The state of the life insurance sector as outlined in the Australian Prudential Regulation Authority’s (APRA) APRA 2020 YEAR IN REVIEW, released on 5 February 2021, comes as no surprise to those of us working at the coal face in this sector.
We know the industry experienced a significant decline in return on net assets (down to negative 6 per cent in the 12 months to 30 June 2020; compared with 3.5 per cent in the preceding year).
We also know, as APRA noted:
“Profitability of risk products has substantially declined in recent years. The net profit margin for 2019/20 was negative 10 per cent, considerably below the longer-term average of around 3 per cent. This result was driven largely by continued substantial losses in IDII [Income Protection insurance] and further declines in the profitability of individual lump sum and group business [Figure 3d].”
Accordingly, we also know the pressure to continue to increase premiums is not going away any time soon. That is precisely why we have decided to address this issue up front in our insurance cover review process with all clients this year.
All client review communications will note that the cost of insurance typically increases each year in line with increasing age, risk of claim and/or increases in level of cover. Further, we will also flag other economic and regulatory factors that are putting pressure on ALL insurers to increase premiums.
Accordingly, we have provided an overview of the issues involved in a Special Communique on our website and a link to this background paper will also be featured in all client insurance review communications this year.
The background paper highlights the high volume of claims payments made by insurers in recent years and also underscores the fact that valid claims are indeed paid.
We provide independent validation of this fact, citing APRA’s report that for the year to 30 June 2020, the claim acceptance rate across all life insurance cover types and distribution channels was 94 per cent.
We, of course, underscore the fact that if you have an adviser, like AFRM, assisting you with your claim, the claim acceptance rates are even higher.
We also point to the new regulatory measures introduced by APRA in 2019, that seek to force insurance companies to change the way they had been pricing many insurance products because the regulator was concerned about sustainability for the future of the life insurance industry.
We plainly state that the premiums being charged for some types of life insurance products in recent years were not economically sustainable. Put simply, premiums have been “cheap” for the risk the insurers have insured. In a hyper-competitive insurance market, with all players competing for market-share, it has taken the regulator to step in to provide some sensibility because no insurer could afford to be the first to move.
However, we also, highlight that APRA’s strategy to encourage more conservative investing and more conservative product terms and premiums; together; provide clients with the “good news” that these measures will ultimately result in a stronger industry. A life insurance industry that will be able to continue to pay claims as they arise into the future – so clients can have faith that provided they get the right advice and put the right cover in place, they can have confidence in the protection of their own future financial security.
AFRM has always worked with our clients – and yours - with the mindset of putting in place long-term risk mitigation solutions. We build our advice based on what we know works at claim time, having achieved more than $200 million worth of claims paid out to our clients to date. When it matters most, we believe that it is our experience that makes the difference.
We appreciate the referral partner relationship we have with your practice and would like to assure you that any annual insurance reviews we undertake for your clients this year will be performed to our usual high standards.
Perhaps refer your clients to the checklist on our website so they can easily determine if it is time for them to review their cover?
Sincerely,
Rob Vitnell Managing Director AFRM