What’s Wrong With Life Insurance?

Critical issues impacting the life insurance sector continue to abound, both from within and outside the industry. Why is it so? Synchron Director, Don Trapnell, examines the industry’s challenges and puts forward a potential solution – and it’s all about level premiums…

Five main issues continue to plague the life insurance industry, impacting the life offices themselves, the corporate regulator, advisers, consumer advocates and also from a big picture perspective. I believe these issues are inter-related, stem from one root cause and can be largely solved with one remedy. But first, let’s look at these issues one by one:

1. Life insurance companies

Life insurance companies continue to raise concerns about sustainability. They have been complaining for some time about advisers with high lapse rates. It’s partly for this reason that the Life Insurance Framework reforms came into being. Just for the record, I do not believe there is a culture of churn amongst advisers in Australia.

2. Corporate regulator

Like life insurance companies, the Australian Securities and Investments Commission appears to believe that there is a culture of churn amongst advisers. While I agree that there is a high lapse rate, I believe affordability is the issue; not advisers.

[Editor’s Note: Since this article was submitted for publication, ASIC has made a statement that qualifies its approach towards the incidence of churning. See: Lapse Data Suggests Churn Numbers May Be Low].

3. Advisers

Advisers are concerned about the quality of the cover available for their clients, whether it is sustainable and whether it can be called on when a consumer needs it most. Advisers are also concerned about the impost of legislation and regulation on the viability of their businesses.

4. Consumer advocates

One of the complaints put forward by consumer groups is that life insurance becomes increasingly expensive as time moves on, ultimately becoming prohibitive for people when they need it most – that is, as they get older and become more likely to claim on it. I happen to agree with them on that.

Australia has a ridiculous love affair with stepped premium (yearly renewable) products

5. The big picture

At a big picture level, the criticism of the industry is that Australia remains chronically under-insured. This is due at least in part to the affordability issue.

So, what’s the answer?

As I have said on numerous occasions, I believe Australia has a ridiculous love affair with stepped premium (yearly renewable) products. We need to move on to level premium products, that is life insurance products with fixed premium rates (and advisers can’t churn a level premium product).

Under level premiums, consumers know upfront how much their policies will cost on an ongoing basis and whether or not they can afford it, so the affordability issue will go away. Advisers will also have clarity around income and therefore the viability of their businesses, while the life insurance industry will be more sustainable and the number of insured Australians is therefore likely to rise.

The problem with the answer

Although I firmly believe level premium products are the way of the future, here’s the rub:

Because Australia has built up a culture of re-rating and renewing premiums each year, the cost of buying into life insurance via stepped premiums is actually quite low on a global scale. Moving from a stepped premium product to a level premium product makes the buy-in quite high.

When you extrapolate level premiums over a life time, it is a lot more economically advantageous to hold a policy that has a level premium than to have one where the premium goes up every year. There is a cross-over point at about the six-year mark, from which point the amount the policy owner saves on an ongoing basis more than compensates for the higher cost at the start. But this doesn’t really help with affordability at the beginning. The cost of buying into a level premium policy is still very high. Depending on the age of the client at entry, the initial cost of a level premium policy can be up to three times that of a stepped premium.

This outcome means consumers are even less likely to take out life insurance, making the industry even less sustainable.

Solution 1

Following several overseas fact-finding missions we started to look at better ways of buying in. The concept we developed, and discussed with life companies, was a product where premiums might be level for say five, ten or 15 years. At the end of that period, the consumer can then decide whether to move to stepped premiums or take another five, ten or 15-year level premium product. That lowers the cost of buying in.

This concept has been embraced by AIA Australia and is now available in the market. I understand other life companies are following this lead.

Synchron has no financial interest in the success or otherwise of this AIA Australia product or any similar products. We just happen to believe in it! The product on offer is a standard life insurance contract, which offers a new way of paying.

