When we have so much to deal with in the ‘now’, like regulatory change (and uncertainty), technological transformation, and supporting client needs today, it’s easy to lose sight of what’s on the horizon. But what makes us good at our jobs (Adviser and Underwriter alike) is the ability to see the writing on the wall and ensure we take steps now to plan for what’s to come. Here are some key areas to watch that are likely to have broad impacts for Advisers, insurers, and clients.

More Australians may become critically ill over the next two years.

Data from the Medicare Benefits Schedule (MBS), analysed by the Heart Foundation, reveals a 10% drop in GP visits for the management of chronic disease in March 2020, equating to 96,000 fewer visits compared to the same time last year*. In fact, across the board fewer of us have been visiting the doctor to get check-ups – between 30% to 50% , with a 40% drop in pathology^.

What does this mean? Well we know the rates at which Australian’s develop chronic diseases, we’re just seeing the delay of those being discovered and treated. From a client point of view, not discovering these things sooner may make them harder to treat, and from an industry point of view, the increase in severity means bigger payments and potential cases for increasing the cost of premiums.

Mental health impacts are still largely unknown.

We do not yet know the impacts that long term isolation or living through a pandemic will have on people, but we do know enough about psychology and claims data to know that we are likely to see an increase in mental health issues. Acknowledging this very issue, the Federal Government pumped an additional $500 million into suicide prevention and mental health support as part of their COVID-19 response.

That said, it’s not only mental health issues and resulting claims caused directly by the pandemic, but as we have seen, people’s ability to access social support (emotional and practical) through extended family and other social interactions has been significantly affected by restrictions on movement and travel. This means for people who were already managing mental health concerns, their access to support has been limited. What we may see is not only relapse but mental health conditions on top of other long-term illness or injury.

Increased cost of Income Insurance.

While not a direct result of COVID-19 and more to do with the unsustainability of the products, the increased cost of II or IP (income protection) is likely going to compound the two other issues. Not the least of which because so many insurers cross-subsidise their products. Integrity, of course, does not.

So what does this mean for Advisers and clients?

It probably wouldn’t surprise anyone if prices for new protection policies started to rise, which means getting cover in place now may not be the worst idea. Whether we see price increases – and how big these may be – will largely depend on market forces, but either way, insurers are expecting a significant rise in claims – which often leads to higher prices.

Advisers have another important role to play here too and that is keeping their clients covered, even as financial pressure continues for many clients. Integrity, like many insurers, has options like premium waivers for financial hardship and ‘premium breaks’. These should always be the first resort before cancelling and removing cover altogether.

*http://www.mbsonline.gov.au/internet/mbsonline/publishing.nsf/Content/downloads

^https://www.dailytelegraph.com.au/coronavirus/the-illnesses-being-missed-thanks-to-covid19-and-skipping-doctor-visits/news-story/1226638711cf48ae8dd0d39bdb088e86

This information has been prepared without considering your personal objectives, financial situation or needs. Before acting on it, please consider its appropriateness to your circumstances.

One of the benefits of being a relatively small organisation is that we don’t need to apply sets of arbitrary rules to govern our approach to underwriting. Instead, we align to a set of values that are about finding simple solutions to complex cases, getting the most number of people insured as possible, and in so doing  achieve the right outcome for the client but also for our pool of people already insured with us.

This is actually the cornerstone of risk transfer – people pay us a premium to pool their risk with lots of others, and we manage that premium pool for the benefit of those whom life delivers an illness, injury or even death.

To carry out this work properly one must ‘act with integrity’, a concept so important to us – it’s how we named our company. We are guardians of the risk pool, and our policyholders depend on us to only allow properly selected risks (new policyholders) into that pool.

We sat down with our Chief Underwriter, Scott Hodgson to learn more about how the team operate and our broad, balanced approach to underwriting.

First question Scott, why no rule book?

Scott: Arbitrary rules (or rules of thumb) are great as a starting point, for simple standard cases, or as a tool to govern a large underwriting team, but if the whole company is set up to operate like that, when you get something that does not fit into the mould it often means an inconsistent outcome, and advisers want certainty – good underwriters try their utmost to deliver this. Our philosophy is about giving Advisers the support they need to be efficient in their business and to facilitate the advice they provide by writing appropriate policies to cover client’s risks.

What is your view on cases that might be ‘too complex’ for other insurers, but you are open to consider? We know this is a bit of a specialty for the team we have assembled at Integrity who are all very senior with a lot of years and experience behind them.

Scott: Sometimes ‘complexity’ is relative to the companies’ risk tolerance and expense margins. Complex = time and therefore cost. What we’re seeing through the current pandemic, is that many underwriters are refusing risks over a certain tolerance and applying rules to selected industries based on anecdotal evidence. It makes for efficient operations, but I am not sure it always results in the best outcomes for clients or Advisers… or even for the life company.

We find medical risk is often about asking the ‘next’ question to get the best information – as the more detail on medical history we get the better. Our underwriting decision making on medical risks is aided by good data from our reinsurer (often international, but some Australian experience is being included where it is statistically viable).

