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Income Protection unsustainable and rule book rewritten

Reinsurer MunichRe says the current income protection market is unsustainable and it decided to throw away the old actuarial tables used and replace them with something new.

Wednesday, June 24th 2015, 10:06AM 8 Comments

MunichRe is the largest reinsurer of disability income business in Australasia. It says the latest Australian Prudential Regulation Authority (APRA) statistics show Australian insurers reported after-tax losses of A$394 million in their retail disability income insurance (DII) businesses in the last quarter of 2014.

"These quarterly figures reveal that insurance companies have been having difficulties in the retail DII market for a number of years, sustaining net losses of over half a billion dollars in 2014 alone. This has ramifications and lessons for New Zealand life insurers as there are similarities to the Australian market."

Munich Holdings of Australasia (MHA) has conducted a major investigation which its says,  brings to light just how much trouble the disability insurance market is in.

"There are serious concerns regarding the sustainability of current retail DII products."

It has conducted an extensive analysis using biometric experience data from 2004-2013.

"This in-depth coverage of the Australian market has allowed MHA to develop new insights regarding the risk factors that drive DII experience," it says.

Following the analysis it has made "the significant decision to discard the industry-standard actuarial table". This table is more than 20 years old, and is being replaced it with a new contemporary table developed in-house.

The results of the analysis highlighted that the long-term cost of claims is significantly higher than allowed for in office premium rates. Key results include:

  1. The cost of DII claims has been increasing over the last decade. This is due to an increase in the incidence of claims, rather than any change to the recovery rates of DII claimants.
  2. The rate of claims due to sickness increases with policy duration. The increase is significantly higher than the industry is pricing for. Sickness claim rates for policies in force for 12 years are double that of policies in their first year.
  3. The incidence of accident-related claims (overall) is increasing. From 2009 to 2013, there was a significant increase of 47% in the rate of accident claims occurring.

MHA's Head of Life, Andrew Linfoot, said "Our research has revealed that current products typically have claims costs that are 20% – 35% above levels that would deliver a reasonable return for shareholders. This suggests that life offices are adding losses to their books with each new retail DII sale.”

"Price, while a major factor, is just one of the key factors contributing to the state of the market. Over time, DII benefits and other terms and conditions have become more generous, which has contributed to increasing claims costs,” he said.

Linfoot acknowledged the many barriers to change, saying “There are a number of reasons why insurers may be reluctant to move. However, I question the extent to which products can be sustained in the longer term, if steps are not taken to develop a more sustainable offering. Industry participants may face a scenario where their products quickly become unaffordable to the many people who rely on such products for their financial protection.”

In response to the findings, MHA has developed what it believes is a more sustainable and cost effective DII product, removing costly features that move cover away from the principles of insurance.

“The new product aims to address technical and behavioral weaknesses within the current product design, and is better aligned to the needs of the customer,” Linfoot said.

To remedy the situation, Linfoot suggested that “Each insurer needs to identify and address the causes that have led to these concerns. A return to sustainable and sound design must become a priority if the long-term future of DII is to be achieved.”

He says MHA is determined to bring the issues sharply into focus and is committed to working with industry participants on both sides of the Tasman to tackle the problem head on.

Tags: Income Protection MunichRe

« AIA reports profit growthNo screams and howls on IP, but some concerns »

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Comments from our readers

On 24 June 2015 at 4:19 pm Referee said:
This is no surprise to me and it's time to remove some of the fancy features that have been introduced over the past 15+ years. Too often product development has been driven by marketing departments in attempt to gain a competitive edge instead of designing a product that is sustainable to the consumer.

In addition to this issue, too many Advisers think the Benefit Period has to be to Age 65 or 70, when in fact 85% of all DI claims don't last more than 2 years. This mindset may change when this new pricing structure comes into force!

Finally, compared to the Australian market, our NZ pricing must to be appropriately discounted to offset those claims that fall under our ACC Scheme.
On 25 June 2015 at 12:57 pm LNF said:
When F&G Insurers wrote this business, prior to the Life Insurers being the major players, it was profitable and totally sustainable with short terms claims and yearly renewable
Then the market was taken over by the Life industry with commissions and long term claims
How many well people have a guarantee of income to age 65 ?
On 25 June 2015 at 3:26 pm Ron Flood said:
One of the reasons the business was profitable was the contracts were not "guaranteed renewable" could be cancelled by giving 14 days notice without needing to give a reason and have exclusions applied after a claim once the person went back to work.

In 1996 I called on a client with one of these one sided contracts and insured him through to age 65 on a guaranteed renewable Life Insurers' contract.

In November 1998 he went on claim and has been on claim ever since.

Yes, I did get commission as did the F&G broker who sold the original policy. Why it has reared it's head in this debate I don't know. The F&G broker would have earnt an equivalent amount of commission after 8 years and then be well ahead thereafter with their 20% renewal commission compared to my 5%.

On 25 June 2015 at 4:04 pm Ahem said:
Referee, I suggest you re-read your comment.
If 85% of all claims are of less than 2 years duration, what will the result be of withdrawing the 'to age 65 or 70' terms from the market? Answer, less money in the pool from which DI claims are paid. Net result? Even greater losses.
Fact is, DI premiums will be high unless more people are put into the pool with decent underwriting. If not, then DI will evolve into a product with significant and sweeping exclusions.
I can't understand why a more enticing discount isn't given to customers who are willing to have a 'Mental Health Exclusion' as some companies offered, given the claims statistics.
On 25 June 2015 at 4:29 pm LNF said:
To Ron. It has reared it's head to give a broad overview of the IP market and my comment is relevant given the whole theme of the MunichRe stance and why. The industry goes where the RI goes. What the various Brokers EARNED is neither here nor there.
Back then all IP covers were F&G and then F&G insurer National (now Tower / Fidelity) introduced the long term non amendable covers that we have today
On 26 June 2015 at 9:58 am Ron Flood said:
LNF. It is fine to have a broad overview but to an uninformed lay person your comment "Then the market was taken over by the Life industry with commissions.." would suggest that in the past the F&G industry wrote disability out of the kindness of there hearts and no commission was received.
On 26 June 2015 at 5:14 pm Graeme Lindsay said:
Well said Ron.

To LNF: Whilst the F&G insurers offered Accident and Sickness cover, there was a non-cancellable Income Protection cover offered by National Mutual as far back as 1972 - The Extended Disablement Cover. Problem was that it was level premium and very expensive.

This well pre-dated the National Insurance Executive Income Protection. The earliest Nat EIP wording I have is clearly dated June 1989.

Picking up Ron's point - our clients are far better off with the non-can IP covers offered by life insurers than they would have been with the old F&G A&S covers. Let's hope that the insurers are not forced to price them off the market by the reinsurer...
On 26 June 2015 at 6:04 pm LNF said:
Ron - based on a $1000 annual premium, after 5 years the F&G company had $4000 net to meet claims - for a policy weighted in favour of the Insurer
The Life company - using a conservative 150% front commission and 7.5% annual has $3200 to meet claims for a policy weighted in favour of the client
So hands up who is surprised that the re-insurer sees a problem

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