Solution 2

AIA Australia also offers another payment option where, by paying a slightly higher stepped premium, once the policy arrives at the crossover point where it’s cheaper to have level premiums, the client automatically moves over to paying level premiums from that point. So, stepped premiums build up slowly to the level premium cost, and then don’t go any higher. That’s another good way of transitioning a consumer into a level premium environment, so that the product will be there when it’s needed most.

Let’s get on with the job!

To solve the challenges faced by the life insurance industry, we need to continually think outside the square. We need to look further afield, to other geographic locations and perhaps even in other industries. We need a Yes, we can! attitude and, for the good of consumers, life insurers, advisers and Australia as a whole, we need to stop whinging and start moving with the times.

  • Jeremy Wright

    Don, you are always a breath of fresh air, in what is today, a rather noxious environment.

    You are able to clearly see the important issues that are the true areas of concern, not the fabrications, pushed along by disgraceful vested interest groups like the FSC, who have helped perpetrate false accusations of churn and led the Government and ASIC, on a merry go round, with their inaccurate data and “recommendations” that has always been about making improvements to the Big Life Company and Banks bottom line, dressed up as consumer protection.

    You have hit it on the head, in that the number one reason for clients lapsing policies, are the premium increases, that in conjunction with age rises, usually hits 10% or more and clients will simply not keep putting up with it.

    Our Business devotes a huge amount of time trying to reinforce the importance of the covers and it is no coincidence that most of the enquiries from clients who want to reduce or cancel their policies, is at renewal time, when the Life
    Company sends their Demand / renewal notice that highlights the cost increase to the client and under sells why they should keep the cover.

    The Life Companies do not understand that the adviser is responsible for a large percentage of Business staying on the books, through their ability to reinforce why the clients took the cover in the first place.

    Without adviser input, lapse rates will rise, as employee retention staff of the Life Company have very little sway and NIL relationship with clients, who have little loyalty to the Life Company who is trying to force them to pay more and more premium.

    The Life Industry is starting to listen to you and we all thank you for your tireless efforts to improve the entire Industry and for all Australians to be given a fair go.

    It would even make sense if the Life Companies, adjusted their exposure, by maybe keeping the premium the same and offering a bit lower cover initially, with the promise to not increase premiums.

    That would be a very easy argument to sell to clients.

    An unspoken but true analogy of many Aussies, is that they want certainty and for things to be easy, without having to spend too much time thinking about alternatives.

    What this means, is that upon a client taking up a policy, Apathy will usually keep the policy going, unless there is a trigger point, like a 10 to 15% premium rise, which like for all of us, is enough for clients to react, though unfortunately for most Australians, their immediate response is usually, to cancel the policy and take out that easy, over the phone, you “beaut’’ policy that the phone sales person forgot to tell them, covers very little, which of course is not a problem until the client needs to claim, or becomes uninsurable.

    Let us hope more Life Companies start listening and realising that for every action, there is a reaction.

    Thanks Don for all you are doing and will continue to do.

  • Alleycat

    There are a number of issues here in Don’s assessment which are fundamentally wrong !
    First off, level premiums are not guaranteed for the life of the insured or the life of the policy. That’s a fallacy !
    If you are not convinced, just ask the AXA clients who had level premium Income Protection policies that they thought would never increase, that the AMP decided earlier in the year to increase by 30.0% !

    Secondly when indexation of cover is included in the original level premium contract, at what age does the increase become assessed ?
    It’s a rhetorical question.
    It becomes the new level rate at the age the indexation of cover is applied and the client is usually blissfully unaware that each year their level premiums are increasing.

    Why is there a love affair with stepped rates ?
    For many years underwriting used to be an art form where underwriters had more than 2 years experience that were senior underwriters, and actuaries knew the business they were in.
    Between the ages of 16 -25 term life rates used to increase on a year by year basis because the “bullet proof” mentality of youth took risks. Between the ages of 26-35 the premiums were much lower than they were at the age of 25. The reason being as I glibly like to put it, those bullet proof minded teenagers had survived and had become more responsible.
    You will not see anything like that in any quote system put out by the life companies today !
    One CEO who happened to be a marketing actuary once said at an AGM, “we made a pretty good profit this year because a bunch of people decided not to die !”

