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Asteron to push level premium policies

Asteron Life has rolled out new product changes that are designed to encourage advisers to sell more level premium product.

Friday, July 12th 2013, 1:01PM 21 Comments

by Philip Macalister

Asteron managing director David Carter says lapses and unprofitable policies  are a huge problem for the insurance industry.

According to his numbers, a 1% increase in lapse rates means premiums have to go up 5% to compensate for the loss of business.

Lapse rates have been rising and this is partly due to affordability and, to some extent, adviser behavior.

For a life company there is a significant impact as so many of the costs are incurred in getting the business on the books and it takes years until a policy is profitable. These costs include commission, underwriting and other business expenses.

Carter says the most expensive lapses are policies which have been on the books for a long time, such as 15 years, and get cancelled for economic reasons.

But for policies that are between three and five years old, lapses are sometimes because potential increases in premiums have not been clearly explained. The other common reason is churn.

Carter says there is a small number of advisers who are “proactively reviewing business, with good intent or not, and that business is moving around”.

One of the worrying things, he says, is that policyholders are cancelling their policies around the time they are likely to make a claim.

Carter says level premium policies will make insurance more affordable for policyholders and  there are also benefits for advisers building their businesses.

Level premium policies tend to stay in force longer than stepped premium ones.

He produced a graph at the company’s Auckland roadshow that showed if a policyholder took out a level premium policy rather than stepped premium they would save 60% in premium costs.

Currently around 20% of Asteron’s book is in-force level premium business. Carter says it will take time to change this, but he would like to see level premium business grow to 50% of new applications annually within a couple of years’ time.

Carter says the move away from stepped to level premium is “a more sustainable model” for insurance, including life companies, advisers and policyholders.

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Comments from our readers

On 12 July 2013 at 1:44 pm Snoop said:
I hope David Carter has been talking to his actuaries because on the face of it this sounds like a stupid idea. Level premium business very difficult to manage from a pricing and reserving perspective. Good luck to Asteron.
On 13 July 2013 at 5:50 am Andy said:
It's been asked of Asteron for a long time to offer level premium DI. Loss of earning with level premium could arguably be one of the best products on the market and i look forward to it.
On 13 July 2013 at 10:17 am David Whyte said:
Snoop - I ain't no actuary so could you please explain why level premium business is more difficult to price and reserve for than YRT?
On 13 July 2013 at 4:36 pm Mike said:
From an insurer's POV, I suspect they want to grab some market share by having an adviser sell a policy and pick up a higher level of initial comm and then have pretty sticky business once the client gets past the 24-48 month period (when clients often seem to want to move to a new insurer to save a few dollars?)

The adviser gets a good upfront commission and a sticky renewal. The client gets some certainty around premium levels and the insurer (most likely) get a better level of persistency on the business (once it survives the at-risk period, when a less-scrupulous adviser might compare the client's level premium to a current YRT premium)

Good luck to Asteron, seems like a win for all !
On 15 July 2013 at 10:38 am Bestwoman said:
I believe there is no reserving or pricing difficulty but it is important to recognise that there is also NO certainty for clients. This is because Asteron can simply put up level premiums any time they need to. If you read the policy wording you will see that it is only Life Cover with level premiums that is guaranteed.

Level premiums for Trauma, TPD and DI are NOT GUARANTEED. This means that Asteron can stick up the premium for clients on a level premium option any time they choose to increase their rates. The only certainty any client has with a level premium that is not guaranteed is the certainty they will pay much more than necessary for many many years (much more than 24-48 months in most cases Mike!)and, more importantly, the client may never reap the benefits of lower premiums 10,20 or 30 years down the track because the insurer has had to increase the premium rates "because of the cost of providing protection".

