Blame the Adviser?

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Russell Hutchinson takes issue with the Australian regulators view that insurance policy churn is leading to higher lapse rates across the Tasman. He says there are other issues at play that the regulator needs to consider.

Monday, January 13th 2014, 11:38AM 1 Comment

by Russell Hutchinson

The Australian Prudential Regulation Authority is reported as stating in its publication Insight that “increased disengagement of advisers” is contributing to high lapse rates but also blames advisers for high lapse rates because of “churning” while providing no definition of exactly what that means.

As one adviser wrote on the story, advisers are pretty much ‘damned if you do and damned if you don’t: either you give advice and move clients, or you disengage and you don’t…’ either way, APRA seems to be blaming your colleagues across the Tasman Sea.

Any good regulator would look at the impact incentives may be playing as part in any judgment – and APRA’s incentives are aligned with those of the insurers because they are concerned about insurers’ pricing and reserving decisions being prudent.

Those decisions are heavily dependent on lapse assumptions and they are worried about the ability of insurers to make predictions about lapses with confidence.

Insurers are having trouble doing that just now because things appear to be changing.

Concern about that is fair. What isn’t fair is to find every possible excuse to pin it on advisers or changing distribution (such as more online sales of insurance, which can have lower persistency as well). There is another candidate for the blame, and it is well known – price increases.

For some time insurers have ignored price elasticity of demand – the effect of reduced demand as prices rise, and increased demand as prices fall. The connection appeared to be weak in the case of insurance. For the market which buys cover, it is viewed as an essential, and there was low correlation between price and the amount of cover sold. But there is now. That can be because it is easier for consumers to shop around, but it is also because in-force contracts can often be more expensive and have fewer features than new contracts.

But greater forces are at work, and now the link between price and demand is perhaps stronger than it has been for a long time. Forget what insurers think the price for cover is as look at it from the client’s perspective: the money deducted from their account.

It used to be that they bought cover and paid a level premium for it – there was much wrong with this model, they bought too little cover and investment returns were impossible to calculate and often poor value. But they knew what they were paying and that it would not become unaffordable for them.

Today we have rate-for-age increases, plus indexation increases, plus a premium hike on life insurance because of a tax change, income protection and TPD because of claims experience, Trauma because of broadening product features, and medical because of the inexorable rise in medical costs… and consumers can find that prices can quadruple in less than 10 years.

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