Improving DI insurance through wellness

I see encouraging signs that the life insurance industry has begun taking meaningful steps to embrace consumer ‘wellness’ as a realistic goal, against some significant underlying drags in the system. These include recent industry financial results, which present a significant challenge to our industry to accelerate its pace of change.

‘Wellness’ can mean many things, but in this context, I mean the holistic goal of helping get Australians who suffer a disability back to good work sooner, not later, rather than merely accepting or declining a claim.

It means finding new insurance products and new approaches – changing the underlying systemic processes – in order that our industry can better, together with our customers, not only to help meet their genuine financial needs but support them to get back into good work.

In short, getting disability income (DI) insurance back to where it needs to be: with realistic premiums and realistic claims payments generating sustainable, long-term outcomes for the consumer and the whole industry ‘ecosystem’.

But the ecosystem has immediate issues it must confront. One major concern is the annual cost of DI insurance to the industry.

Australian Prudential Regulation Authority (APRA) data shows Australian (retail) life insurers incurred after-tax losses on retail insurance products of $180 million in the December quarter 2016.

Losses on DI insurance policies were a predominant contributor.

Losses on individual DI insurance contracts in the December 2016 quarter amounted to $209 million, according to APRA’s December 2016 Quarterly Life Insurance Performance Statistics.

When we add group statistics we see that over the full year ending 31 December 2016, insurers lost a combined $560 million on all individual (and group) disability income insurance products.

The big number I see buried in the data? Looking back over the five years to December 2016, industry losses for individual DI products totalled $1.1 billion. It raises the question: how many businesses in Australia today can sustain a billion-dollar loss over any five-year period and not see that as a call to action to remediate the underlying issue?

Why do we not hear more about these numbers in the public sphere? Masking the individual DI losses are offsetting profits made from other product groups. Over that same five-year period to December last year, the industry generated a $4.8 billion combined profit on individual lump sum insurance.

By combining the lump sum business results with DI, we see a somewhat more acceptable financial outcome of overall profit margin of around 7 per cent over the five years.

The question here is: how realistic is the cross-subsidisation, and how sustainable is the practice of offsetting material losses from one product group against more profitable business?

And how sustainable is the very real prospect of ongoing premium increases?

Recent analysis conducted by Rice Warner for RGA showed the average retail disability income premium increased by 9 per cent between 2013 and 2014 (over and above age increases) and the average group premium increased by 19 per cent during the same period.

Change is clearly necessary to contain the prices of premiums, rein in losses and ultimately assist with the conversation our industry needs to have with its customers about new ways of covering them against unexpected disability.

The pooled effect

So, as we think about that sobering financial analysis for a moment, it raises another, related issue in the current environment of low consumer trust: where to start to rally our combined efforts and engage with our customers to deliver more effective results?

This is important in order to shift perceptions. Finding ways to convey some fundamental (yes, insurance 101) messages – for example that losses are eventually funded through increased premiums – is one of the challenges our industry faces.

Ultimately, claims must be funded out of premiums. While cross-subsidies may be useful in enabling insurers to better segment markets and smooth premiums, it also creates a situation where customers may not be paying the ‘correct’ premium required to support the risk they present.

In simple terms, consumers want a disability product that is priced fairly and will be there to support them in times of need. We know the current DI product is under-priced and needs significant increases to break even, let alone generate profits.

I wonder whether our market has focused on product ‘bells and whistles’ to the detriment of designing simple and affordable policies to meet the expectations of our customers, and that encourage Australian insureds to get back to work through a more overt focus on their wellness?

Insurers have an opportunity now to recalibrate their focus and efforts in the critically important area of DI protection. New policies that protect policyholders and provide genuine cover when it is most needed. Importantly, getting the insured back to good work as soon as possible is not just about improving the bottom line, but is good for the mental and physical wellbeing of the insured.

Consumer trust

Bridging the well-articulated trust deficit in the current environment is an issue for all players within the insurance industry. Consumers, driven by negative media reports, perceive we are looking for claims loopholes to avoid paying claims. But the reality is, insurers are paying out more and more on DI polices, and incurring unsustainable losses.

Trust is earned through consistently backing up what you say you will do with action.

So, is it not time to act? To get back to basics and focus on the importance of getting Australians who suffer a disability back to work sooner rather than later. Let’s focus on meeting their genuine financial needs, on working together towards wellness and getting DI insurance back to its own state of independent health.

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Meredith Barnes is head of underwriting and technical services for RGA Australia