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Review of Loadings and Exclusions

Continuing my journey in the weeds on existing business servicing; policy terms. More specifically, reviewing policy terms for existing clients.

Tuesday, August 8th 2023, 3:27PM 11 Comments

by Jon-Paul Hale

I've had experience over the years where this aspect of reviewing policies for clients has had a massive difference in the approach from insurers.

Some have changed over the years too. The most extreme example I've had is cardiac and cancer exclusions due to a family history with Southern Cross with no symptoms that they refused to review at the time.

Yet, today Southern Cross only ask family history questions on the extension covers, cancer meds and trauma covers, and not for the base medical benefits.

So things do change, but some can still be a significant challenge too.

The approach from Sovereign is probably the best one from a client perspective, and this is where AIA continues to apply this. If an exclusion or loading is being reviewed, they will look at just the causes for that exclusion or loading.

This means that the client, in a situation of having other things now out of shape, only has the elements of the changed risk with the terms being reviewed being looked at.

Looking at the other end with the approach from others, the underwriter requires a full application (specific to the risk, medical, occupation, or financial) to assess the review of terms. This opens the door to other conditions now present influencing the decision on terms.

This is less of a concern for things like shoulder exclusions, but it becomes a problem when we are talking about premium loadings. The whole-person assessment means that while the original issue triggering the loading may have been resolved, other now-developed problems are why the loading isn't removed.

There are arguments for and against both situations.

The tight focus on the issue for review has the advantage of removing terms more effectively. At the same time, the insurer assessed the risk at application and determined that "thing" was an increased risk while taking on the risk of other issues developing in the future. So you could consider this a fair approach.

As an adviser for clients at an individual level, this is a good thing, desirable and able to assist in improvements in the future.

The counterargument is that the whole risk assessed and then reassessed manages the risk to the insurer, and it could be argued that the insurer is prudent in their risk management.

Not as friendly for the individual but helpful to managing pressure on premiums for all policyholders in terms of premiums gathered to address resulting claims.

Which is best? That's pretty subjective, given your position in the equation.

From the client's position, you'll want the specific review answer; as an adviser, you will say much the same.

But there's a cause-and-effect issue here as the same clients and advisers will complain about rising premiums.

The removal of loadings for specific issues removes the premium income from that individual risk and applies the risk to the rest of the pool for the claimed reality from those same clients in the future.

More specifically, other clients pay where the approach has reduced premium income that subsequently has a claim.

We've all seen the increases in premiums over the last few decades. While this is from both improvements in medical technology for diagnosis and a decline in the population's general health, it has also come from providers' success in paying claims.

With passback options in the market for over 20 years, we can now see the expansion and creep of policy wordings, particularly trauma covers, resulting in overall increases in premiums.

This is double-edged; assisting existing clients with relevant current policy terms also applies increased pressure on premiums from increased claims.

The idea that passbacks only apply if it doesn't result in an increase in premium at the same time isn't entirely accurate.

The insurer gets to lift the underlying premium on the existing policies as a direct result of an overall claims increase caused by the application of passbacks.

I suspect the insurers are only doing it this way because the incremental increase of underlying premiums is more significant than the rise in claims costs vs the drop-off directly associated with increased costs (which also reduces claim experience).

Passbacks may not be an immediate increase at the time, but the "2% or whatever it ends up being" overall increase in base rate premiums next year from claims pressures will still happen, and passbacks will contribute to that.

Why are passbacks relevant to loadings and exclusion reviews?

Because the approach to passback and pooled risk premiums is part of the consideration of how an insurer might tackle terms review underwriting.

Is there a simple answer here?

I don't think so. I do feel we need to be careful with what we wish for.

That old policy, priced as it was 20+ years ago, may not have the subtle partial payment nuances of the passed-back policy today. Still, it is significantly more likely to be in place on the cover and premium structure it was than the passed-back policy of today.

And that's sort of the point; we put coverage in place to work; if the policy isn't there to claim when needed, we may have missed the point.

This is where the Partners Life mess of trauma products may have some intelligent insight if used well, and I'm not talking about how it's been "sold" to us.

Instead, you have an advice plan for clients with a comprehensive trauma starting point that is more stepping back than reducing. Age-related premium pressures allow migrating moderate and severe trauma products to maintain cover levels and manage premiums rather than lowering or removing trauma cover.

What do you think?

Tags: Jon-Paul Hale

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Comments from our readers

On 10 August 2023 at 5:02 pm Merv Mitchell said:
Interesting article and good points.

However you do seem to be in the weeds and maybe need to look at a wider impact. Different insurers have different approaches and that means different outcomes.

Partners may have good marketing and good on them for the innovation they have brought to the market. However they seem to have been very volatile in terms of pricing with large increases then a partial reverse.

