AFRM Referral Partner Update - 6 October 2021
What to do about the challenge of ongoing insurance premium increases?
Talk to any financial adviser in recent months and the subject of insurance premium hikes is pretty much always met with a wince and a shake of the head.
It is that nasty, nagging, pain that just won’t go away.
And if you ask an adviser what the solution to it is, more often than not, you will see that wince and shake of the head again, accompanied by words along the line of:
“I don’t know. It is a really tough one. It’s hard!”
More often than not, they’ll be thinking of the related client conversation when they are saying how tough and hard it is to deal with.
So, how do we address such a tough and difficult issue with our clients? How should we be talking about it?
Well if we are to believe recent media reports, it seems the Financial Services Council (FSC), is opting for a defensive, almost apologist approach, pointing to a range of factors seemingly outside of the control of the insurance sector such as:
A significant increase in insurance claim numbers, largely as a result of increased numbers of mental health-related claims, being exacerbated by the COVID-19 pandemic.
Those increased claims contributing to an overall total net loss after tax of $1.6 billion across the life insurance sector for the year to 30 June 2021, and;
Higher than expected claims for individual income protection insurance (IP), resulting in net loss after tax of $179 million in this product alone, wiping out almost all the profit from other individual product lines.
The FSC ‘s senior policy manager for life insurance, Nick Kirwan, is quoted as defending these numbers saying they are proof the insurance sector is fulfilling its social contract.
“The life insurance industry is playing its crucial role in protecting the Australian community,” Mr Kirwan is reported to have said.
“Overall, during 2019 life insurance companies paid out $12 billion to 101,821 Australians and their families. Every single day last year, the industry paid out the equivalent of almost $33 million to 279 Australians and their families, providing crucial financial support when people need it most.”
“The flip-side of that coin is that these increasing claims are the reason why many Australian households will have noticed increases in their life insurance premiums. We know premium increases are never welcome, but like any business, life insurers must balance the books. Premiums coming in must cover the cost of the claims going out,” Mr Kirwan said.
Meanwhile, at the Association of Financial Advisers (AFA) Hybrid Conference 2021, on 21-22 September, AIA chief executive, Damien Mu, is reported to have conceded that volatility in premiums had not been a “friend” to the industry and was not good for the cost of an advice business, not good for relationships with clients, and not good for the cost of the industry.
And TAL chief executive, Brett Clark, is reported to have said there was “no joy” for anyone when it came to the premium increases the market had seen because it eroded confidence from customers and in the advice process.
Like the FSC, Mr Clark pointed to increased claims numbers and also lower interest rates, which he said had not helped the sustainability of the life insurance industry.
Mr Clark is also reported to have said the change forced on the industry by the Australian Prudential Regulation Authority’s (APRA) intervention to change the way Income Protection (IP) products are structured and offered was: “…sorely needed and frankly, long overdue.”
Now, if we are going to balance the arguments outlined above that the insurance sector is using in its defence, I would have to say that the current issues we face are not entirely due to unforeseen circumstances, as the industry seems to want us to believe.
The insurance industry has to take ownership and accountability for its fair share of the blame for the situation we find ourselves in today.
It was the industry that chose to cross-subsidise IP premiums via other products. It was the industry’s financial governance practices that prompted APRA to intervene with the aim of improving the financial sustainability of the industry. Thus, ultimately resulting in increased premiums and new Income Protection products with limitations to their offerings set by the regulator.
But all of this aside, for me, the one thing that has been missing in much of the discussion has been the very real question of how we best explain these momentous changes to the life insurance sector and its products to our clients?
How do we talk about higher prices and the inevitable resentment that can bring in a way that resonates with our clients and perhaps mitigates some of that irritation?
I recently chose to break it down for AFRM’s clients by sharing my own personal journey through recent insurance premium hikes. I explained how my knowledge of the context of APRA’s market intervention and of why it had done it, did not lessen my irritation, nor the pain I felt in my hip pocket.
I also talked through the real and true value provided by my various insurance policies – and of how they provide financial protection for my wife and three small children into the future, should I ever suffer the misfortune of being unable to work.
