At an industry gathering recently I was surprised to hear one of our competitors openly state that his organisation “could not afford to be sustainable, because sustainability means that you are not innovating and capturing market share”.
That statement incorrectly implies that you can’t afford to be innovative and your business can’t grow if it is sustainable; the corollary being that the cost of sustainability impedes growth and limits innovation.
Has the industry lost sight of what is most important to our customers — being protected at sustainably competitive premium rates and having claims paid when needed?
Sustainability does not necessarily mean expensive, unaffordable premiums; nor does it mean that your portfolio cannot contain innovation, and it definitely does not mean that your portfolio cannot grow. It is primarily when companies push the benefits and definitions envelope too far that this results in increased claims, a downturn in profitability and subsequently increased premiums.
In the extreme, the premium increases are such that they are uncompetitive for new business and the current portfolio is closed. Often customers in a closed product series will not be upgraded, will not have a contemporary product and will pay relatively high premiums for the cover. This happens throughout the industry and supports the assertion that sustainability is the forgotten innovation in the retail life insurance industry.
There are three factors in our industry that work against sustainability:
- research house ratings criteria that currently don’t capture sustainability;
- no published data that provides an indicator of sustainability; and
- ignoring or a lack of focus on what is really important to the customer.
Research house rating criteria
There is no disputing that research is an important part of the advice process.
However, with varying types of research and ratings software, we need to work together to ensure research house ratings criteria have an accurate measure of sustainability.
To attain prominence in research house rankings, often seen as an avenue to market share, I believe that many companies have progressively liberalised their ratings assessed product features and definitions to the point of business unsustainability.
When ratings rather than customer interests are the priority in policy design, the cycle can only end in tears. Ask yourself this: how many research houses reward sustainability or the financial strength of the insurance company through their ratings?
More importantly, ask yourself how many companies have taken the time to work with research houses to help make this transition? The doors to research houses are wide open and waiting for our approach.
A closer working relationship between research houses and insurance companies would help ensure that the tools used by advisers to provide their client recommendations are both accurate and meaningful.
It is easy to let the research houses bear the brunt of the blame, but it is our responsibility as an industry to work together to improve this situation for the benefit of our customers.
No published data that provides an indicator of sustainability
Unfortunately, the creation and existence of closed portfolios is not an issue addressed by research houses nor is it information that is readily volunteered by insurers.
There is also little overall market awareness or historical record of individual insurer actions, such as the withdrawal of policy features or substantial premium increases. Such events would anecdotally indicate tendencies towards unprofitability and, therefore, unsustainability. However, it is difficult for advisers to find a reputable central source of industry data that can be used to clearly identify it.
What would be most useful are individual company results reporting on these measures, though they are not currently published for reasons of commerciality. A system where all companies provided these statistics would form a ‘level playing field’ for advisers to make fair and accurate comparisons.
A need to refocus on what is really important to the customer
Sustainability is an issue that I often discuss with advisers. More often than not, I am pleasantly surprised by the depth of knowledge that advisers have on this topic and the role it plays when they make recommendations.
Sometimes, however, advisers will comment that when those companies with unsustainable business models tighten their settings, they switch clients across to a more sustainable player. This can be a high-risk strategy that prompts a number of important questions:
- Will the client be healthy enough to gain cover with the new provider?;
- Will the other insurance companies tighten their own underwriting and product definitions in the meantime?; and
- What if the client is paying a level premium?
Surely it is preferable that an assessment of sustainability be made before sale so the need for these questions doesn’t arise in the first place. And when a company has a good track record of sustainability, there is less concern about clients being potentially trapped in a closed portfolio where they may be ineligible for upgrade improvements, a prisoner to premium increases and unlikely to get the benefit of premium decreases.
As an industry, we need to focus on the customer and ensure we cover as many Australians as possible. It is also our duty to see those who take out cover staying in a sustainable product that meets their needs and pays their claims in a timely manner.
Unsustainable practices such as liberalising definitions in the chase for market share at any cost will end poorly for insurance companies that pursue this strategy, and it is the customer who ultimately pays the price.
It is important that as an industry we work together to improve the sustainability of our offerings to the benefit of our businesses, advisers and, most importantly, customers. I sincerely hope we can look back at the end of the current market cycle and remark that sustainability has proven to be the preferred fashion within the insurance industry — where I work, this approach has never gone out of style.
Sean McCormack is head of product at MLC Insurance.
