Numbers confirm the need for improvement

Life companies are still struggling to find the right balance between profitability and effective claims management, according to Gerling assistant general manager for actuarial services, Tony Bofinger.

Bofinger says this issue is drawn out by a new benchmarking section included in the Gerling Global Individual Risk Products Market Evaluation, which compared the claims experience of the survey respondents.

“The important thing to remember about the benchmarking section is that it differs from the rest of the survey in that it is based on numbers,” Bofinger says.

“It is much less based on people’s impressions.”

Given this numerical base, Bofinger says the benchmarking section of the survey highlighted a few major issues in terms of claims experiences.

One in particular was variability of results in loss ratios across all product lines, and the number of companies that did not satisfy the criteria for profitability.

Loss ratios are calculated based on the claims payments leaving the insurance company plus reserves, those funds placed aside to fund possible future payments, divided by in force premiums.

Put more simply, loss ratios are the proportion of premium received that is required to meet claims.

When the ratios are outside the accepted parameters it indicates that the products are not meeting profit criteria.

Bofinger says as a rule of thumb this criteria stands at a ratio around 45 per cent with many companies in each of the categories of disability income, trauma, total and permanent disability (TPD) and term products failing to meet the criteria.

The reason for the poor loss ratios may be one of three reasons, according to Bofinger.

“One reason for these figures is there is inherent volatility in insurance. Another reason is that current premiums may be inadequate and are not covering the claims payments being made,” Bofinger says.

“There could also be old claims on the books and despite changes in the way products are structured, the liabilities in these must still be included.”

However he does not rule out that the data here is representing another picture all together.

He says, as part of dealing with the difficult circumstances facing the life industry, actuaries are constantly re-examining the claims payments drawn from reserves and premiums.

“Emerging experience may mean the life company needs to increase the necessary reserves, which would have a negative effect on loss ratios,” Bofinger says.

“As a result, loss ratios can reflect damage done and efforts to fix that from previous years.”

In fact, this is mentioned in the survey results, which state that until more long term data is collected this year’s information may actually point to those companies that have taken action to curb negative claims experiences through increasing their reserves levels.

“In the last few years there has been a focus on disability income due to the losses and pressure to fix the problem,” Bofinger says.

“Yet 51 per cent of respondents still believe industry profits will drop further over the next five years.”

On the other hand, only 11 per cent believe their own company’s profits will do likewise. Bofinger says this ties in with the loss ratios results, with some insurers possibly feeling comfortable that they have corrected the problem, but he says it may also be an instance of wearing rose-coloured glasses.

Sitting alongside the issue of loss ratios is average claims size, since these are a central factor in determining the former.

Bofinger says average claims sizes are determined by distribution models in terms of who the target market is and how risk products reach them.

An example of this is the basic trauma cover insurance policy, many of which can be purchased through the mail and are used when an adviser is not desired or needed.

“The response rates to these products are low as they are a simplified product and hence these policies are in the lower range of claim amounts,” Bofinger says.

However, Bofinger says he is surprised to see the average claim size for disability income is just under $13,000.

“This works out at just under $2,000 a month for an average claim duration and I am surprised at this figure since a major area identified as being hard to deal with has been occupations with high insured benefit levels of claims,” Bofinger says.

He says the major changes in disability loss ratios will come from increased premium prices, as well as improved claims management in getting those on payments back to work.

“The industry will also seek to remove troublesome benefits,” Bofinger says.

“It needs to ensure premiums remain fair for all consumers but any changes to product design will only affect new business. The overhang of old policies on older, more liberal conditions will continue to have effects on loss ratios and claims.”