Disability Income insurance has been a bad experience for insurers, General Cologne Re's Australian general manager Michael Molesworth says.
He warns that premiums must rise and some benefits will go to keep the product sustainable.
"Rates probably should go up every year," he says.
Molesworth was speaking at an industry seminar where Sovereign announced that its premiums will rise by between 3.5% and 25%.
Rates for Colonial, Prudential and MetLife are under review.
Sovereign’s health insurance rates will also rise by between 15% and 24%.
Unexpectedly high claims mean DI has been unprofitable for many companies around the world, Molesworth says.
Although data from 1995 to 1999 shows the incidence of claims in New Zealand has been lower than expected compared with United States experience, the duration of claims has been much longer.
For some client and product groups, claims duration had been two or three times the US experience.
Molesworth says DI was badly managed during the 1980s and early 1990s. In an attempt to win market share, premiums were held down, while benefits were added and underwriting standards relaxed. Claims management was poor and advisers were able to slip clients into lower risk/lower premium occupational categories.
As a result, "DI has been a bad experience and it’s getting worse".
In order to keep the "Rolls Royce" DI products New Zealand has premiums must rise for new and existing customers, he says.
There must be a fall in maximum and monthly benefits, which were more generous here than in the US, relative to living standards.
Occupational categories and underwriting standards must be tightened. Personal statements by clients, used to disclose existing conditions, must be more thorough.
Claims management, aimed at getting clients back to work, must improve.
"The companies that do claims management well will be the ones that survive."
Inquiries to identify fraudulent claims will also increase.
Lifetime benefits must go, while exclusions should be included for subjective conditions open to abuse, such as mental disorders.
Molesworth says eventually DI is likely to become a specialist product offered by just a few insurers.
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