Advisers wedged by unsustainable insurance costs

Amid decades-high inflation and a cost-of-living crisis, it surprises no one that insurance costs are ballooning.

Yet substantial premium hikes predate our current economic woes and seem certain to persist – or potentially worsen – even as inflation subsides.

Such increases are directly contributing to a fall in the amount of insurance coverage. Insurers respond with further increases in an attempt to offset their dwindling customer base. The spiral continues.

However, few are considering the long-term implications, and what it means for those of us tasked with devising risk mitigation strategies for clients who decreasingly can afford these costs or see value in them.

The problem

In 2023, double-digit rises in premiums have become the norm. Everything from life to home and contents policies are increasing by as much as 20 per cent, or more.

With APRA’s insistence that insurers collectively were undercapitalised, premiums increased even more – in life insurance, by as much as 35 per cent.

If such an inflationary price spiral occurred across the wider economy, official interest rates would resemble those of the early 1990s – or higher.

Circumstance – back-to-back natural disasters, a global pandemic – aren’t solely to blame. Structural issues within the insurance industry are also at play.

For years, health insurance has attracted significant criticism, as frustrated policyholders debate its value when faced with rising premiums and falling rebates/inclusions. Many abandoned coverage altogether.

The same has been observed across other insurances.

Life insurance sales plummeted 8.5 per cent in the year to September 2022 alone. Despite this, overall inflows surged 3.4 per cent.

At the same time, insurers have gotten stricter on managing their risk: Exclusion lists grow ever longer. Loadings for what were once considered mild ailments seem to be occurring more frequently. As are application rejections.

Consumer experience

Unsurprisingly, clients are pushing back. “Why should I keep paying more while getting less in return?”

Often, the reaction is knee-jerk: scrap the cover altogether and redirect those funds. Little thought goes into whether this is the right move, nor how it will impact them in the longer term.

The effects generally aren’t realised until years down the track. When injury, illness or worse strikes, clients go to make a claim only to find they are uninsured or underinsured with age-related policies with reducing cover as you get older, and level premiums that have behaved like stepped premiums contra to the purpose of recommending level cover.

Those who diligently retain their insurances are typically the ones most likely to make a claim, placing yet more pressure on insurers to recoup costs and maintain capital buffers.

Then there is the added complexity for women in terms of ongoing contributions needed to retain insurances during periods out of the workforce – maternity leave, childrearing, and caring for elderly parents/in-laws (naturally this applies to any gender, but statistically, women assume the bulk of unpaid carer responsibilities).

Advisers caught in the middle

For advisers too, insurance is becoming less attractive.

Factor in the clawback extension of recent years, the increasing difficulty for clients to retain adequate coverage, and the ever-changing risk environment, not to mention persisting issues around fee-for-service on insurance alone, and it is no wonder.

My concern is: where is the insurance industry going to head? How does it sustain its business model? Will it simply be more of the same?

It begs the question for advisers: At what point do we stop defending the indefensible? We have both a desire and an enforceable responsibility to ensure our clients’ interests are protected. If insurance fails to do this, can we really recommend it as part of wealth protection strategies?

Where to from here?

Double-digit increases will undoubtedly push insurance further out of reach of many – especially those who can least afford NOT to have it.

The effects can be devastating. Look at the many recent instances of uninsured flood victims – everyday Australians who dropped unaffordable premiums only to lose everything when the heavens opened.

For business insurances, these increases inevitably get passed onto their own customers – further stoking inflation and squeezing the margins of particularly small businesses.

Meanwhile, insurance funding constraints come at a time when insurers – and the wider economy – are also grappling with climate change, ongoing COVID-19 impacts, and an aging population.

The “same-old, same-old” approach can’t continue. A major rethink of the insurance model is needed to ensure it remains fit for purpose into the future. As advisers, we have an important role to play in this evolving conversation.

Helen Baker, licensed Australian financial adviser and author