The chief executive officer of AMP, Craig Meller, says that implementation of the Life Insurance Framework (LIF) should lead to lower prices for consumers, but has warned that in the short term, price reductions may be delayed by higher claims expenses.
Speaking at AMP’s 2016 results announcement on Thursday, Meller unveiled a 10 per cent drop in underlying profit from $570 million to $513 million for the six months ended June 30, following a poor performance from its wealth protection division. He said the immediate impact of the LIF changes would be to reduce the capital intensity of new life business.
“I’m not sure there’ll be much change to the absolute level of profitability,” he said.
“But the change in remuneration arrangements will make life insurance less capital intensive going forwards because the life insurer will have a lower level of upfront costs in setting up a life insurance policy.
“What we’d expect is that over time, that lower capital intensity would work though to lower prices for customers.”
Meller (pictured) said he is confident lower costs would be passed on to consumers, “all other things being equal”, but added that the life insurance industry is currently experiencing “significant increases in the level of claims, and my suspicion is that is more likely to outweigh any consideration of premium reductions from the introduction of the LIF framework”.
Meller said AMP is poised to introduce a new style of life insurance product which focuses more closely on assessing consumer needs and changes to lifestyle as a result of an event that leads to a claim, and relies less on medical definitions of any particular event.
He said the twin aims of the new product were to get claimants back to work more quickly, and lower costs by reducing long-tail claims.
“What we’re trying to achieve in the new product is a solution which says if you are no longer able to work, and you need to restructure your lifestyle, this product will assess that requirement rather than you have to have a heart attack to a certain prescribed definition in order the get a payment,” he said.
“So what we’re trying to achieve is a much more consumer-oriented outcome that’s driven by consumer need, rather than a medical definition. That’s pretty different to the way life insurance, and particularly TPD and trauma, have been defined historically. It’s a big change and that’s why we’re taking a very incremental approach to introducing this product.”
Back to work
Meller said that “a significant component of the new structure” is the rehabilitation of claimants to help them return to work sooner.
“I think it’s agreed by all medical professionals that the physical and mental benefits of working are undoubted,” he said.
“We know that if we can rehabilitate people and get them back into the workplace faster, they will be healthier longer-term. But that also means that we end up with fewer what we call long-tail claims, which are the most costly of claims.”
Meller said the new approach will more closely match the financial payments from insurance with the financial needs of claimants. He said the historical, definitions-based approach to paying claims often produced a significantly greater benefit for the claimant than was actually required.
“Now that’s fine, we’re a life insurance company, we’ve made that commitment and we’ll make the payment,” he said.
“But if someone suffers a trauma but is still able to return to work in a week, the industry is paying out a payment when, in terms of the human need and the customer need, it isn’t there. So the product is also designed to eliminate those types of claims as well.”
Meller said the new product will initially be rolled out across AMP Advice practices, where it is also piloting new remunerations structures for advisers.
“We’re designing those value propositions primarily based on fixed fee for service, depending on the extent of usage by the client,” he said.
Meller said the “whole reorientation of the advice business under the AMP Advice model” is designed to move advisers away from remuneration based on assets under management or inflows, which can both be volatile, to a more sustainable and less volatile footing.
He also said AMP is committed to supporting its advisers to meet new education, professional and ethical standards, contained in legislation expected to be introduced into the parliament before the end of the year.
“We already spend significant amounts of money on the professional development of all the financial advisers within the various AMP licensee businesses,” he said.
“What we’re doing is looking at that professional development and tilting it to make sure that over the coming years we’re working with our advisers to make sure they meet the educational qualifications that are going to be required by the industry in due course.
“We’ve been piloting with the Ethics Centre an ethical development program that we’ve been encouraging and helping our advisers to drive through as well.”
