RISK – IP providers claw back into the black

Last yearMoney Managementpublished a series of articles outlining the mess surrounding the income protection insurance market. Stuart Engel asked a number of key players whether the industry had cleaned up its act.

In June last year, some of the biggest players in income protection (IP) insurance introduced a round of premium increases designed to bring the product segment back into the black.

Over the space of a few short years, the market had grown from spectacularly profitable to one which was causing great discomfort to life insurance executives when reporting financial results to shareholders.

In a nutshell, life insurance groups had been fighting tooth and nail for a larger slice of the income protection pie. Companies were attempting to lure business through a combination of lower premiums, reduced underwriting standards and more attractive conditions. Consumers were getting better and better deals but profits for life companies were taking a nosedive.

Loss leaders were becoming increasingly prevalent as companies jostled for market share. Even now, changes in market share can swing wildly from year to year (see table).

According to industry observers, the price hikes last year were only the first taste of a series of premium increases likely to hit the industry over coming years.

Many insurance industry observers see such a development as a return to sanity.

Rice Kachor director Mark Kachor is one such observer. He says premium increases have continued since June last year, however, he notes most rises have come from companies that held out when the initial premium increases hit the market. He says there is unlikely to be any respite from increases over the next few years.

More sensible pricing is not the only remedial action being taken in the effort to repair IP bottom lines. The first signs of a tightening in policy conditions are now beginning to emerge, as life companies seek to limit their own downside in the event of an avalanche of substantial claims.

Last year, Lumley Life launched a restricted-benefit policy, 'the Optimal', to complement its full-benefit product. According to managing director Geoff Black, distributors and their clients have warmed to the Optimal so much that it now makes up a third of Lumley's new income protection sales.

The Optimal is a lower cost product which pays out for conditions such as cancer and heart attacks for up to 30 years but only for a maximum of two years on other conditions which Black describes as "more subjective", such as fractures.

"The Optimal is designed to get back to what income protection insurance really is," Black says. "It gives more certainty to customers about exactly what they are covered for and gives more certainty for us as to our liabilities."

Industry observers say most life companies would like to introduce similar products but are concerned their distributors might not take kindly to such a move.

Lumley Life distributes the vast majority of its products through a network known as the National Partnership. It has a very close relationship with its distributors, so did not run the risk of alienating them by introducing the product. In fact, it was a member of the National Partnership who provided the original seed for the idea for the Optimal product.

Whether or not the rest of the industry will follow suit is still unclear, however, it is a clear sign that companies are looking at the terms of their IP policies.

One example of how conditions have become increasingly generous to consumers is the definition of "disabled". Kachor says originally a claimant needed to be unable to perform any occupation. The standard eased a couple of years later to stipulate that a claimant was "disabled" if he or she was unable to perform their own occupation for the first two years and after two years unable to perform any occupation.

Later it eased further to allow claims for people who were unable to perform their own occupation. It now allows claims for people unable to perform one important task in their chosen occupation.

There is no evidence yet that life companies have been tightening up on the definition of disabled. However, some groups are now paying closer attention to underwriting and claims management. Consultant Peter Ramjan says anecdotal evidence suggests life companies have accepted the need to increase resources for their claims management operations.

As MLC's Michael Browne points out (see page 23), insurance companies are now taking "the first tentative steps to fix the problems". Most realise that their income protection product lines are under pressure and are formulating strategies to rectify the situation.

BREAK-OUT

Profit margins for the income protection category may be shaky in Australia, but the situation here pales into insignificance when compared to the state of the US market about five years ago.

Industry pundits often hold the US market up as an example of what can happen when spiralling competition gets out of hand. Most hope the Australian market has learnt from the mistakes of their US colleagues.

In the US, more than half of the original IP market participants have decided to cut their losses and exit the income protection market altogether. Over a three year-period in the mid-nineties, about 40 life insurance companies exited the American market, including some of the industry's biggest names.

Industry analysts says there are now only two major players still active in the US market alongside a group of smaller, mainly niche players.

Most commentators put the mass exodus down to companies clambering for market share by cutting premium prices and making it easier for people to claim on policies.

For example, many companies offered policies which paid out 100 per cent of the policy holder's income at the time the policy was taken out. Some of these policies had the potential to be paid out over 40 years.

But competition alone did not cause the market to implode. The problem was exacerbated by reforms to the US health-care system which forced doctors to work longer hours for the same pay. Apparently, some doctors found that the new conditions increased the stress levels associated with their work, to the point where they were forced to claim income protection benefits.

The caused the rate of claims among the relatively high-earning doctors to skyrocket and played havoc with the bottom line of many US life companies.

In Australia, most industry players believe we have learnt the lesson of the American experience. To date, no company has left the market, although there are suggestions that some profit margins are still suffering.

Premium prices in Australia have also steadily increased over the past two years.

Plus there is evidence that insurance companies here are now reforming product development, underwriting and claims management to meet the changing conditions of the market-place.

TABLE

Top 10 disability insurers' new annual premiums

Company June 1998 June 1997 (rank)

1. National Mutual 17.7 16 (2)

2. Australian Casualty & Life 16.3 20.2 (1)

3. Mercantile Mutual 12.5 7.5 (8)

4. AMP Life 11.6 9.9 (5)

5. Royal SunAlliance 10.7 8.4 (6)

6. MLC 9.6 11.8 (3)

7. Tyndall 8.7 7.2 (9)

8. Colonial 7.4 8.2 (7)

9. National Australia 6.6 10.8 (4)

10. Legal & General 5.8 3.9 (14)

Source: Rice Kachor Research