    But lets get to the commercial reality and the basic fundamental of “know your client”.

    99.0% of average clients who take out life insurance have a $600K mortgage if they are lucky, have 2.5 children to feed and educate, and assuming the wife works pay $300 a week into childcare and have an after tax income of around $120,000.

    Now if they need to protect their most important assets, being the family, then it’s incomprehensible that they can afford to pay for level premiums and Don the cross over point is not 5-6 years it’s 8 years !.
    That means paying up to 80.0% more for level cover (with no guarantees in reality) when they can ill afford to do so.
    The reality is that as children get older, go to university or get a job of their own, the wife working full time, you would expect that the mortgage may be a lot less and the asset they borrowed to purchase has probably doubled in value over a 10 year period, then the need for a large amount of life insurance is diminished.

    The problem is two fold.
    There is a serious lack of competition in the life industry.
    Once there were 57 life companies offering 378 products including Whole of Life, but now there a 9 if you consider the acquisition of Comminsure by AIA.

    The second problem other than the lack of competition is that life companies don’t have anything special in their product offering that distinguishes one from another. It’s pretty much more of the same.

    With great respect to Mr Trapnell, the AIA new term offering is not what it’s cracked up to be.

    • I agree with Alleycat’s points. AMP has increased AXA’s level policies on at least one occasion by 30+% each year. It is very hard for an insurance company to have policies that will lose them large amounts of money on their books and level premium policies that are 10 years or older fit this description and new management may wish to do something about it and nothing stops them except reputation.

      The crossover point may be at 8 years but add in the extra premiums paid over those 8 years and add a factor for the time value of money and you start looking at a crossover point of 12-14 years or even more.

      The third point is that the level policies will be in the same portfolio as the stepped policies of sick clients, who can’t change insurers anymore, further increasing the temptation to increase premiums. Level policies are a great way to capture a client but they cause multiple dilemmas later on.

      As one 40 year old client said to me: If I claim at age 50, I will have paid far too much for my insurance!

      Level policies can be a good idea – the 28 year old physiotherapist with stable lifetime earnings could be one example but for most people who have young families I am not so sure.

      • Old Risky

        Christoph The AMP AXA example you cite is of course appalling and indicative of the rubbish perpetrated by some insurers. I was practicing in1996 when NML demutualised and became AXA in 1999. I distinctly remember it was hard to compete with the NML/ AXA IP LEVEL premiums, and now we know why – they were never sustainable. Which raises the question – did the AXA actuaries lose the fight with AXA marketing as to the pricing of the “offer ” and the marketing need to be “competitive”?. Think about the egos in charge of the zoo at that time!.
        When AXA departed in 2008-2009, the egos on the AMP Board saw an opportunity to make themselves king of the heap in premium terms. That’s not my criticism, the Fin Review said exactly that in no uncertain terms. It is now blatantly obvious that AMP failed to do due diligence on the former NML/AXA IP policies it purchased from the departing AXA at such a “bargain ” price in 2009. And do not forget that by 2009 APRA was in place, supposedly regulating this neglect !
        AMP now has an equity owner and is preparing to revert to a tied office. That same AXA book has ( supposedly ) been made profitable, and the book now sold to a re-insurer, while the punters ( and some advisers ) still think they are insured with AMP, or at least those punters who stayed after that last purge.
        A 30% increase in level premiums has attacked my faith in recommending level premium for long term savings. Yet ASIC will probably run another “churning ” fiasco on advisers who replace, in their clients best interest, those now hugely expensive AXA policies

  • Don Trapnell

    Hi Alleycat.

