To say there has been a lot of ‘noise’ across the industry since the launch of the new IDII products in October 2021 would be an understatement. With the conversations focused heavily on product features and definitions and how they compare against previous iterations. While important especially when considering existing clients and their circumstances, the more critical conversation is about how advisers will adjust their ‘house view’ on Income Insurance as a result of these changes and have the changes gone far enough to ensure the future of Income Insurance as a sustainable product option.

The sustained financial losses experienced across the industry have been widely document and speak for themselves. APRA is a prudential regulator not a product regulator, however they were compelled to step in and take action as a result of their assessment about the overall strength and sustainability of the industry from an Income Insurance perspective. APRA’s intervention was unprecedented and far reaching. No one in the life insurance ecosystem (clients, advisers and insurers) have been immune from the impact associated with the poor experience seen across the industry over the past number of years. No single insurer was going to be able to facilitate the necessary change, hence the reason for APRA’s intervention.

APRA’s intervention was based on one key principle – sustainability. It’s important to note this isn’t just a product and pricing change – it’s a holistic change including philosophy, approach & strategy, operational practices, risk and governance, along with data management. There has been a lot of debate in the market about why and how we got to this point, and while this is interesting the reality is that if these changes didn’t occur, it’s unlikely we would have Income Insurance products in the future.

APRA’s expectations combined with the Actuaries Institute’s IDII Reference Product and Sustainability Guide laid out some clearly defined “guardrails” for insurers in respect to product design and pricing that were about re-setting the product back to its fundamental purpose. Providing financial support by replacing part of a client’s regular income if they are unable to work due to accident, illness or injury.

Interpretation of these ‘guardrails’ has been mixed and varied across insurers but ultimately APRA will be considering whether the industry has delivered on what it was asked to do and assess accordingly in early 2022.

The days of the industry seeing most applications being submitted on maximum Monthly Benefit amounts, 30 Day Waiting Periods, to Age 65 Benefit Periods at the cheapest price may well be changing. IDII products in the market now are all quite different and determining which product is most appropriate becomes more subjective than ever. Therefore, considering how Income Insurance will be used in the advice process is something that needs a conscious rethink by advisers moving forward. Matching shorter term Income Insurance benefit periods such as 2 & 5 years with complementary lump sum covers is expected to be part of the considerations that advisers will make as a result of the changing landscape.

As an industry, we all have a collective responsibility to ensure Income Insurance products exist to support people when they need it most. However, we need to step up our game and not go back to the ‘old ways’ and more traditional mindsets. What was done in the past won’t work in the future. The longer the benefit period, the greater the uncertainty and the higher the risk of future premium increases.

Now is the time for advisers to contemplate what these changes mean for their insurance ‘house view’ moving forward and challenge the conventional thinking about Income Insurance as the world as we knew it has now changed forever. While this may be our collective reality, the one thing that remains consistent is the need for and the value of professional insurance advice.

APRA’s edict to life insurers to focus on sustainable practices in respect to the design, features, pricing and management of individual disability income insurance, places responsibility on product managers and actuaries to rebuild the product.

Not only do the products have to be sustainable, but they also need to be attractive to consumer and, of course, do the job. It must protect the insured’s income by providing a benefit in the event of illness or injury.

To achieve this, APRA have stepped in and told insurers to remove elements and add restrictions on others in order to ensure the future of the products. Outside excessive discounting for new clients paid for by existing ones, there are some other less obvious discounting practices – that may erode profitability over time.

My examples both relate to the underwriting process; a process of negotiation sometimes- but it seems often the wrong aspects are being bargained.

Manipulation of occupational rating factors.

One of the easiest ways to obtain a discount for disability income is to try and move a client’s occupation rating to a higher category (eg white collar to professional) the idea being that more ‘select’ occupations get higher discounts. 

But – select occupations tend to be less common and it is tempting for advisers to negotiate with underwriters on the basis that their client deserves to be in a more “favourable” category – and hence get a discount, even if the client doesn’t strictly meet the criteria to be included in that category.

The problem is that the life insurers’ book is then skewed toward discounted lives when the expectation is that the book will be balanced – yes, some occupations will be discounted, but most pay a standard rate and some a loaded rate – to account for the differences in claims experience across different occupations.

So, if a life insurers’ premiums are expected to be balanced – but too many are discounted by creep into a discounted occupational category – the effect is that profit is reduced as there is not enough premium to cover expected claims, expenses and commission collected.

Loading Waivers.

This works by providing selected advisers the ability to ‘waive’ medical loadings up to a limit – that is, a loading is imposed by the underwriter after the medical assessment and recorded on the policy system – but not charged to or paid by the client. 

