The insurance industry is trying to grapple with high lapse rates and lower profits and risk advisers often get blamed for churning and commissions. But part of the jigsaw is softer underwriting by insurance companies trying to get as many people as possible onto their books, says one adviser.
Risk adviser Meike Suggars defines softer underwriting as when an insurance company has underwriting terms which are too lax in order to get new business for the books.
“At the end of the day the insurance game is a gamble and the insurance company is gambling the client won’t get sick.
“But we’re seeing more and more underwriting decisions being made where underwriting terms are far more flexible than they were five or 10 years ago, particularly around things like BMI.”
Most insurance companies give people who have a BMI of 34 or 35 – considered clinically obese – a standard premium, Suggars says.
“So insurance companies are happy to take a gamble with someone who is obese and offer them standard rates, because it’s easy for them to get business on the books – even when they know the medical risks involved with obesity.”
“I think it’s crazy that insurance companies are willing to take that gamble… they are happy to give them the same premium rate as someone who is a healthy weight.”
The problem, says Suggars, is while in the short-term it is “great” for all involved, in the future it causes policy premium increases and lapse rates.
“The client gets cheap premiums in the short-term even though they are enormous and as an adviser I look good because I’ve been able to get the client cheap premiums, and for the insurance company they’ve been able to get someone else on their books.
“However in the medium term, it’s bad for the client because their premiums start to go up… And those premium increases are across the board. It’s not just for those clients who have a BMI of 35, it's everyone, because there are too many fat people on the books who aren’t paying extra because they’re overweight.
“So it’s bad for the clients because in a few years their premiums become far more expensive. And bad for me as an adviser because the clients’ premiums go up. And bad for insurance companies because the client wants to now change their product to something on the market that’s justifiably cheaper, so they are left with a hole in their books because that client’s policy hadn’t become profitable yet.”
Suggars said the decision to change this has to come from the insurance companies. She recommends Zurich, OnePath and Macquarie, “who haven’t closed off a product series for up to 10 years, so all the product upgrades they do get passed all the way back”.
She likes being able to recommend a product to a client today which she recommended to a client seven years ago.
“If I know an insurance company is going to jack their prices up in a few years, creating angst to me because of a client on the phone angry that their prices have gone up, by 20 or 30% then I’m less likely to write business with that company."
The issue is something advisers are becoming more aware of, Suggars said.
“You see insurance companies talk more about sustainability and constantly point figure at commissions, but there a whole lot of pieces which solve the sustainability jigsaw.”