Macquarie Life's Active brings something new to insurance

Col Fullagar takes a look at the recently launched Macquarie Life product and what it brings to the life insurance industry.

Macquarie Life recently released a new insurance product in Australia called Active and it is sufficiently different from others previously available here to warrant some attention.

True to the form demonstrated by all insurers, Macquarie has talked up the positives and opportunities of the product; however it has been less effective in giving the counter position.

Advisers, however, are not just looking for where a product will satisfy a need, they also have to know where it may fall short either in its own right or in comparison to other products that are available.

In this way they can ensure it is correctly positioned in the advice process and also ensure the necessary explanatory wording appears in the Statement of Advice (SOA).

When it comes to analysis of their own products, insurers are nervous yet critical and self-analysis is an essential part of product promotion.

With this in mind, the following analysis of Macquarie Active has been approached from a position of deliberate bias.

The aim has been to identify any issues but then attempt to position those issues so an adviser can better make an informed decision whether or not to recommend the product in a particular situation.

The following article has been prepared to aid discussion.

It does not purport to be a thorough analysis of the product and as such it should not be used as the basis of advice. Advisers need to have their own research undertaken taking into account the particular needs of their clients.

What is active?

Active is a composite insurance product incorporating several different policy types:

• income protection insurance;
• term insurance; and
• trauma insurance.

There is no occupation-based total and permanent disability (TPD) or business expenses insurance equivalent. If these covers were needed, they would have to be taken on a stand-alone basis.

Income protection insurance

The income protection insurance under Active is not directly linked to the term component of the policy and it is only linked to the trauma component by virtue of the crisis ancillary benefit equivalent.

There are two types of income protection insurance which, rather than use the traditionally accepted and understood terms, are called by Macquarie-unique terms:

• income at claim = indemnity;
• income at application = agreed value.

The usual range of waiting and benefit periods is available, including a benefit period to age 70. The usual plethora of ancillary and optional benefits is also available.

Term insurance

The basis of benefit payment of the term insurance component is relatively standard. If the life insured dies or is diagnosed as terminally ill, the full insured benefit amount under the term insurance is payable. The term insurance benefit amount can; however, be made up of two components:

(i) Initial cover

Initial cover is the benefit amount that is shared between the term and trauma insurance components of the policy, much like a traditional term insurance policy with a trauma insurance rider.

If the first insured event to occur is the death or a diagnosed terminal illness of the life insured, the full initial cover amount is payable.

If, on the other hand, an insured event under the trauma insurance component of the policy occurs first, the applicable benefit amount would be payable (described later under trauma insurance) which would lead to a reduction in the initial cover component of the policy by an amount equivalent to the benefit payable.

For example, if a client required $1 million of death cover, this could be achieved by having initial cover of $1 million; however, if $400,000 was payable under the trauma insurance component, the death cover would reduce to $600,000.

The absence of any buy-back facility similar to that which exists with traditional term and trauma insurance means that if the life insured died or was diagnosed as terminally ill subsequent to a trauma insurance benefit payment, the amount payable would be less than the initial cover.

This could represent an underinsurance situation.

(ii) Additional cover

Additional death cover can be purchased to supplement the initial cover described above.

The additional death cover is pure death and terminal illness cover and as such it is not affected by any payments under the trauma insurance component of the policy.

Therefore if a client needed $1 million of death cover but the client was concerned that it could be eroded by early trauma benefit payments, $1 million of additional cover could be added to any initial cover insured.

If this strategy was followed, however, and the client died or was diagnosed as being terminally ill before suffering a trauma insured event, the client would receive their initial cover and also the $1 million additional cover, i.e. they would effectively be over-insured.

Some might defend this outcome by saying they have never known a claimant who complained about being over-insured.

While theoretically correct, the point still stands that appropriate advice is just that - neither too little nor too much insurance is put in place. In this way the client's insurance dollars are used to optimal effectiveness.

Trauma insurance

The trauma insurance component of Active is the area requiring the most analysis, as there are a number of aspects that would benefit from careful consideration.