For financial risks it’s important to have an understanding of how business (especially small to medium enterprise) works, and what challenges they face. Even though all our senior underwriters have many years of experience in insurance, we have all worked in industries other than life insurance – some of us in small businesses as well as academia and even global companies. We understand life insurance as a financial tool – it allows businesspeople to take on risks sensibly. It’s the glue of commerce.

At its heart, life insurance should be simple. The insurer is paid a fair price in good faith for a policy which has been clearly explained. When the unexpected happens, the insurer responds quickly and fairly, and treats the insured with respect. Both parties win.

However, as the Hayne Royal Commission revealed, not all providers were seen by the community to hold up their end of the bargain. Some of the most shocking case studies were engaged in wilful wrongdoing and claim avoidance, but these were a minority of the industry as a whole*. Equally, however, the structure of the industry and providers’ business models were also responsible. Opaque policies and convoluted claims processes combined with conflicted commission and remuneration structures often resulted in inappropriate outcomes for Australian consumers. The effect was that trust in life insurance diminished.

The good news is that the majority of life insurers are working hard to address the issues identified in the Royal Commission, and the Life Insurance Framework, plus the industry’s COVID-19 response, has laid the groundwork for this.

How did the life insurance industry end up here?

There is no simple answer to this question, unfortunately. In addition to the conflicted remuneration and commission structures, the fact that life insurance is dominated by a relatively small number of key players, and that financial services in Australia are highly vertically integrated, have all contributed to the problems highlighted by Commissioner Hayne.

Despite calls for bans on commissions, there are strong arguments for why they should be retained – it’s not a black and white issue. In many cases, work done by a distributor or broker is not charged as a separate fee. If it was, the argument goes, fewer Australians would seek or have access to life insurance, and the widespread problem of underinsurance would become worse. Indeed, many of the larger insurers continue to argue, post Royal Commission, that the removal of commissions will serve only to reduce competition in the market, increase consumer risk and ultimately empower large institutions.

At the same time, the necessity of finding ways to control conflicts of interest within a commission structure is clear. There are risks inherent in a sales-driven, commission culture for both consumers and insurers. For consumers, it’s the risk that unscrupulous brokers can be financially rewarded for recommending unsuitable, but more profitable products. But for the insurer, commission structures aren’t nirvana either. In some ways they can create a disconnect between how a sales force is rewarded, and how a claims department could traditional be viewed as “successful” – that is keeping costs down (and paying as few claims as possible is one way of doing that).

This is not to say that claims departments aren’t empathetic to claimants, or that they are eager to reject claims – but when performance targets are linked to the number of claims closed and healthy loss ratios, there is a clear incentive to make the claims process difficult. And this often makes the process adversarial.

A different, better model.

It was in part a desire not to incentivise sales that has brought new insurers like Integrity into the market. It seemed clear that the industry could benefit from competition in the form of a disruptor – one with a focus on being transparent, simple and fair – and that such a model could be financially viable for both sides of the transaction.

It was here that technology played an important role in keeping the process simple and costs low. With the benefit of technology, insurers like Integrity, have been able to create more simple application processes which reduces the number of questions by only asking for the information necessary.

Two of the biggest challenges associated with life insurance is that death and disability isn’t anyone’s favourite topic, and that putting a price on a life is a difficult process. However, if you take the view that a simple financial settlement shouldn’t be the only thing an insurer offers, then the focus becomes support and outcomes as opposed to money. The reality is that most people who suffer a serious illness or accident, or have a family member die early, have never before dealt with such an event. They often have no experience with the hospital system, have never organised a funeral, and are unsure of what is required, and how to do it. An insurer can not only provide finance, but can also provide emotional and logistical support too.

This requires a personal relationship with the insured, one which is not adversarial but which seeks to support. If both insured and insurer are transparent and fair from the beginning, the outcomes are far more likely to be better for both parties. We all know that a good dose of prevention is better than trying to find a cure, and that better outcomes result from early support and intervention. This can’t just be support to the claimant – it also means a close relationship with employers, medical professionals and other service providers as well. Because good relationships mean that when a problem with an employee is identified, even if it appears to be a relatively minor problem, the insurer can reach out early, and offer support before events spiral out of control. Without strong relationships, or if the relationship is adversarial, claimants are less likely to work with the insurer to find win-win solutions – which means everyone loses.

Another factor to bear in mind is that some clients have more challenges than others when it comes to accessing medical and other services. In regional areas, such services can be few and far between, and navigating the health system can be challenging. In a traditional claims process which reacts only when the claim has been lodged, small and potentially resolvable problem can become big, challenging problems by the time they are dealt with. A more flexible claims process which begins as soon as a problem is identified, before a claim is lodged, and which takes into account a client’s specific circumstances can help clients to better navigate the challenges they face.

Ultimately, it is the claims experience which determines whether an insurer’s reputation thrives or dies and a simple, transparent and fair claims process is one way to help demonstrate the value of life and income insurance and rebuild trust in the industry.