Crippled life industry looks within to stop the bleeding

There is mounting evidence in the marketplace that life insurance companies are starting to pay more than lip service to some of the folly of the last decade. Executives at the highest level are pub-licly discussing the drag on the bottom line of certain business practices and middle management is falling into line by beginning to plug the holes created by profit leaks.

As industry expert Mark Kachor points out, one of key challenges fac-ing life companies is to repair the damage caused by reck

There is mounting evidence in the marketplace that life insurance companies are starting to pay more than lip service to some of the folly of the last decade. Executives at the highest level are pub-licly discussing the drag on the bottom line of certain business practices and middle management is falling into line by beginning to plug the holes created by profit leaks.

As industry expert Mark Kachor points out, one of key challenges fac-ing life companies is to repair the damage caused by reckless pursuit of market share in disability products.

As has been detailed by a number of industry players, premium in-creases have failed to match the easing of conditions on disability policies. But until recently, there has been little industry-wide hard evidence to back up these opinions.

Gerling Life Reinsurance commissioned just such a report a little over a year ago and has just made the report's findings public. It builds up a statistical picture of the environment surrounding indi-vidual risk products, including disability lines, as a basis for pin-pointing problem areas and providing solutions. Gerling has been in the Australian life industry for about five years and is putting to-gether a range of reference materials to help life insurance compa-nies build profitability.

As was revealed in the last edition of Money Management, the headline figures emanating from the report are that two thirds of companies are not achieving profit targets in the disability lines and there is growing concern that trauma insurance products could go the same way as disability products.

"There is huge problem with profitability across disability income products," says Gerling managing director Phil Muir. "But it is not something that has appeared overnight, it has been an emerging phe-nomenon for about five years."

Beneath the headline figures in the report, Market Evaluation: Indi-vidual Risk Products, lie some of the underlying causes of this ap-parent malaise. For example, 70 per cent of the companies surveyed say they have liberalised their disability products over the past three years.

As the graph above indicates, most companies are aware of the kinds of areas that need to be reviewed if they are to turn their disabil-ity books around. Companies have identified pricing, product develop-ment and claims management as the focus of attention.

Gerling's actuary Tony Bofinger says the processes in life insurance companies have not kept pace with these changes in disability prod-ucts.

"The products themselves have changed significantly in the past few years but the way the risk is managed by the life companies, includ-ing underwriting and claims management, has not," he says.

Gerling general manager Brian Sussman says the problem with product development running faster than the processes necessary to back up the product will only get worse as the recent spate of consolidation continues in the industry.

"As the market continues to rationalise, the need for product devel-opment processes and documentation will increase die to the size of the organisation," he says.

Non-genuine claims are another much talked about area in life insur-ance circles. While there are reports of the high incidence, figures to substantiate the talk has been hard to come by. Non-genuine claims include both fraudulent claims and those which fall short of fraud but still involve bending of the policy's rules.

As the chart above indicates, Gerling found that just under half of respondent believe that at least one in six disability income claims is non-genuine. The news is not much better for claims management people looking after trauma claims. Nearly a third of respondents said about one in seven trauma claims were non-genuine.

While acknowledging non-genuine claims as a sensitive area, Bofinger says life companies could reduce claim costs by 10 per cent simply by focusing on this area of claims management.

"Even if you only use the low estimates, the non-genuine and fraud results for disability income are alarming," he says.

A good starting point, Bofinger suggests, is to visit people who are claiming benefits, which the survey found was a very rare practice. Three quarters of respondents never visit claimants.

Another oft-quoted concern for disability insurers is the prolifera-tion of what are known as "problem" claims among white-collar work-ers. Indeed, doctors emerged as the top problem group, with 46 per cent believing doctors were often a problematic group, followed by professionals (38 per cent) and in contrast to blue collar workers where only 15 per cent of respondents found this group a problem.

Problem medical conditions for disability insurers are depression, chronic fatigue and mental illness. Trauma insurers have often found anomalies with breast cancer. In 1995 for example breast cancer made up 71 per cent of trauma claims for cancer, but only 25 per cent can-cer victims suffer from breast cancer.

While the survey paints a fairly bleak picture of the disability mar-ket, Sussman warns against any short-term bandaid approaches to re-form.

In the US disability market, which suffered far worse lapse in profit, some insurance companies move to limit claims on stress and depression related illness.

Sussman says this is an example of a short-term reaction he thinks will not translate well to the Australian market.

"To me, this seems like an admission from the life company that we don't know how to manage this part of the market, that we think it is all too hard," he says.

"Imagine telling people, we can no longer keep paying your benefit because it is too hard. I don't think Australian consumers would put up with it.

"We need to take a long-term view on the market and provide the cor-rect pricing for the benefits we are offering as well as improve the training and resources available to manage claims and underwrite policies."

But as Bofinger points out, the industry must start the reform proc-ess as soon as possible.

"While nobody wants to be the first to move, the longer we delay the move, the worse the problem will get."

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