Healing the trauma of under insurance

Sue Laing

There’s been a lot of talk about Australia’s underinsurance problems and their solutions, but there is a subset of concerns within this debate.

If we were to break down the comparative penetration of the generic lump sum life risk insurance products — term, trauma and total and permanent disablement (TPD) — into the universally eligible population of Australia, there is cause to question how well we are covering that population with trauma insurance specifically.

As an insurance concept, trauma is brilliant and will become more so as the years unfold on better medical treatments and longer life spans due to survival rather than death.

Trauma is paid at the most useful time; it pays upon the most common and feared illnesses and injuries suffered in the western world; it unequivocally serves to remove hindrances to recovery in many cases; and it is relatively simple in its application and therefore easy to qualify for.

As a concept, it should be readily embraced by our clients. For the price it represents a good ‘return’ statistically and it is flexible these days in terms of policy structures.

So why the under-penetration?

If we accept this under-penetration premise, then it becomes an interesting exercise to examine trauma from all angles, both to fathom the roadblocks to its success to seek some solutions to its comparative lack of use by advisers for consumers.

Conceptual understanding and acceptance, demographic application, needs analysis, selling, underwriting, claims, product development and pricing are all factors in the formula for success of any product.

I travelled overseas in January to briefly research trauma in other markets.

I was afforded the opportunity to achieve this in one trip by attending a critical illness (as they call it in many other countries) conference in Victoria, British Columbia, Canada.

I was very surprised to find that where the western markets were pretty much tracking together some 10 years ago when I last had the opportunity to ‘research’ trauma, there are now some vast differences in the trauma outcomes elsewhere compared to Australia.

In some ways we may be able to say we are ahead of other markets.

In most aspects we are definitely behind — and that hurts! We have always prided ourselves on being at the forefront of life risk insurance development and now there’s an important area where we appear to have fallen behind.

Now, my viewpoint is that of a promoter of the simplistic concept of better consumer protection via more product penetration, so to be fair and balanced I must seek input from others who are charged with looking at the issue from other angles or who can provide broader views.

So it seems only right to undertake an examination of trauma from several angles and present a comprehensive view on where we are and why, and whether there truly is room for improvement.

In the final analysis, improvement has to necessarily be measured under different criteria to cater for all stakeholders, but from my viewpoint I will still come down on the side of consumer protection and hence the market penetration rate.

The contribution that this product can make to the community is enormous and that can’t be sent to the bottom of the priority list.

Besides, manufacturers and reinsurers (the other key stakeholders) will always make sure any blips in profitability are addressed.

They have solutions to any possibility of long-term corporate damage. And advisers will always make a living no matter what the nature of their product suite.

Among the population there is only one path — sell more. There is no other product that can replace the role trauma plays. The assumption that it is a part of a full suite is a given, too.

From the perspective of all these stakeholders then, what are the key obstacles to better trauma results for our mutual clients?

Trauma is therefore viewed through various experts’ eyes and via meaningful industry statistics.

Input has also been sought from other markets and there are some really fascinating outcomes in this. Maybe there are some lessons — at the very least this information is absorbing.

What about the home front, then?

There isn’t necessarily blanket agreement that there is under-penetration of trauma sales, so it is relevant to attempt to interpret some of the available statistics.

I spoke to Mark Kachor of Dexx&r Research about the bald statistics of trauma insurance sales. Although the latest statistics provided by the industry to Dexx&r relate to the 2004 calendar year, they are nevertheless useful to draw conclusions from (see table).

Kachor proposes that based on these latest figures “the growth in trauma is faster than the growth in TPD, and advisers seem to be selling trauma wherever possible”.

Another interesting fact is that the average age of policyholders is getting older.

Of the in force term premiums, the largest proportion, 27 per cent, is in the 55-plus age band. In ‘chances of’ terms it should be that the highest proportion of in force trauma premiums also be in this age group, but they aren’t.

Kachor believes this term weighting is an outcome of the tendency for policyholders to ‘hang on’ to term policies they were sold 10 or so years ago, knowing that they are getting closer to the ages vulnerable to death.