The AIA-Sov approach to underwriting seems to have delivered better outcomes with stability and greater certainty.

Of course I am not saying you have swallowed the kool aid from PL but maybe consider the outcomes.
On 12 August 2023 at 11:04 am JPHale said:
@Merv oh we’re in the weeds alright ;)

More the point is the distinction in thinking about what's going on with underwriting attitudes and thinking about future options for clients going through underwriting with your advice. There's no Koolaid involved.

Those late to the PL party (started in the last 3-4 years) won't have seen where it started, best wordings and the cheapest premiums. So much so that the early days were 20-30% below the rest and that's not taking into account the apples-for-apples comparison.

The harsh reality, was that position was never going to remain, it was always going to regress to the mean, and any thoughts of other insurers dropping rates were naive. Some tried to foot it but that didn't last.

This meant that around year ten PL premiums were going to be substantially higher, the market didn't anticipate how steep that adjustment was, but mostly it's not been wildly out of shape with where other provider premiums are.

The perspective of PL clients, and also advisers that don't use a range of providers, was a sharp increase in premiums causing noise and pain. Lacking the perspective on what was going on, most squawked about the increases. And yes it was painful for everyone.

It was an easy sales opportunity for some to move clients. But did they actually help or just solve a problem in a less appropriate way?

Only the client file will tell us that as there may well be good reasons for the changes to other providers.

With reference to AIA-Sov, the premiums there may look stable presently, high in areas, but the perspective over the last ten years would suggest their premiums moved more in the last 10-6 year's than in the last 3-4. Market perspective is always an interesting one to consider, and the time frame can make a massive difference.
On 14 August 2023 at 7:36 pm kev foster said:
Thx @JPHale

Well you said we were in the weeds.

Interestingly on 13-Dec-21 a certain JPHale posted a comment defending the Partners Life price rises (article headline was Partners Defends Premium Increases)

JPH said Partners were just seeing trends others would face and leading the way on price rises in repose to data. He said “other insurers are either not looking at these trends …. Either way this issue is coming to all insurers.”

Now JP PL was reverting to the mean and other.

So the explanation has changed.

Of course it is complex and none of us are Nostradamus
On 16 August 2023 at 9:58 am c silvey said:
Well done to JP for his articles which highlight some interesting points. I like the fact JP gets into the weeds and spends time to benefit the understanding of the whole industry.

It is a bit harsh to be passive aggressive to JP around him getting a few predictions wrong. All of us have faults and although some of JP’s predictions have been wrong we are all guilty of that.

Similarly some have called JP out on his lack of data and reliance on hearsay. JP and readers are advisers not reinsurers or actuaries so do not have all the data. JP makes great insights on what info he has.

Do not be disheartened JP by a few predictions that went wrong or commentators criticising your lack of facts. I enjoy your articles and you highlight important differences in UW practices which impacts clients. keep up the good work JP.

On 18 August 2023 at 11:10 am wilf said:
Transparency of insurer practices is important and JP does a good job at bringing sunlight to some detailed areas like this one.

It is bordering on offensive to imply JP is drinking the Partners Life Koolaid.

Partners like all of us are not perfect but have done a lot for this industry as have the likes of AIA-Sov.

We are have our biases and JP may simply take the Partners position because he has familiarity with them.

Finally on predictions we all get things wrong. When Partners increased prices JP was not the only one to predict others would follow. Like JP I got that one any many other predictions wrong.

Thanks JP. I like how you try to gather facts as you can and put a few predictions there. Yes many of your predictions do not work out but you do raise important points. Some accuse you of being aligned to the Partners PR and marketing department but I have no doubt you are your own man.
On 18 August 2023 at 11:19 am Rolleston man said:
JP is becoming a modern version of the former Big Gun G Lindsay through shedding light on insurer practices.

Graeme helped drive better outcomes and was an insurance pioneer and JP has the potential to get there.

We all have things we get wrong and from memory it was a valiant attempt at wine growing for Graeme. JP has a few predictions wrong but who cares.
On 18 August 2023 at 6:02 pm JPHale said:
Thanks, team, a nice read to finish a challenging couple of weeks. Appreciate the support for playing in the weeds.

As to the hat tip to Graeme Lindsay; well we have talked a lot in the last 20 years and still do on a regular basis, so it's not a surprise there's something rubbed off on my approach being similar. Good company to be associated with IMHO.

I like to think I get more right than wrong, end of the day a prediction is a stake in the ground to establish a measuring point and then see what moved.

Perspective is the key, and sometimes we fail at that. But get knocked down 7 times get up 8 is the attitude ;)
On 18 August 2023 at 6:16 pm JPHale said:
To other comments, I still struggle to understand the Kool-Aid comment, given my comment on PL's trauma. :D

Interestingly; the idea to look in this briar patch came from a BDM with another insurer. The example is not about PL being better, but more a perspective on a single benefit change that was new to the market and how the two providers looked at implementation.

