For morethan a century, the average Australian family’s single biggest asset, after their mortgaged home, was the accumulated value of life insurance policies they owned. Some had superannuation, but it was only a minority whose generous employers offered this perk.
The adage that life insurance is never bought and has to be sold, has applied ever since the industry began. Policies were sold by tied agents and it is not surprising that many found the tax concession a great facilitator in selling their products by demonstrating how the government-funded discount provided $100 of benefits for some $70 in premiums.
For many decades, the industry offered variations of only two basic insurance products, whole of life and endowment contracts, in combination with optional rider benefits which included term life. These contracts were given the title of traditional or permanent life insurance and provided death cover, as well as a savings element, the value of which grows as long as the policy stays in force and the premiums are paid on time.
Both contracts offered the option of participating in the company’s profits and were known as participating, or with profit, or with bonuses. Bonus allocations were added to the sum insured and increased the policy’s accumulated value and the death benefit. The contracts were adapted to a range of needs, such as children’s education, collateral security on mortgages/loans or superannuation nest eggs.
The over-conservative actuarial assumptions on investments and reserving adopted by the life industry combined with the emergence of unit trusts, a period of high inflation, increasing consumerism and the entry into the life market by banks, all marked the start of enormous changes for the life industry.
It was consumers’ demand for simple, transparent products, their thirst for clear, understandable information and new competitors that caused the life industry to transform itself into fund managers.
This era also heralded a host of new regulations for the industry and hallmarked the passing of traditional policies.
Life policies are long-term contracts. With its unique background, it is understandable that the life industry nowadays still holds thousands of current traditional life policies, which were bought decades ago. Although these legacy products may seem out-of-date, they are still very much part of individuals’ assets and their real worth should be considered very carefully when financial or retirement plans are formulated.
However, there is one major problem with legacy products and that is the high cost of maintaining systems to administer them.
To glimpse the tip of the iceberg, consider that a conservative life office may have developed upwards of 250 separate variations of its products over the years, with an additional 200 to 300 different variations of riders and ancillary benefits. All the combinations of these products require individual tracking systems. Now, multiply these system requirements by the additional complication of numerous mergers that form a financial services group over time, and the result highlights the enormous effort needed just to maintain legacy products.
Developing a one-size-fits-all system to cater for every type of policy variation sounds practical, but is really only an amalgam of the inherited systems and not a solution at all.
Another approach is to massage the products and migrate them into a group’s generic system, but even this approach involves a multi-million dollar investment for a portfolio of business that is running itself out.
Life insurance policies are contracts that can normally only be varied when both parties agree to the variations. Massaging products entails contacting every policy holder and obtaining their agreement to any proposed changes, another huge and daunting task.
Clearly, legacy products are potential pots of gold to policy holders and life offices alike, but product migration may prove more costly than the rewards.
However, if we continue to ponder the pros and cons of various approaches, we risk seeing the accumulated values of traditional policies frittered away through increasing operating costs and declining portfolios incapable of supporting these costs.
The life industry has a long, enviable and successful track record of acting responsibly for the welfare of its clients, advisers and its own stability. Its ability to muster considerable forces may well be the key to this dilemma.
By pooling resources, the life industry can set up and fund a single entity with the express task of creating and maintaining one flexible system that caters solely for the administration of legacy products.
We have some very capable industry professionals who have lived with and thoroughly understand these products. Now may be the very time to recall some of the talent shed over the past decade.
Chris Medin is managingdirector of Life and Superannuation OutsourcingServices (LSOS).