However, he also predicts that these will fall off sooner rather than later as these older policyholders suddenly hit the ages where the premiums become too steep to afford no matter what the continuing need is.

From an adviser’s business perspective, one wonders what will happen to the in force and therefore the renewal income streams when these policies do lapse.

Kachor suggests that this is the trigger for actively selling to younger ages, maybe the children of older clients, to replace this premium.

“But it takes a lot of term premiums on 30-year-olds to replace all that premium on older lives — so trauma must be written to keep averages up,” he said.

If this is good for advisers and their sustainable books of business, then it also has to be good for the clients who benefit from this trauma cover.

The 2004 statistics indicate that after basic death cover, trauma has been the next most significant source of revenue for the industry.

It’s relevant though to keep in mind that trauma premiums are so much higher than death premiums per dollar of cover, so this comparison needs to recognise that relativity.

Doing so opens up the possibility that the sums insured being written still have room to be higher in relation to actual need — which is what many commentators instinctively feel is the case.

How to calculate the sums insured on trauma is a constant source of angst for many advisers, particularly new entrants to the industry. They are being given formulaic formal training on life risk needs analysis, which seriously lacks substance when it comes to trauma.

Do consumers need more consistency?

A presentation by Catherine Brown, national director of Mindzeye, was delivered to an industry ‘think tank’ convened by the Investment and FinancialServices Association (IFSA) in November 2006, reflecting the findings of the TNS Qualitative Specialist Group on the language of the life insurance industry and its impact on consumers.

These results, released under the title of Project Lingo, found conclusively that consumers feel bamboozled and hamstrung by jargon and inconsistency.

This in turn forms a barrier to wider consumer acceptance of insurance.

A clear example was the different product names for the same type of product.

IFSA’s response has been to charge its existing working group on underinsurance to seek insurer input into suitable methods to investigate and raise awareness of these barriers.

It is felt that of all products it’s fair to suggest trauma is the least understood and the most confusing, due to the medical nature of the key areas of the product wordings — the event definitions.

If some progress is made in this area it will no doubt mirror some of the same type of work that was undertaken in the UK in recent years.

Why not sell children’s trauma?

One of the interesting features of the UK market is the relatively high take-up of child trauma.

Kachor makes the observation that this is probably because there is a greater emphasis there on family protection in the younger and mid-life years.

The planning task around future pension needs has already been implemented at the younger ages by virtue of the design of the allocated pension structure in the UK — this leaves the parents free to think about the pure protection needs.

The lack of child trauma sales here is a puzzle, but may be able to be put down primarily to a cringe factor.

We need to get around this and find palatable ways to present the need so as to secure the protection for parents.

After all, we have sufficient examples of the devastating effects on parents’ livelihoods, of children’s traumas.

Is underwriting another key?

Taking a practical perspective, it seems logical to manage the client’s expectations by pointing out the high probability of claiming on trauma and the logical need for underwriters to consider this when assessing past history and current medical conditions for trauma insurance.

It’s a given that underwriting and its commonly adverse outcomes are a barrier to sales, so the best that can be done to alleviate this is to be transparent about the common outcomes and sell the positives of gaining cover at the right (not always the standard) price.

Is the claims message clear?

There are of course two sides to any claims message — the positive one of the statistics of payments and telling the good news and the negative one of the incidence of suspected anti-selection and its effect on the cautious nature of claims case managers (and actuaries in the long run).

The good news filters out to a certain degree, but the industry is still very reluctant to blow its own trumpet when it comes to telling these stories.

Several contacts suggested that defensiveness drives such reluctance.

Telling the world how good it is to claim on trauma insurance and how much these claims support the population might encourage anti-selection from consumers.

It’s difficult to support this stance and it certainly doesn’t serve to rebut the bad publicity that current affairs programs propagate. It would be useful to hear some reasoning for any validity associated with this fear.

Anti-selection in trauma insurance is probably more a factor of lack of adviser training and poor underwriting practices when it is experienced in other countries.