    I don’t ask people to agree or disagree with me, but I do ask that they debate the issues and for that I thank you. You have placed some well thought out and compelling comments that deserve to be read and considered.

    Interestingly that while in the UK on a fact finding mission following John Trowbridge’s report release, Synchron’s Chair Michael Harrison and I met with a number of very senior Life Office executives and senior staff from the UK Financial Services Regulator (equivalent of ASIC). None could understand Australia’s love affair with yearly stepped premiums, and indeed one Life Office executive made the observation Australia is the only country on earth where life insurance is designed not to be in force at the time a claim is most likely to happen.

    Of course, like you, I remember the AXA premium increases against the old National Mutual level premium income protection policies, but those consumers who purchased the policies way back, despite the horrendous increases you mentioned (I don’t dispute your facts at all here) are still substantially better off than like consumers who purchased yearly stepped premiums. Sadly there are not many true level premiums on the market, but a company that re-rates its level premium also re-rates its stepped so the long term advantages held by level is maintained.

    You are correct In that in most cases indexation increases are rated at the rate for age of the increase, but the initial contract is always at the rate for age at inception and indexation increases will also remain at the rate for age at the date of indexation, so long term the level premium advantage remains. As it happens, with the AIA product indexation increases are rated at the rate for age at inception, so the longer the product is in force the far greater the advantage. With say a 15 year term, an indexation increase at the 14 year mark would be rated at 14 years younger than the current age of the insured. That is a massive discount.

    As far as crossover point is concerned, well that clearly depends of the insurer and the age/smoking demographic of the insured. Crossover points can be as short as 6 years or as long as you say at 8 years.

    I too fondly remember when there were 50+ life insurance companies and competition was at its highest. Yes, I would like to return to the days of more choice and I was delighted when MetLife made its return to the Australian market. Unfortunately however the Australian market and population is simply too small to support a large number of life insurance companies and we have to make do with what we got. When I visited Nippon Life Head Office in Tokyo in May this year, I was amazed to learn that they have 55,000 life insurance agents, whereas Australia’s largest licensee AMP has 1,526 Reps and Synchron, Australia’s largest licensee not owned by an institution has 445 Reps.

    Level premiums are not the panacea of all that is ill with our industry, but they do go a long way towards addressing the fundamental issues that continue to plague us, but do not plague any other country.

  • Alleycat

    @ Christoph,
    Why do you think signing up a 28 year old Physiotherapist on level premiums is such a good idea. Have you assumed that they will never earn any more later on.
    Did you earn more at 40, or 50, than you did at 28 ?
    If you did then it’s most likely you over 10 years earned 50.0% more at 40 than you did at 28.
    Insurance is like buying a car or a fridge, they are bought for a specific purpose and are not designed to last forever !

    How does that look after your client on level premiums and serve their best interests ?
    You would not have that client for long if you left them under- insured even 5 years down the track in the event of a claim.

  • SS

    Interesting points made below- may I add my views.
    I am a big believer in level premiums and also that more innovative premium payment structures would be a significant improvement. To Alleycat’s point I would say, if we could only get Australians to get enthusiastic about buying lump sum insurance covers EARLY (ideally at age 28-30) on level premiums, even if to some extent it is in advance ie an “anticipated need”, the costs would not only be greatly reduced over the life of the policy, but clients would more likely to get underwritten clean skin.
    By the time they reach 40, really need the cover and are up to their eyeballs in debt and responsibility, even annual level premiums on a new policy will have doubled. Not entirely possible perhaps with IP as salary increases with age, but when you can get 35 years of lump sum cover at age 30 for a total cost less than 25 years cover at age 40, or 20 years at age 45, then why not buy early and be covered for your entire working life???
    My worry would be though, with so many people now lapsing from stepped premium policies in their 50’s (typically a few years younger than a claimable event), if the industry does trend towards level premiums and policies tend to remain in place for an entire working life, will the ultimate annual level premium cost of cover necessarily have to go up. (Room for innovative premium payment options here…)