I'd be interested in hearing how these level premiums which are not guaranteed, benefit the client. At best they are a big gamble (costing the client an enormous amount initially, especially when you take the opportunity cost of the excess premium over a stepped option into account) that the client will always be best served by their Asteron policy, that they will always have the need for cover long-term and most importantly, that premium rates will be stable, possibly for decades. Stable premium rates is a gamble that Asteron is clearly not prepared to take, if they were they would guarantee the rates.

On 15 July 2013 at 2:57 pm David Whyte said:
Bestwoman - just for clarification - the level life premiums ARE guaranteed, YRT Life premiums are not?
And neither the level nor the YRT premiums for Trauma, TPD, and DI guaranteed?
On 15 July 2013 at 4:08 pm Mike King said:
@bestwoman - well stated. It is also my view that guaranteed level life premiums are the only ones that make sense (due to the guarantee, while 10 year level (annually reviewable) premiums for trauma have, at least to date, been very stable. If a level trauma premium was to leap significantly, we have the option of reverting to YRT on that benefit.
On 15 July 2013 at 4:54 pm billy the broker said:
blah blah blah....tell me something I dont know far as I know apart from company guarantees all types of lets not just discriminate against Asteron eh!!
On 15 July 2013 at 5:11 pm bestwoman said:
Hi David
Exactly: that is how I read it. Section 11.3.1 of the Asteron Life Personal Insurance policy - How level premiums work: clearly allows Asteron to increase level premiums for all benefits except Life Cover if their rates increase. The exception for Life Cover as I read it means Life Cover rates are guaranteed with level premiums.

On 15 July 2013 at 8:47 pm Dirty Harry said:
Yes but are we jumping the gun?

Was bestwoman at the roadshow?

Will Asteron come up with something properly level as they pursue growth in that area? New stuff not out until the end of july after all....
On 17 July 2013 at 8:55 am Snoop said:
@David Whyte

1. Huge pricing risk if you are to guarantee your level rates.

2. Profitability very sensitive to interest rates, relative to RFA.

3. Higher capital requirements.

4. While there are better lapse periods during the level period, there are massive lapse rates at the end of the level period. 10 year level premiums are good in theory but insurers would keep RFA for longer.
On 18 July 2013 at 11:10 pm David Whyte said:
@Snoop - 1. Same pricing risk if you guarantee YRT rates?
2. Why are YRT contracts any less sensitive to interest rates?
3. Capital requirements from life company driven by a number of factors such as reinsurance arrangements and retention levels. Why are overall capital requirements higher than YRT?
4. YRT lapse rates significant increase at 60+ ages causing dramatic increases in lapse (except for sub-standard lives) across portfolio due to affordability issues, and perceived lack of need to protect dependents..
Sorry - still can't see the negative for a well-capitalised life office like Asteron. Level premium may not sweep the market, but in the appropriate client circumstances, level is as valid and usable as YRT.
On 19 July 2013 at 9:54 am Bestwoman said:
Hi David and Snoop.
It would be useful if you could clearly distinguish between level premiums that are guaranteed and those that are not. I'm assuming you are talking about guaranteed level in your latest post David.
Level premium that is guaranteed poses risks to the insurer while level premiums that are not guaranteed do not, since those premiums can simply be increased at any time (even if the increase is only effective at policy anniversary).

I apologise for any repetition but in my experience a great many advisers do not understand that some level premiums are guaranteed but many are not and that level premiums that are not guaranteed are essentially just a YRT structure where the annual increases for age over the term are smoothed, nothing more. This misunderstanding puts advisers at huge risk of giving negligent advice and breaching S33 of the FAA.

I personally cannot see how a level structure that is not guaranteed can ever be right for a client. I can however see the benefit where the premium rate is guaranteed.

Finally, Billy the Broker, this is not about "discrimination" against Asteron, it is about discovering the truth. I think Asteron are doing the sensible and prudent thing by not guaranteeing DI and trauma level premium rates all the way out to age 65 or 70.
On 19 July 2013 at 1:31 pm Snoop said:
I think you make some good points on advisers understanding what "level" means, at least from a guarantee perspective. From my experiences a lot of advisers don't know what YRT means either, or at least don't explain it to their clients.