China for example has a close to 50 per cent decline rate on trauma claims, according to Gen Re’s research, which puts this down to anti-selection on application. Thankfully, we are not in that category.

Advisers tackle the barriers head-on

Clear messages emerge from any forum where advisers have a chance to air their experiences. Conceptualising value for money and underwriting issues come at the top of the list on average; the struggle to identify the reasonableness of the sum insured comes in close behind these.

Co-founder of Australian Financial Risk Management based in Newcastle, Phil Young, said if advisers want to give advice to their clients on trauma insurance (and he believes they do), then they have to know what they are giving advice on.

“Greatly improved medical procedures and greater public awareness are driving clients to ask more about trauma cover. Our clients are becoming more concerned about their lifestyle financial needs if they survive the traumatic event than they used to be,” Young suggests.

“As advisers, we need to not only understand the definitions of the various contracts and why one is better than the other — which one is suited to males compared to females — but we also need to know about the philosophy of the insurer at claim time. Yes, do use research as guidance but don’t rely on it solely because if you don’t do your own research then the advice you give your client may be the wrong advice.”

When I asked Peter Moyle from Integrated Financial in Adelaide how he overcomes the difficulties of selling trauma he said: “But I don’t have a problem selling trauma, so I don’t know what I’m doing right.”

He concluded that there is one simple reason — he just never questions the value of this insurance himself, and it shows.

Moyle presents a pie chart with the chances of suffering a critical illness versus dying, before 65, and the difference shows up as a huge driver for trauma insurance. In addition, he points out the ‘30 events versus one event’ concept, which he said works a treat.

When it comes to underwriting, Moyle tackles loadings and exclusions with a twist on the usual discussion about guaranteed insurability and taking the cover now rather than later. His method is to tell clients that it could be any time that insurers stop offering life insurance products, if terrorism and the threat of pandemics continue.

There’s another approach Moyle mentioned, which I have heard from other advisers, rather than telling clients that their condition can be relieved by the absence of stress, he quite correctly points out that without trauma insurance the worry will worsen their physical condition. A subtle difference, but a powerful one that seems to work.

A risk specialist of some 20 years operating in Canberra, Bill Brown, tells good stories about trauma. Emerging from these stories is clear evidence of the true driver for trauma insurance, in his opinion.

Brown has had, over the past 16 years, seven trauma claims, all of which were for cancer, and only one of which was for a male.

“In each case, without fail, when I delivered the cheque I suggested to the insured (and their partner if appropriate) that they not rush into any precipitous action with their newly received funds. I pointed out that they were probably yet to receive qualitative advice as to the exact prognosis of their cancer and the prospect of expensive treatment not covered by health insurance,” he said.

Despite this sound advice from Brown, in each case, without fail, the insured on average within two weeks had walked into the bank, placed the money on the counter, and asked for the mortgage documents.

“The reason is quite simple. It is called family security, and it is driven in most cases by the females in the partnership,” he explained.

Selling the needs analysis is a challenge, confirmed Nancy Peat who works as a risk specialist within William Buck’s accounting practice in Melbourne.

“Although ideally we’d like to see our clients be able to totally eliminate debt in the event of a trauma claim, with unprecedented high mortgage levels and credit card debts, sometimes this is simply too expensive,” Peat said.

It then becomes a matter of compromise. One long-term protection strategy Peat finds beneficial is to drive for level premiums whenever possible.

“I strongly encourage my clients to consider using level premiums for their trauma cover. I don’t want them to pay premiums on a policy for 10 or more years only to let it lapse due to spiralling costs at a time when they are far more likely to make a claim,” Peat said.

“Generally, when we look at how the stepped premiums will increase over time, my clients see the wisdom in ‘biting the bullet’ now for future affordability.”

From the outside in

Every challenge has several potential solutions — trauma penetration is no different.

If we approach the resolution of the shortfall in trauma sales against need from several angles and work actively to recognise and address it, then some improvements must result.

Looking outside rather than in may also serve to locate some alternative remedies we haven’t considered yet. This then will contribute to resolving the overall underinsurance problem.

Sue Laing is managing director of the risk store. E-mail: [email protected]