The other past one on premiums, meh, most seemed to miss my point there too. My comments were more about the reality Partners Life premiums had to increase at some point from where they originally started.

This was a simple market reality, you can't have the best wordings at the best price forever, it must return to the average. Anyone not understanding that might need to question their math skills and the rules of the market.

While I had interesting conversations with my PL clients, the original advice they had was "This will be cheaper than the market for a time and it will increase once they attain market share or have increased cost pressures". Exactly what it did (over a 10-year period)

The result was I didn't have clients screaming about prices, they understood what was going on. The ones that had only been in place for 2-3 years, sure they had a rough time. But that's not a large part of my base at that time either.

The correction to the market average was far steeper than most of us liked, but we aren't in the decision-making shoes there either.

As to the other insurers, they are all having their issues with premiums, anyone watching what's going on with claims? Ask any insurer and they will say they have bumped significantly. My comments were off the back of this uplift in claims across the industry. But hey, if you don't do claims, then you probably don't know, and you'll be the one surprised by the hikes insurers trot out eventually. (I never put a time frame on that prediction either)

When people have been saying massive increases with PL, cheaper elsewhere; the reality has been comparing apples with pears. Products that don't have the extras PL products have. Add the extras in (accident, trauma, & TPD) and strangely the existing premiums aren't significantly different.

That might explain why PL has come out with the option of removing the extras in their more recent product changes, to avoid the sales noise that's been disguised as advice.

Now if explaining what I'm seeing is Kool-Aid, drink up!

Understanding how providers work is an important part of ensuring that the policies we implement work as they are intended at claim time. When I have about equal business with most of the insurers I'm seeing the whole market, not just one or two form a puddle perspective.

There are lots of these examples around, mention PL and it attracts eyeballs. Good Returns is in the business of eyeballs ;)

On 26 August 2023 at 8:10 pm Chatterbox said:
If you dive into the weeds then expect to drown in the ocean eventually. Just touching on some aspects of interest - that fall into duties for brokers/agents to be aware of - where the expansion and "creep" of policy wording change practices is resulting in unappreciated problems including: (a) different versions of the same product (with same policy number, branding, name, format etc. passed-off as the "original" where large percentages of policyholders lose the policy, or receive a review, or are given a "refreshed" version or even "demanded" to hand it over for "administering" (including claims) before wordings/claims will be considered - many have not copied it first (nor their agent) - now it replaces under the "switch" under an insinuation and business practice that results in a "replacement" or "replica" or "refreshed" or "enchanced" or "duplicate" or "copy" of the policy where disclosure of version changes were never transparent or disclosed to all existing policyholders while deducting premiums over time for effectively an entirely different policy contract - the words "genuine duplicate copy of the original" never enters the process. Despite contracts being (utmost) good faith contracts of adhesion with standards of conduct that reach across the doctrine of uberrimae fidei contract laws and duties. (b) but "pass-backs" are not transparent or disclosed nor even arise, but conveniently use the most recent version. (c) inserting the implied condition "...if the wording changes are not suitable (even if disclosed) then the policyholder can cancel anyway or if they do not like the new higher premium rates - (hopefully that generation of policyholders do so that the product can be "churned" into another reversing fund so that the old fund can be release to free up capital (d) as the insurer's business practice is to review the policy over its life time as the important aspect in terms of the product is seen as that it remains commercially viable for the insurer (ignoring expectations or purpose or fairness rights and circumstances the policyholder relied on or the interests of the policyholder) (e) never mind the process is anti-competitive so all the other insurers start to adopt the same "gaming" (f) while the spin transforms their agents into willing supportive believers that enhancing wording changes make it all good so long as they get servicing commission funded from the tainted process of funding off associated documents to extract money from bank accounts under bank authorities never replicated with version changes over time. The creep of the process not just infecting annual policies but now long term contracts and investment policies right down to trusts. Just a short summary of what is on the horizon once out of the weeds !
On 28 August 2023 at 7:48 pm JPHale said:
@Chatterbox, yup.

For example, noted just today and was somewhat astounded it's happened, and more astounded it never got noticed...

Southern Cross no longer has a definition for non-surgical hospitalisation in their policies.

Did you notice it? Nope?

It's really subtle and it looks like the whole industry missed it when it changed back in 2020... Yes, three years ago...
On 30 August 2023 at 8:21 am JPHale said:
Regarding IP premiums, AIA have announced an increase in premium rates for all the reasons discussed.

At a far more reasonable 3% which is likely to be a continued stepping approach to bridge the gaps as they won't want to repeat the sudden changes PL experienced that caused all the consternation.

Time will tell

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