Income protection cover is proving a bloody wound for life insurers, as changes in consumer behaviour squeezes margins in a fiercely competitive and changing landscape.
Insurers are being hit with the proverbial perfect storm, as poor economic conditions have resulted in low investment returns, combined with poor risk management and higher claim volumes from increasingly educated consumers.
A recent survey has found that while all types of life insurance products have experienced increased level of claims, income protection was a cause for real concern among company chief executives.
“Income protection has been toxic,” a life insurance company chief executive told the Financial Services Council/DST Global Solutions 2012 survey.
Once a growth product for the insurance industry, the survey found that a significant number of redundancies, particularly in the professional services sector, contributed to growing claims.
And consumers are getting smarter about insurance. The report says: “A lift in consumer awareness about life insurance products has driven an increase in claims that might not otherwise have happened because consumers
were unaware of their entitlements (especially in group insurance situations). This shift is only likely to increase as
the population becomes increasingly focused on wealth management issues.”
Editors note: Our income insurance comparision service is but one example of how consumers are increasingly being empowered.
Mental health awareness
While significant job losses are behind an increase in income protection claims, Financial Services Council spokeswoman Holly Dorber says the growing levels of recognition and treatment of mental health problems are also a major cause.
“Mental health problems are one of the largest causes of claims for income protection,” Dorber, a senior policy manager, says. “About 20 per cent (of claims) would be for mental health, while cancer diagnoses, back injuries and other physical ailments also contribute.
“There is financial stress in this current economic climate. People fear losing their jobs. Someone visiting a general practitioner could be diagnosed with depression and that would trigger an income protection claim.”
Dorber says the stigma once associated with mental health problems is waning and this may be behind more income protection claims.
“People feel more comfortable today about disclosing mental health issues to their doctor,” she says. “An increase in mental health claims is indicative of our society, particularly in white collar industries where stress is a very big factor.”
Dorber says income protection is one of the biggest costs for life insurance companies because claims can be long term. Typically, claimants receive 75 per cent of their income if they are unable to work. A life insurance company may pay a claimant’s subsidised income for a short period, or it can extend to years depending on the policy.
It appears life insurance companies may have to increase income protection premiums to offset higher costs, or be forced to offer reduced cover.
Tick box insurance
Dorber says: “Because income protection is such a significant cost, it’s most important the underwriting is correct. We need to balance accessibility (to income protection policies) with affordability for all consumers. A premium has to reflect risk.”
Life insurance products can be complex because they involve health and other personal issues. Dorber says a life insurance company may accept an internet browser’s application after “ticking all the boxes”, but the policy may not provide all the outcomes a consumer expects.
Ticking boxes isn’t as thorough as going to an adviser who can match a person’s health and history with an array of suitable life insurance products. For example, an adviser can comprehensively explain a policy and its obligations to an applicant suffering from diabetes or heart disease.
“Consumers need to understand what type of product they’re taking out,” Dorber says. “Buying a product online isn’t necessarily cheaper (than an adviser’s price) because, online, life insurers include a lot of assumptions in the prices of their products.”
MySuper reforms are closer that you think
Dorber says that from July 1, 2013, MySuper members must be offered life and total and permanent disability insurance on an opt-out basis. A trustee, depending on the fund, may offer income protection, but it isn’t default cover.
The survey reflected that new low-cost, high-volume selling channels are putting downward pressure on premium prices as customers can more easily compare products, or use their group buying power through superannuation funds.
The chief executives interviewed for the survey noted that polices were generally priced for a seven-year term.
“However, actual experience of recent years has been somewhat shorter,” the survey says. “In effect, people are lodging a claim on their policy sooner than under historical patterns. This has (adversely) impacted the sector’s return on capital.”
According to the survey, 95 per cent of Australians don’t have adequate life insurance, suggesting there is plenty of potential growth in the market.
More: Do you need income insurance?
It found that adviser distribution will remain, but the low cost, high-volume group and direct channels are likely to experience continuing strong growth.
A sea of red tape
The survey found that consolidation is already underway in the superannuation and funds management sectors, driven by the need to deliver services for lower fees. Mergers allow superannuation firms and fund managers to achieve greater economies of scale, enabling them to provide their services at lower costs.
The future financial services sector is likely to have fewer firms, but more funds under management flowing from compulsory superannuation.
It is clear that the chief executives surveyed were pessimistic about increasing levels of red tape. Particularly as they overwhelmingly believe that reducing regulation, undertaking tax reform and providing more workplace flexibility are key to improving Australia’s productivity performance.
And with a Federal election in the wind it is telling that they believe that red tape is an issue that extends beyond the financial services sector to the broader Australian economy. Clearly senior executives within the financial services sector believe that excessive regulation is stifling innovation.
So where does this leave the consumer?
Life insurers will be seeking to recalibrate their risk profiles. Consumers will increasingly be offered online "tick box" solutions and there will be a surge of amalgamations within the financial services industry as the regulatory burden comes home to roost.
What that will do to prices is open to speculation. A betting man may think much will depend upon who wins the upcoming election.
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The FSC / DST CEO Report is based on an annual survey of Australia’s leading CEOs in the $1.9 trillion wealth management industry covering funds management, superannuation, life insurance and financial advice. The survey focuses on key issues affecting their business, the financial services sector more broadly and the Australian economy. These views are collected via a member survey, a series of roundtables and one-on-one interviews. The findings are then combined and distilled to produce an annual report.
Anthony Black is a long-standing journalist, having worked in newspapers for 23 years. He was the Sunday Herald Sun’s finance editor for eight years and his reports were published in News Limited papers across Australia. Since 2008, he has been a freelance journalist and a public relations consultant. He interviews company chief executives and also writes about the Australian sharemarket and personal finance issues. Email: Anthony Black