Windfall claim

Active was in part designed to overcome one of the main issues insurers have with traditional trauma insurance, i.e. it has the potential to deliver a windfall claim payment to clients in that, even though they have suffered a relatively minor trauma insured event, the full benefit amount is payable.

Unfortunately, if insurers were not so intent on adding and liberalising insured event definitions in order to score risk insurance research points, the windfall problem could be largely mitigated.

Notwithstanding this, Active seeks to correct the position by making trauma insurance benefit payments severity-based. Insured events have up to five definition categories, A through to E, each of which represents a more severe occurrence of the particular insured event.

The more severe the occurrence of the insured event, the greater the percentage of the initial cover benefit amount that is paid.

For example, category A severity leads to 100 per cent of the initial cover being paid, category B a 65 per cent payment, and so on through to category E which has a 5 per cent benefit payment.

This aspect of the product structure certainly does achieve a more equitable level of benefit payment provided the definition of equity aligns the severity of the insured event to the financial loss sustained by the client.

Multiple payments

Traditional trauma insurance generally only pays the benefit amount once, on the first to occur insured event.

There are some exceptions, particularly the increasing number of so-called partial payments that are made and also early part payments upon the diagnosis of some chronic, debilitating insured events such as multiple sclerosis and muscular dystrophy.

Active, however, goes much further in that it provides for multiple trauma insurance benefit payments with each benefit payment reducing in full or in part the remaining initial cover amount.

For example, the life insured might suffer an insured event at category C severity (40 per cent payable), which would reduce the remaining insured cover to 60 per cent of the initial cover.

At a later date a category D severity insured event may occur (20 per cent benefit payment) which would reduce the remaining insured cover to 40 per cent of the initial cover.

The remaining cover is guaranteed never to go below 25 per cent of the initial cover; however, this guarantee ends at age 65.

The provision for multiple claim payments within Active is a positive aspect of the product that is aimed at alleviating the financial pressures arising from the occurrence over time of recurrent or multiple insured events.

Restrictions to cover

There are two main technical restrictions on benefit payment:

(i) Any insured event payment that is directly or indirectly related to a previous insured event payment reduces the second payment.

Therefore, if the second insured event was at the same severity level, for example, both were category C's there would be no second benefit payment.

If the second insured event was more severe, the difference only would be paid, for example, if the first to occur was a severity D (20 per cent) and the second was a severity B (65 per cent), only 45 per cent of the initial cover amount would be payable.

There is no time limit on this; for example, the second event could recur several years later. This type of situation would not be uncommon and therefore it would seem appropriate for the adviser to ensure the client is aware of this contingency.

Within the policy this is referred to as the Progressive Claim Condition.

(ii) After an insured event occurs that gives rise to a benefit payment, any amount paid will be deducted from any subsequent entitlement that arises within a period of 12 months, even if the subsequent claim is for an unrelated insured event.

The only exception to the above is if a claim in the 12-month exclusion period is for an accident (as defined) and even then the offset will still occur if there is any correlation between the two insured events.

The 12-month exclusion period is tied to the date of occurrence of each insured event as distinct from the date of benefit payment. Complications might arise when the date of "occurrence" is unclear i.e. a chronic condition. Again, this provision should be made known to the client. Within the policy this is referred to as the Limited Claim Period.

Severity (v) loss

When considering Active within a risk insurance recommendation, it should be borne in mind that severity and loss do not always correlate.

One way to position this is to consider the three core reasons behind trauma insurance:

1. to enable the client to obtain the best possible medical care;
2. to provide access to sometimes costly rehabilitation services; and
3. to enable the client to facilitate certain lifestyle changes.

It would be reasonable to position reasons (i) and (ii) as being severity-based in that medical care and rehabilitation are generally more costly the more severe the medical event.

Reason (iii) however is more standard of living-based in that the more affluent the client's standard of living, the greater the amount of funds that would be needed to make any desired lifestyle changes subsequent to the occurrence of a trauma insured event.

Active is generically suited to protecting reasons (i) and (ii) but is not necessarily as well suited to providing the client with the funds necessary to change their lifestyle, for example repaying debt, pre-funding retirement or school fees.