@David Whyte
1.Who guarantees YRT?
2. Because your cashflows (premium less claims) are positive early on, negative later in the contract. In simple terms the NPV is sensitive to the interest rates. YRT would be less so.
3. Your policy liabilities are positive for level premium business unlike YRT business where its negative. You need to hold a capital margin on the positive liabilities.

Level premium are good in theory but bring issues to the insurers and customers, that YRT doesn't.

On 19 July 2013 at 3:51 pm Kev said:
Hi David,
National Ins back in the early 90's had a guaranteed YRT product but as the rates for YRT have reduced over the last 20 yrs relative to age, the cost of the policy ended up more expensive.
I sold a lot of level to age 80 cover with one provider before the costs jumped up, but unfortunately even though they say the rates are GUARANTEED, if the policy is joint and the clients separate and want to have their own policies, they don't honour the level rates for both clients, just a heads up be careful about how you set up the ownership, to age 80 is a long time. I do like level rates but they have to be Guaranteed.
On 20 July 2013 at 10:05 am David Whyte said:
Hi Bestwoman & Snoop,

Yes, I was referring to level Guaranteed, and, Snoop I was merely looking to compare the two options on a broadly equal basis from a client perspective. It seemed to me that guaranteed level rates were being compared unfavourably with non-guaranteed YRT rates - which, as you rightly point out, are seldom guaranteed. Accept pts 2 & 3, thanks for the clarification. I still don't think this is a major issue for Asteron - but I could, of course, be wrong (this has happened!). Level guaranteed still has a place in the appropriate circumstances.
Kev - thanks for the point of reference re National.
On 21 July 2013 at 7:40 pm Broker said:
1/ How often is a client going to need the same level of life cover now as they do in 15-20 years time if the main purpose for the life cover is to cover mortgage debt?
2/ The increased cost of level life premiums usually means something has to give in the risk package. Often I see clients with level life cover but no disability products. I prefer to see clients with a range of risks covered.
3/ National Bank in the 90's perfect example.
4/ It should all be about what's best for the client not about whether it suits the insurer or adviser's business models.
On 22 July 2013 at 9:31 am Laughing all the way said:
I have had level premium IP for many years now. The debate regarding guarantees is not relevant to me. Yes, my premiums have gone up since I took it out due to claims experience. Do I care? Absolutely not. The premiums are still at least half of those than than the equivalent stepped even with CPI adjustments charged at the new age rate. At the same time, when I was an adviser, I sold my brother in law a level IP contract. Some turkey then came and changed him to stepped without me knowing on the basis of it being cheaper. Now my brother in law has cancelled all cover due to excessive premiums! In my view Level Premium rules regardless of any guarantees or not.
On 22 July 2013 at 10:13 am MJS said:
Guaranteed level rates: using a little forward thinking, I now have a growing number of clients who see a significant advantage in placing a Guaranteed Level (to 80) cover, of a largish amount (usually around $500K) on their late teen-early 20's children, with a view to their future needs in terms of: a) borrowing for family formation and b) wanting to ensure those kids don't face the frightening 5-year doubling of cost they themselves are experiencing in their 50s. However only guaranteed rates make sense, of course.
On 22 July 2013 at 11:38 am Snoop said:
@David Whyte - All good. Asteron appear to be doing well from recent product changes and this may also reap them rewards.

@Laughing all the way
That's great that you purchased level premium and are benefiting. The problem is advisers flogging level premium to age 80 to people who don't need it to age 80 and will (they don't know it yet) reduce cover from about age 50 onwards. The equation doesn't stack up.
Advisers will push level premium if they can due to the larger upfront premiums.
On 22 July 2013 at 4:50 pm billy the broker said:
Broker hits the nail on the head, its what best suits the client not the brokers view on what suits him!!!

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