Rocky ride ahead for life products

Last year a more balanced and sustainable future for insurance products was in sight after a period of dramatic product reform.

But it appears this stability is not as close as first thought, with life companies in the race for market share quickly forgetting the woes of the disability income product debacle.

The evaluation conducted by Harvest Partners reveals a market that is still under competitive pressure, possibly precipitating another troubled period for advisers and their clients.

Over the past four years, advisers have dealt with the fallout from the severe profitability problems plaguing disability income products, resulting in continuously increasing premiums and disgruntled customers.

It is good news then that this year the tables are turning for this particular product. The average premium increase for disability income products for 2002 was 12.46 per cent. This year the figure was halved to 6.11 per cent.

The bad news is that life companies have not learnt from experience. The heat may be off disability, but it’s not out of the market yet.

The halving of the premium increases on disability products between the two years indicates more stability and better controlled profitability — a trend that has spread across most of the Australian market.

According to Harvest Partners’ Peter Ramjan: “People aren’t looking to upgrade as often, and a number of companies have looked to restrict benefits in products and definitions.”

However, life companies are still keen about differentiating themselves from the crowd, and at a product level, continue to focus on features and benefits.

This year, the spotlight is just on a different product.

“Because of the poor disability experience, companies have tended to focus on the critical illness or trauma insurance products,” Ramjan says.

Life companies ranked the current level of competitiveness in each of the markets — disability income, trauma, TPD and term.

The rating for trauma in 2002 was three out of seven (when one is the highest), but this year the rating moved up to 2.49.

This is the first time the market competition in trauma has been rated on par with the disability income market — indicating the shift in competitive focus.

“It looks like the point of competition is moving away from disability income and now focusing on trauma, because that’s still profitable,” Ramjan says.

“If that’s what is really happening in the market, we can expect that trauma is going to end up in the same situation as disability.

“Life companies haven’t learnt their lesson from their experience, and they’re just repeating all the old sins on a different product line.”

According to Ramjan, companies have flagged possible changes to profitability for trauma products.

Ramjan says the danger here is that “you’ve got a lot of customers who have been hit by premium increases in disability income. Now as companies move the point of competition to trauma and end up losing money on that, so the customer with trauma contracts also experience increases in premium on those products”.

And this spells trouble for advisers.

“Consumers like a bit of stability — if you pay a certain level of money for a product, and within three years that has increased by up to 40 per cent, then obviously you get quite concerned. And then that flows on to the adviser as well,” Ramjan says.

New Zealand enters troubled waters

While Australia appears to be making headway on the product reform issue, Ramjan says it’s only the beginning of the trouble for our trans-Tasman partners.

“New Zealand is roughly about three years behind the Australian disability cycle, and they’re going through a tough time at the moment.”

New Zealand life companies have only recently started the process of increasing premium rates.

According to Ramjan, it is eventually becoming clearer to the Australian market that “putting up your premium rates and continuing to improve your product isn’t a smart thing to do”.

“Pricing is perhaps the crudest of levers to pull to steer out of troubled waters and can in some cases be characterised as a knee-jerk reaction to bottom line woes.”

Hit predictions—a look at product initiatives in the next three years

Looking forward, products will continue to be steadily upgraded and remodelled. But what do life companies see as being the drivers in terms of product development and major product initiatives over the next three years?

For disability income, increased price is anticipated to be the strongest driver, consolidating the repricing activity already in place. More restrictive definitions and level commission were touted as the second and third most likely drivers of major product initiatives, which Harvest Partners says “augurs well for the future viability of the product category, but is at odds with the continued liberalising of benefits being pursued by some companies”.

When it comes to trauma products, the responses have sparked concern of an overheated product line, with many respondents believing the number of benefits are set to increase. This will likely be the major product initiative for trauma, with level commission and increased price trailing after.

For TPD, the three top results were level commission, decreased price and more restrictive definitions, while for term the focus will be on increasing the number of benefits, decreasing price, increasing commission and liberalising definitions.

The market can expect to see more frequent upgrades on disability income products, with a higher proportion of companies moving to upgrades in the bi-annual to a two-yearly time frame, while term has also seen a significant increase in annual reviews this year. Those on the trauma side have slackened off, moving from 18-monthly reviews to two-yearly, while TPD has also slowed down with a movement towards two-yearly reviews.