The increasing cost of life products

The series of changes in financial services and insurances has resulted in cost increases which may be passed on to clients. Doug Scriven examines how those writing risk and life can prepare for the next premium rise.

Since the introduction of the Federal Government's new tax system some life premiums have risen by as much as 15 per cent and further increases are likely as life offices pass on new costs associated with the introduction of the Financial Services Reform Bill (FSRB).

All this has come at a time when claim experience continues to escalate prompting concerns for the profitability of income protection and potentially trauma cover.

In regards to claims for trauma insurance most underwriters are on track but the industry could face future difficulty if products continue to blur the line between cover for traumatic events and health insurance.

Additionally, future improvements in medical procedures may see some trauma conditions become commonplace resulting in claims escalation and higher premiums.

Statutory costs aside, it would appear that premium sustainability problems are the result of liberal product design, but other factors such as underwriting standards, claims management and distribution also affect the future pricing of individual risk portfolios.

While it is possible to measure some elements of an underwriters risk management, the assessment of premium sustainability remains extremely subjective.

Financial strength ratings as published by agencies such as Standard and Poor's provide objective assessment of a company's ability to meet it's commitments but in the context of premium sustainability these have limited bearing on the pricing of individual risk products.

As with managed funds the quality and performance of life products depends on the skills, experience and stability of the management team. These include product managers who develop products, actuaries and reinsurers who cost the risk, underwriting managers who are responsible for the qualification of individual risks and claims managers who have the job of ensuring that benefit payments are made in keeping with the underwriter's policy document.

So in the absence of a premium sustainability rating or objective qualitative research what questions can advisers ask underwriters to determine the stability of future premiums?

Ideally advisers should direct their initial inquiries to product managers with specific reference to individual insurance products. Questions that should be asked include:

- How experienced and qualified are the managers and their teams?

- How long have senior managers been in office?

- How often and when have policy and premium reviews been conducted?

- Are there any cross-subsidised products within the product range?

- Are there any products within the range that are not tracking claims within pre-determine expectations and if not what are the causes?

A number of underwriters have already come out with statements regarding the future sustainability of their respective products? At the same time a number of them were asked what assurances can be given that substantial premium increases will not be introduced over the next three years?

Royal and Sun Alliance says the nature of the market is such that it was not prepared to commit to fixing premium prices but it did anticipate increases and had made compensations for that.

"Our product philosophy centres on policies that are competitive and meet our profitability criteria. We do not cross subsidise our products. We can state categorically that claims expectations are accounted for within premium rates," Helen Troup, spokesperson for Royal & Sunalliance says.

"It is too early to know the results of our current review process and we cannot rule out the possibility of premium increases within our product portfolio. However we can assure that if we were to implement any increases we will keep the competitive nature of the market in mind."

MLC general manager marketing protection Michael Browne says continuing ahead without responding rashly to market changes offers better long term prospects for product stability and its insurance business.

"With the combination of solid product design, prudent underwriting and sound claims management, we are sending a clear and strong message that despite the uncertain environment, we are committed to the protection market."

Despite such commitments to an industry which has been the basis for the development of the wider financial services market, debate over what to do will probably drag on until individual risk portfolios are independently and objectively assessed for standards of profitability and future premium sustainability.

Doug Scriven is the insurance research executive manager with Investment Data Technologies.