When the life insurance industry has a bad year, it can manifest as a perfect storm for all participants, amplifying the impact of current year claims and policy lapses on the level of reserves insurers are required to hold.
By any measure, 2013 was a challenging year for the Australian life insurance industry, with the most visible result of those challenges reflected in the lack of profitability across the board, including within reinsurers.
Industry analysts and commentators have become prosaic in their analysis of the problems facing the industry, with opinions divided about whether the causes are cyclical or structural. Despite the above, the life insurance industry is important for society – protecting assets, income, debt and lifestyle.
Key features of Australia’s life sector
The Australian life insurance industry has some interesting features. Firstly, it is fragmented, with no two insurers being the same and no individual insurer having a dominant position, but rather a differing approach and focus between their on-sale and legacy book of business.
Secondly, the adviser community is diverse, ranging from salaried financial planners, those operating under an Australian Financial Services Licensee (AFSL) aligned to a life company, and others operating under their own AFSL.
Thirdly, the evolving Future of Financial Advice (FoFA) requirements increase the challenges faced by advisers to recommend appropriate advice solutions to their clients whilst they endeavour to build and operate a profitable business.
Adviser impact of life insurance challenges
Life insurance is a long tail product by definition and the features, benefits and premium rates can vary substantially across a wide variety of competing products. The challenge for advisers is to meet their obligations under the best interest duty whilst facing product diversity, and this is why research houses perform an important role.
However most advisers understand research ratings are just one factor to be considered. While features, benefits and premium rates are fundamental, there are a number of critical, non-rated factors lying below the waterline that advisers should also consider. These include service, underwriting, claims, relationships, technical support, education and practice support.
When it comes to premium rates, some research houses will provide the cheapest price today. However, understanding a life company’s pricing philosophy, track record on the quantum of premium rate changes and approach to passing back benefits and features to portfolios no longer on sale should also all be taken into account.
Insurers’ responsibilities
The intention, track record and ability of insurers to deliver in-force adjustments are becoming increasingly recognised as an important consideration. Easy access to quotes on old series, the ability to make portfolio changes without having to move to a new business series and online capabilities are all important factors to be considered as part of the longer-term best interest duty.
Advisers need to, and many do in fact, consider the claims philosophy of the insurer. All insurers are bound to pay valid claims, but the claims philosophy and track record in assessing and settling claims is an important point of differentiation.
Relationships are also a critical factor, with the underwriting relationship key. Advisers should not underestimate the ability of the underwriter to make commercial decisions as well as the ability to communicate adverse decisions that can be understood by the client.
A good insurer will form a relationship with financial advisers and make senior management available to support them in building a practice. Technical support, education and practice support are other factors to consider as they strive to act in the best interest of the client and build a practice. Life insurers may offer a program of continuous education on insurance matters, as well as platform and asset management solutions enabling the adviser to develop their practice on a holistic basis.
All industry participants must strive to provide better value to customers because the high costs of manufacturing and distribution exacerbate underinsurance issues such as affordability. It is incumbent on the industry to take excessive costs out of the product and to streamline the manufacture, delivery and operations associated with life insurance to resolve the problem of under-insurance. This will allow insurers and advisers to continue investing in their businesses knowing that adequate returns can be achieved through the economic cycle for many years to come.
This article originally appeared in the Professional Planner iPad Intelligence Series – Insurance app, which is available to download here.
