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.”