Discounted premiums leave risk advice customers worse off

The research, undertaken by Rice Warner and commissioned by insurance company PPS Mutual, revealed that while risk products offering first-year discounts were 2.5 per cent cheaper than the market average in the first year, they were 3.5 per cent more expensive than average in the second year and 5 per cent more expensive in subsequent years.

Further, while three out of the five cheapest advised insurance policies on the market were front-loaded discount products in the first year of a policy, four out of five of the cheapest policies in the long term were non-front loaded discount products, the report said.

PPS Mutual chief executive Michael Pillemer said the research put paid to the fact that the strategy of many insurers to aggressively gain market share by discounting premiums up front was not meaningfully contributing to their bottom line, as clients would switch out of the products after the discounts finished.

“Increasingly, in a bid to secure market share, the retail insurance industry has adopted initial short-term discounts for new business premiums. The research demonstrates how over five to 20 years, policies with front loaded discounts have significantly higher premium increases relative to the first policy year,” Mr Pillemer said.

“By way of example, customers of one insurer who have been offering a 25 per cent up-front discount could face increases of 50 per cent plus in premiums in the second year once you also take into account age-based increases and indexation.  

“The effect that these sharp premium increases have psychologically on a client, and the increased likelihood the client will lapse as a result, should not be underestimated.”

The research also concluded that policies offering true-level premiums were more affordable for clients in the long run, as premium prices between true-level and non-true level products were essentially the same for the first five years of a policy, but by the 11th year, the cheapest non-true level product was more expensive than all available true-level products.

Given the disastrous revenue figures coming out of the life insurance sector at present, Mr Pillemer said the study may give insurers another incentive to look at new business strategy and product options to improve outcomes for policyholders and advisers.

“In 2019, life insurers lost $1.3 billion, lapse rates for traditional life insurers remained stubbornly high at about 17 per cent and policyholders have had to endure significant and repeated increases in premiums, in some cases by more than 35 per cent year on year,” he said.

“While many of the issues the industry is grappling with are a function of the macro socio-economic environment, an historic and aggressive chase for market share by various insurers has created highly undesirable outcomes for consumers. 

“We believe that there has never been a more important time to reassess past dynamics of the sector, and work towards building a strong and sustainable insurance industry for all Australians.”