An exception to the above would be if there were a lower per mille cost for Active that gave the client access to a higher benefit amount such that some of the lifestyle needs could be covered.

Active (v) TPD

Another key difference between Active and more traditional contracts is the omission of an occupation-based payment criteria such as that available under a TPD style policy.

While there may be a perception that occupation-based TPD payments are subjective and difficult to assess, this is not necessarily the case. These issues can be considerably overcome if the adviser is able to apply a disciplined claim process.

TPD-style benefit payments are necessary because of the lack of a consistent link between severity and loss when occupation is concerned. A relatively minor event may render a surgeon TPD but be of little consequence to an accountant, for example.

Active may be less suited as a TPD replacement because, under its benefit structure, clients suffering the same insured event at the same level of severity would receive the same proportional benefit payment, irrespective of the financial impact on the client.

Benefit payments and definitions

There are several matters to be noted in regards to benefit payments and the definitions of insured events under Active.

When reviewing the Active insured event definitions, it is important to appreciate that some category B (65 per cent) severity payments and even some category C (40 per cent) payments for the more likely to occur insured events are at a severity level that they may well trigger a 100 per cent benefit payment under many traditional trauma insurance policies.

Also, the diagnosis of diseases such as multiple sclerosis, Parkinson's disease, muscular dystrophy would generate a severity category E (5 per cent payment) under Active but depending on the insured benefit the client may be eligible for a larger payment under a traditional trauma insurance policy.

This type of situation occurs in other areas such as some major organ transplants and chronic renal failure.

If an adviser was recommending Active over traditional trauma insurance and particularly if replacing traditional trauma insurance, it would be important for the adviser to alert the client to any differences in benefit payments triggered by the definitions of the insured events.

Subjective (v) objective definitions

Despite claims to the contrary, not all insured event definitions within Active have an objective base to them; for example, severity category B for "other digestive conditions" refers to:

"severe exacerbations of bowel dysfunction with disturbance of bowel function with continual pain…restrictions of activity with continued restriction of the diet and response to medical therapy…constitutional symptoms - fever, weight loss or anaemia".

Product complexity

A reasonable concern with Active is the complexity created by having so many medical definitions covering not just each of the insured events but also the various severity categories of those events.

One can only shudder at the though of several insurers with the same product engaging in a "liberalisation of definitions" war!

A more subtle issue is that of possible client diversion, i.e. the client becomes so engrossed in asking questions about what is or is not covered or what may or may not be payable that the client interview is potentially hijacked, endangering the sale in the process.

Underwriting

The unique nature of Active potentially calls into question how it will be handled from an underwriting perspective.

There might be a temptation to impose an exclusion clause at all severity levels of the trauma insurance component, for example, simply because of the likelihood of a claim under the more liberal severity category E definition. It is too early for adviser experience in this area to be comprehensively tested.

Verdict

Active is an excellent example of the adage, "product, in its own right, is neither good nor bad; it is either appropriate or inappropriate, based on the unique position of the client as identified and analysed by their adviser".

A number of issues have been noted within this article; however, the aim has been to position these such that advisers are better able to identify where they may or may not be an issue for a particular client.

At the same time, Active does appear to give the adviser access to some unique opportunities in various areas, including:

(i) A client seeking competitively priced trauma-style insurance that is designed to cover the severity-based issues.

1. A client who sees the potential advantage of having access to multiple claim payments for different insured events or for longer-term recurrent claims.
2. The omission of occupationally based TPD cover means that client's who are ineligible for traditional insurances may be able to gain access to Active.
3. If used as an alternative product to those currently available, there is the possibility that Active could be found appropriate for markets as yet untapped.
4. If the recommendation is premium rather than benefit amount driven, the lower per mille cost of Active may enable the client to access higher levels of cover.

In the end, it will come down to the adviser's analysis of the client and the needs of the client; however, Active is now a part of the Australian insurance market and as such it should be considered but it should be considered on a fully informed basis.

Also apart from anything else, Macquarie should be congratulated for introducing something new to the Australian insurance market, which will no doubt lead to insurance needs being looked at in a new light.

Col Fullagar is national manager at RI Advice.

Click here for Macquarie Life's response to this article.