Advised life insurance sector ‘in crisis’: FAAA

In October, the Australian Prudential Regulation Authority (APRA) released a discussion paper on the IDT project, which aims to collect data that will enable “regulators, policymakers, and insurers to undertake a more comprehensive assessment of prudential and conduct risks facing the industry”.

According to the discussion paper, this will also “deliver clear benefits to consumers through enhanced understanding of insurers’ businesses, products, and services”.

Currently, APRA said, there are “insights gaps” that limit the data’s usefulness and inhibit the “strategic drive for data-enabled decision making”.

In its response to the discussion paper, the FAAA pointed to a number of challenges faced by the life insurance industry over the last few years and cautioned that there will be flow-on effects for the broader insurance industry.

“In short, it is easy to conclude that the advised life insurance sector is in crisis. This is only part of the story, as the flow-on consequences for life insurance are equally important, with fewer new entrants into the life insurance pools and particularly in terms of younger lives,” the FAAA said.

“This will undoubtedly, over time, push up the average age of insured Australians, which will fundamentally change the economics of the life insurance business model.”

While the FAAA noted that it was responding specifically to the areas of the discussion paper that will impact advisers, it identified a range of factors that it said should be “closely monitored”, including new business volumes, discounting practices, premium increases, average policyholder age, discontinuances, underwriting, and leakage of benefit payments.

“In the context of the challenges that the changes in the environment and regulations have caused, we believe that it is essential that data collection focus on some of these key factors that provide an insight into the sustainability of the life insurance industry and the trends in the marketplace,” it said.

On the new business volumes and new policyholder numbers front, the FAAA said the focus should be on new clients into new policies, rather than increases to existing policies.

“The ongoing practice of indexing the level of cover each year, and treating this as new business, can distort the real underlying level of new business. In some cases, the rate of indexing has been much more than CPI,” the association’s response said.

APRA also needs to consider the extent of underlying upfront premium discounting, the FAAA said, possibly measured in terms of dollars of premiums that have been discounted, relative to standard pricing.

It also called for greater information on lapses or discontinuations, split between those that are partial in order to address affordability challenges and complete lapses, where the cover is either no longer needed or the client has elected to discontinue.

“We would like to see the availability of data on the reasons for discontinuation,” the FAAA said.

“We propose the establishment of some additional standard discontinuance categories such as moved to more competitive offering, no longer required, unaffordable, etc. Discontinuances should be measured in terms of total dollars of premiums and number of policyholders.”

Life insurance, the FAAA added, is “ultimately about getting benefits to those policyholders (or their families) who have suffered a major injury or illness”. In light of this, the association wants greater insight into the percentage of premiums that end up in the hands of claimants.

“There can be natural leakage from this system through the costs experienced along the value chain, some of which are well understood, however, others are largely unknown,” the FAAA said.

“Financial advisers largely do not charge for the management of claims, unless the claim is particularly complex. There are other stakeholders who do play a role to assist claimants, and can charge a significant amount for this service.

“We would support the collection of data on what percentage of the benefit is paid to a third party when a third party is involved.”