‘A self-defeating model’: Insurance chief slams new business discounts

PPS Mutual chief executive Michael Pillemer told ifa that the common industry practice of front-loaded discounts for new business, which had recently drawn the ire of advisers, was a “self-defeating model” that had driven increasing declines in profitability for life insurers.

“Some of the reasons for the recent spiralling premiums are these sorts of poor practices, short-sighted practices, because they were increasing market share in the short term,” Mr Pillemer said.

“Your new customers get the discounts initially, or the premium matches or the discounted loadings – they get that up-front, but those new clients become existing clients down the track. So it’s a self-defeating model and it all stems from a shareholder-focused approach.”

Mr Pillemer said PPS Mutual had seen around a 37 per cent increase in its membership in the 2021 financial year from 4,000 to 5,500 members, with an average lapse rate 10 per cent below the industry standard because of its focus on longer-term value for the insurance group’s clients.

“We don’t engage in practices like front-loaded discounts, we don’t do special deals, we don’t discount loadings and we don’t do the latest in price matching. The reason for that is it’s for the benefit of new members at the expense of existing members – they end up paying for all these offers,” he said.

With the life insurance sector seeing an over 50 per cent decline in revenue for the first quarter of 2021, Mr Pillemer said the focus on short-term market growth had had “negative consequences for the whole ecosystem” of insurance distribution.

“There’s two key events which have resulted in that shareholder driven model – the first is the demutualisation of life insurers in the 1990s, and the second was introduction of the vertically integrated experiment around the same time,” he said.

“The bancassurance experiment has come to an end and I think that’s a positive, because the banks never fully understood life insurance – they relied on their advisers having limited APLs and they didn’t focus on product sustainability.

“But you still have shareholder-driven models being the dominant model in the industry – that’s resulting in a misalignment of shareholder and customer interest which is the backdrop for a lot of problems the industry is having.”