Lapse rates blamed on adviser disengagement

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One reason for the increasingly high lapse rates in the life insurance industry is due to advisers losing interest and going back to traditional investment advice, Australian Prudential Regulation Authority has said.

In its Insight publication reviewing the life insurance industry at the end of last year, APRA stated “increased disengagement of advisers as they revert to their traditional focus area of investment business” is contributing to high lapse rates.

The authority also blamed the lapse rates on churning, because “adviser remuneration is tilted more to rewarding new business rather than maintaining policies, [so] advisers can be tempted to encourage policyholders to move from one insurer to another”.

However, it does not seem to be all the fault of advisers. APRA said another factor for high lapses is the increasing prominence given by life insurers to directly marketed business, where a financial planner is not involved.

“This form of business intrinsically suffers from very high lapse rates, especially in the first year after sale…there is usually much more uncertainty about the long-term reliability of lapse assumptions than in the case of business sold through more traditional channels.”

That the industry is facing a significant problem with lapse rates is well-publicised. Overall, annual lapse rates for death or TPD and disability income benefits have increased from 11 to 12% per annum when they were at their lowest level in 2006, to 16 to 17% per annum in 2013.

This year, APRA is urging life insurers to monitor their business closely to try to figure out the underlying reasons for the problems the industry faces.

“Historically, life insurers have paid more regard to business acquisition than business retention and APRA would expect some rebalancing of focus in this regard.”

APRA also said it is concerned insurers have not appropriately prepared for the ‘anti-selection’ effect: less healthy lives will be more inclined to retain their policies over time and more healthy lives less so – particularly in the face of rising premiums.

The authority linked the lapse rate with a rise in the anti-selection effect.

“Increasing lapses may reflect an increase in the anti-selection effect, in which case the impact on profitability is even worse.”
  • alleycat on 17/01/2014 8:34:57 AM

    Dear Anita,
    I've only been in this business some 38 years and have worked in the senior management of a couple of life companies.
    Life companies have no morality.
    It's a fact of life some time ago all companies despite the apparent potential risks associated with "Lifetime Benefits", offered the cover at reasonable pricing until one day either as individuals or by collusion as a group decided to remove lifetime benefits on future contracts offered.

    The line you've pushed on why the premiums have increased is peddled out by the life company to justify why they've ostensibly increased premiums across the board for all contracts with lifetime benefits.
    They can't cancel the clients contract, but they can certainly increase the cost to a level where the client won't pay the premium.
    If that's not immoral, I'm not sure what you would call it then.
    Do you think in say 2 years time, provided your client's health hasn't changed and your clients premiums are increased by another 25.0% that argument will be supported ?

    Assuming your client can still get cover due to health and age, I think one of you will be making a decision that should have been made after the first increase. You can sell the potential for lifetime benefits all you like but the cost in the end for your client will be the ultimate factor in what happens next.

    If you do your research there are better contracts out there than the one we've been using. Think of one with "Z" as potentially one provided you can overcome their inept administration and their underwriters.

  • Anita Muecke on 16/01/2014 9:44:38 AM

    alleycat - I have a client with the same bank on a lifetime IP benefit - like your client her policy got a rate adjustment of + 30% this year on top of a 20% rate adjustment a couple of years ago. We sat down together and calculated what the potential benefit would be if she actually did need to claim - particularly for the period age 65 (when her 2nd 'top up' IP runs out) to 87 (her life expectancy) - it's a SUBSTANTIAL sum of money.

    Insurers, bank owned or not, are running businesses and they have an obligation to shareholders and policy holders alike to remain profitable. The insurer doesn't price the policy individually for each client based on their individual claims but for a class of business - for example 35 - 55 female non smoking white collar - if the claims experience for that class is worse that anticipated by actuaries then a rate adjustment is inevitable and prudent - I personally don't believe morality comes into this.

  • Stevie's on 16/01/2014 7:40:01 AM

    Agreed Alley at

  • alleycat on 15/01/2014 3:45:25 PM

    StevieC, if you are talking about the same particular life company that I am, you will note that most life companies increase their stepped premiums on a rate for age basis of between 8% -10%.
    The life company you might ask.... "which company" offers a client loyalty bonus of cover increases but their age increases are by 15.0% which means the client's paying for it anyway.
    It's a snow job..... and by and large,... a joke.

  • StevieC on 13/01/2014 9:14:25 AM

    Alleycat, I could not agree more, the insurance companies have no loyalty to clients at all, they may provide a 2-5% loyalty bonus each year, but hit them with a huge annual increase ???
    Best interest for the clients is what we are bound by, if it means finding a better product at a cheaper price then we are bound to action.
    Commerciality also works both ways, however i am sure that the "Riskies" will attract adverse comment from the Insurance companies as the scapegoat for clients cancelling.

  • alleycat on 8/01/2014 7:49:24 AM

    There are other more obvious reasons for higher lapse rates and it has to do with the lack of morality of Life companies.

    In the Income Protection area we have had clients with one particular life company on their books for more than 14 years. They had lifetime benefits.
    None of our clients have never claimed, however the particular life company has increased each and every client's premiums by 33 1/3% in the last year.
    Which bank owned Life Company, you might ask ?
    They have made it untenable for the client's to stay there. At the client's request we have been asked to provide insurance elsewhere.
    They've reap the benefits of increasing premiums for a very long time, not paid claims and now have told the client's basically,... "we don't want you."

    For years Life companies have had clients on their books and charged a particular premium.
    Approximately 4 years later a twin brother approaches the same company for the same amount of cover and gets it at a 40.0% discount to his twin brother.
    So much for client loyalty.
    There's surely none displayed by Life companies.
    Life companies can't bleat about lapses, they are a big part of the problem.
    How moral is the particular life company, well we have made the commercial decision "in the client interest" to put them somewhere else. The salient point is, if we don't, someone else will.

  • Mark Thompson on 7/01/2014 3:55:53 PM

    How about reverse anti selection by the insurers with old books of business, where they increase premiums and drive out the healthy and are only left the unhealthy, who eventually make a claim.

  • Michael on 7/01/2014 3:28:49 PM

    Pretty easy problem to fix:-
    1. pay commission on group life
    2. limit initial commision to no more than 30% upfront and then pay 20% on renewal each year for the first 7 years
    Advisers would then be paid for being engaged for the whole of the first 7 years unlike the situation currently. Sometime during the 7 year period it would be reasonable to expect that many policies should be rewritten due to changes in circumstances.
    Churning only happens if underwriters make it financially beneficial to do so, advisers are not the problem.

  • Innocent Observer on 7/01/2014 3:23:40 PM

    Wait a minute....

    One minute the high lapse rates are attributed to advisers being there, the next it's because we've had enough of being the scapegoat & leave the client to their own devices????

    Damned if you do, damned if you don't.

  • Stephen on 7/01/2014 3:22:27 PM

    Is APRA really in touch with what affecting lapses.
    Yes advisers are reducing servicing to risk clients, yes there is a bias to new verse churning but,
    - with direct no-advice product sales and pressure on types on payments (commissions) advisers like any business person are looking at the more profitable area of their business.
    - churning, licencees are are discouraging the practice due to pressure from APRA, ASIC, public pressure groups and FOFA Best Interest Duty.
    Having experienced a significant spike in claims shouldn't the industry be assessing why so many Australian are making increased claims.

  • Phil on 7/01/2014 3:19:17 PM

    This is a very sticky debate.

    If insurers are 'increasing prominence' in the direct insurance space it is then fair to expect advisers to get paid over time (level commissions) as they will risk another insurer selling directly to their client?

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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