Insurance shortfall is a serious risk

The need for insurance has never been greater, with personal debt at historically high levels. Credit continues to grow at an annualised rate of about 13 per cent, while the growth in housing credit is similar.

Credit growth rates are above what has traditionally been considered a comfortable level. They are also around three times higher than the rate of increase in average weekly earnings.

So Australians are enthusiastically increasing their financial risk. They have been much less interested in increasing their financial protection.

Research commissioned by AXA estimates the current death cover per average Australian is 29 per cent of that required. Current income protection cover is estimated at 23 per cent of what is needed — and just 14 per cent for females.

The issue of under insurance is now firmly on the agenda of the major companies and the industry’s key representative groups.

The Investment and Financial Services Association (IFSA), for example, ran an industry seminar on this issue last year. An outcome of that was the establishment of a working party to develop proposals to address the issue on an industry and community wide basis.

There is understandably an element of self interest in this. The opportunity costs for industry and advisers alike are very high.

It has been estimated the annual death premium foregone through current levels of under insurance is $4.5 billion and for income protection premiums, $3.9 billion. For industry and advisers, there are clearly substantial economic benefits if current levels of under insurance can even be partially improved.

However, there would also be important community benefits. Not the least of these would be a reduction in the current alarmingly high levels of risk taken on or borne by Australians.

Dexx&r has estimated that Australians carry 71 per cent — or the equivalent of $364,000 per employed person — of the total financial risk in the event of death. They currently carry an estimated 77 per cent per employed person of the total risk of total disability.

This is a critically important factor that is overlooked in discussions about the value of insurance. If you are insured, the risk burden is carried by the insurer. If you are not insured, you carry the burden not only of your personal debt — but also the potential loss of income for you and your dependants.

The level of credit and debt of Australians is constantly monitored. The level of protection they have to ensure they continue to earn income to service that debt is not. Nor is the protection required to cover debt caused by early death. The irony is that the ability to generate an income is not considered an asset that needs protection — yet a house or other possessions are.

For many Australians, the ability to earn income is adversely affected by health issues. Last year AXA paid around $330 million in claims. Most of this provided income for people who could not continue to work for a period of time.

Some interesting points are raised by the claims being paid for income protection.

First, they are made to people in all professions and occupations. For AXA, doctors, solicitors, building tradespeople and delivery drivers currently receive the highest amounts of total benefits paid.

Second, mental health disabilities account for a growing percentage of insurance payments. A review of the disabilities accounting for the highest amount of monthly benefits paid by AXA showed that psychoses and neurosis accounted for about 25 per cent. Accidental falls comprised 8 per cent while heart-related ailments accounted for less than 5 per cent.

The point here is that the risk insurance industry is reflecting and responding to fundamental changes in the health of Australians. In turn, it needs to change its traditional underwriting and claims management process to effectively respond to mental health issues. The importance of this has been recognised by IFSA.

The establishment of insurance industry guidelines for people with mental illness a year ago anticipated the specific issues our industry and the community are now dealing with. It required the collective efforts of IFSA, the insurance industry, mental health service representatives and community groups and was subsequently endorsed by the Federal Government.

We need a similar collective approach to address the issue of under insurance. This will need to be an integral part of a broad campaign to raise public and government awareness of the economic and social value of insurance.

We will also need the support of financial planners in ensuring insurance is covered in client needs assessments and the provision of quality financial advice.

With regards to insurance, is the general public indifferent, ignorant or simply prepared to take risks? The answer is probably a mix of all three. The fact is that insurance is not a priority for Australians. Yet the personal and community risks associated with underinsurance — whether through ignorance or indifference — should be.

The Federal Government and others have assigned priority to improving the financial literacy of Australians. That is an important outcome.

Australia’s risk insurance companies and financial planners will need to ensure that not only the financial literacy of Australians is placed on the public issue agenda, but they also need to ensure the financial protection of Australians is also placed on that agenda.

Richard Shermon is general manager marketing and retail products, AXA Australia. He is also a board member of IFSA.