I reduced all of the information and the variables down to my wife’s and my own very personal reasons for choosing to keep all of the policies we currently have in place.
And I have to say it has been gratifying to see the largely positive response from our clients to this approach, as demonstrated by this piece of unsolicited client feedback:
“Thanks for these special communiques, and regular updates - they reinforce why I am happy to continue with AFRM and have recommended [it] to a few friends - no 'sales fluff'; just genuine, intelligent, advice.”
Managing Director AFRM.
In AFRM Managing Director, Rob Vitnell’s, August Referral Partner Update on the subject of “retrospective claims” he mentioned the case of husband and wife clients, John and Kate [names changed to protect client privacy], who scheduled a review meeting earlier this year.
Their last review had been in 2019.
Among several reason for seeking a review of their current financial risk management plan were:
To revisit discussions back in 2019 when John was considering changing his level and type of cover to reduce the cost of his premiums,
To review whether their current financial risk management plan remained appropriate now that their children were approaching their teens and in 20 years’ time John would be approaching retirement, and;
To assess whether their “expensive” insurance is providing the appropriate level of cover that they had originally planned.
John and Kate also wanted to discuss their superannuation and retirement planning. AFRM provided advice in relation to these subjects as far as they related to their financial risk management plans but guided them to their referring financial advisor and to an estate planning law specialist for more specific advice in these areas.
John held three policies: Income Protection (IP); Term Life with Total and Permanent Disability (TPD); and a Trauma policy, with premiums for all three policies totalling around $650 per month ($7,800 per annum).
Kate also held the same three policies. However, two of Kate’s policies were subject to exclusions and her monthly premiums were slightly higher, totalling $812 ($9,744 per annum).
Together, the couple’s life insurance premiums totalled more than $17,500 per annum.
John and Kate were keen to investigate ways of mitigating their current premium costs.
During the review meeting, Rob asked how they had both been health-wise over the time since they had last caught up?
That’s when John revealed he’d had a major medical episode several weeks earlier and had to be rushed to hospital in an ambulance. He’d even received shock treatment via a defibrillator on the way.
It turns out, John had essentially had a heart attack. After being admitted to Emergency he’d undergone an angiogram and had a stent inserted in one of his heart’s arteries. He was in hospital for three days (including two nights).
While no heart tissue had “died” during the event, he had suffered what is called a supraventricular tachycardia (SVT), which is a hyper rapid heartbeat that develops when the normal electrical impulses of the heart are disrupted. He’d also shown high levels of Troponin in his blood. (Very high levels of troponin are considered a sign that a heart attack has occurred.)
These various factors are crucial to ensuring a trauma claim meets the definition of a heart attack under the terms of a policy.
Despite the seriousness of this incident, it had not occurred to John that this episode merited a claim under his Trauma insurance. Again, the very same insurance that he had questioned the merit of continuing to pay the premiums.
Rob counselled John not to make any changes to his insurance policies until such time as AFRM had investigated filing a Trauma claim on his behalf. Rob also had to point out that this recent serious medical episode may hinder his ability to get new policies on terms as favourable as those he already had.
AFRM then investigated the potential of making a claim under John’s Trauma insurance policy and also under the “Nursing Care” ancillary benefits included in his IP policy. [Read this separate case study for more information about ancillary benefits]
Jump forward to September 2021 after months of compiling and submitting all of the relevant documentation from John’s cardiologists, the Emergency Department treating physicians and other related medical and financial documentation and AFRM was pleased to advise John that he had been awarded a partial benefit under his Trauma policy in excess of $50,000 because his condition met its definition for “angioplasty – single or double vessel.”
However, an additional claim for an ancillary “Nursing Care” benefit under his IP policy did not meet the terms of the contract because to do so he would have had to have been in hospital for more than three consecutive days. He would have been eligible if he had spent one more day in hospital.
Needless to say, John was extremely appreciative of AFRM’s support through the claim process and was grateful for having that cover in place. Ironically, the very same policy is now up for renewal.
We suspect John will now see the real value in keeping this cover in place.