The effect is that all the insured lives who are not clients of an adviser in the loading waiver program subsidise all those clients whose loadings are waived. This is not equitable, or in line with the principles of risk sharing and insurance generally.

This practice also erodes profitability by attracting a higher number of substandard lives – as an adviser will always place business where most favourable (and cost effective) for clients. So, if one company offers loading waivers and one does not – then the loaded lives will all be placed as ‘standard’ with the company offering waivers.

The final thought.

The challenges facing our industry have not been cause by one single event, but rather a series of choices that erode over time. Part of our commitment to the industry, clients and Advisers is to acknowledge these practices and present a better way forward.

Operational efficiency has always been the key focus for any professional services business, but where you also operate in a tough regulatory environment, it’s even more critical. However, not only do Risk Advisers face an increased cost of compliance (and seemingly endless change), they’re also seeing reduced income from commissions. And while compliance and commissions take up a lot of focus and airtime these two factors are somewhat immovable – as they are legislated.

So where can you get some of that margin back? Your major supplier is the first place to look.

I spoke at a professional development day recently and was asked to go back in time a bit and look at recent history in life insurance. For the ‘this is my first job’ demographic within the audience, I passed around a ‘memo’ from 1989 – a quaint, hand typed missive that would wander around inboxes back then… which were actually boxes that sat on your desk. Then came the fax machine. Then came email. Now we have portals and applications – that process work in real-time.

What is important to highlight here is not the history lesson itself, but to understand that with changes in technology there are changes in expectations, and life insurance has always been a people business, and an emotional one. What we do and what we say has implications for people’s lives and livelihood, so the time taken becomes a reflection of that importance. It was ok to call someone back a few days later, now a same day response is appropriate (ideally within a few hours).

At Integrity, we have embraced technology to the extent that is can speed up processes that don’t need my attention so that ultimately, I have more time to do the human stuff. Like speak to Advisers, provide considered decisions, facilitate their advice, understand their business, and clients.  

Underwriters, policy administrators, and even more importantly, claims managers – need to be efficient with the routine stuff – get it right every time – so they can concentrate on the less routine. But those less routine issues are the ones that really count in life insurance. The ability to consider and write a contract so a customer can take a risk and start or expand their business. The customer on claim, who could use a slightly longer chat with their claims manager, or adviser. To help them through that time.

And, you know what? More time spent talking about the needs of our customers, supported by great digital tools – might go some way to making this business fun again. Fun because we can engage more, riskies are fun people! And having done our job from sale to claim, we can also be satisfied we’ve met our noble purpose.

This is excerpt from “The Fight for Future Markets Report. Attracting Millennials to advice and insurance”

In our report we suggest some ideas to help attract new business. For the full content and report you can download it here.

1. Broaden the relevance of life insurance for those without kids by highlighting the benefits and need for TPD and Income Protection.

One of the biggest barriers to getting millennials on board with life insurance is their belief that it isn’t relevant to them. While many are interested in learning more about life policies and even open to purchasing them, there is a common perception that if you don’t have children, large debts or a spouse, then life insurance isn’t for you. Millennials without children need support in understanding that the range of life insurance on offer includes policies appropriate for their individual circumstances, and that there is a cost benefit in taking these out early. Make sure your value proposition stresses that life insurance can be and is relevant to young, single and childless Australians too.

2. Consider experiments in low-cost advice as referrers (e.g. help them validate their research).

Millennials want premium advice, but the challenge is they’re not willing to pay for it. One way to bring forward the benefit and help them see how financial advice could assist them, is to help them dip their toe in the water through low-touch, low-cost interactions. Offering robo-advice, supplemented by a short in-person discussion to walk through the recommendations and make adjustments where necessary, could be a good way to start building a relationship and help embed yourself as a trusted partner who’s there for them – on their terms. Alternatively, you might consider the possibility of offering ‘validation consultations’, whereby young Australians with a desire to be independent and self-sufficient can independently compare policies and then come to you for questions or support before making the final decision themselves. Focus on the experience and encouraging reviews, not trying to lock them in for the long-term. They may be saying ‘no’ to the model, not the value.

3. Project-based selling and financial coaching. 

While traditional full-service financial or risk advice may not be right for millennials right now, this doesn’t mean the door is closed altogether. You might choose to provide low-cost financial or risk ‘coaching’ to young clients who are simply interested in improving their financial literacy, and progress to fully-fledged advice and product recommendations as the client progresses through life stages. What if the initial focus was solely on coaching them to achieve their goals?

Fixed-cost packages with premiums and payouts tailored to life stage are an opportunity to offer transparent, simplified options for younger customers who are looking to get started with life insurance but aren’t ready to commit to a more complex decision-making processes.