instant and proactive responses of general and life insurers to the Victorian bushfire tragedy.
They actively sought out their customers and tried to communicate prior to claims being notified in many cases.
Despite this positive action by insurers, political figures from both sides jumped immediately into the classic stereotypical response of publicly asking that insurers meet their obligations to claimants.
This disappointing situation was not based on any evidence of insurer failure, but instead played to a perception held by some in the community that insurers tend to avoid or delay obligations to customers, putting their shareholders first.
My perception is that consumer confidence in insurance in Australia is neutral, with the industry attempting to be proactive in a world of greater consumer expectation.
Global experience
I recently attended an international insurance conference, and although we know much about insurer issues in other markets, it is clear that the consumer view of insurers is much more adverse in these larger markets.
A large part of this in the life insurance markets of Europe, Japan and USA is related to the impacts of the global financial crisis (GFC) on client policies and investments.
Additionally, the security of some organisations has been very much at risk as investment effects have destabilised their capital bases.
Customers have lost money in circumstances they did not understand or foresee fully.
Governments and taxpayers have bailed out some high-profile companies, with negative PR effects for the wider global insurance industry.
Insurers at the international conference saw low consumer confidence in the life and general industry as one of the largest challenges they face.
While we don’t have a significant consumer confidence issue in Australia, the risk is very close to the surface.
Australian relevance
We need to monitor the drivers of consumer confidence before change is forced on us.
In Australia when superannuation and investment returns are poor, there is an immediate loss of confidence in advisers and the providers of these investment products.
The takeout is that in a downturn consumers in Australia will react exactly the same way others have overseas.
Life insurers in Australia do not have the same life investment and guaranteed products in significant numbers but there are risks nevertheless.
The industry needs to learn from what has happened in other markets and better position itself in our markets to ensure we don’t repeat the errors seen elsewhere.
Product design issues
We all need to be aware of these risks and make sure product managers and designers don’t create levels of risk and future customer disappointment that damage our industry.
The critical test for me is what is the reasonable expectation of a non-expert consumer from a product solution?
Consumer protection agencies, courts and governments will act to support that reasonable expectation. It is critical we do not unwittingly mislead consumers.
Product designers are one of the greatest risk creators. In recent years consumer confidence in critical illness insurance policies sold in the UK reached such a low point that the industry was forced to standardise definitions so consumers could have confidence.
This followed a period of high claims decline rates as life insurers relied on varied and complex policy wordings to manage claims.
This left consumers disappointed and confused. Product designers thought they were being clever, but there was a loss of confidence in the life industry.
Regulators and capital levels in companies
There is now a hot debate internationally about capital levels, and we have seen the Australian and Canadian governments recently argue against imposts on banks.
European and USA governments have pushed hard for banks to in effect pay for the bailouts they have imposed on taxpayers.
Australia and Canada, which arguably had better ongoing bank regulation, fought against the proposal. Without doubt, there would have been a cost passed onto consumers flowing from this.
A big debate is happening overseas about the capital levels required for insurance companies, and the same debate has been ignited in Australia following a recent Australian Prudential Regulation Authority (APRA) capital discussion paper.
There was a lot of strongly felt dialogue at the international conference, with insurers arguing against higher capital levels saying they were not needed and that consumers would have to pay the cost of those requirements.
The same issue arises in Australia, where insurers and the regulatory model traversed the GFC pretty well.
Any capital requirements increases will flow through directly to consumers and potentially dilute shareholder returns where the costs can’t be passed on.
APRA is making it clear at this point that it does not see a need to increase overall capital levels in the industry, but there may be different impacts between companies.
Over the next few years, issues like changed capital standards for life insurers in particular will no doubt affect much decision-making in both banks and non banks.
Jim Minto is the chief executive of Tower Australia Limited.
