No simple answer to life advice issues

Many commentators have overlooked the fact that the Australian Securities and Investment Commission’s surveillance of life insurance advisers was not random and actually targeted licensees with the highest activity levels, according to an analysis published by Tria Investment Partners.

As well, the analysis points out that while commissions are widely regarded as sitting at the core of some the perceived problems around “churn”, Australian initial commission rates of between 110 per cent and 115 per cent are below those of both the United Kingdom and New Zealand.

However it also points out that Australia has higher institutional alignment than comparable markets and that lapses are generally lower in other markets where non-aligned brokers dominates.

“But Australian lapse rates are higher for non-aligned than aligned, and for aligned than bank (something that isn’t well publicised) and aligned channels have grown faster than non-aligned over the period when lapse rates have increased,” it said.

However it noted that Australia was the only major market that sells non-contracted age-based stepped premiums, with the other major markets selling contracted level or hybrid premium patterns, where the client effectively pre-funds and loses out if they lapse early.

“The Australian product is more customer-friendly, flexible and easy to sell, but it’s general insurance with life insurance commissions and accounting – dangerous stuff,” the Tria analysis said.

The analysis also pointed to problems associated with the growth of group insurance attaching to superannuation saying that Australia had the largest group risk sector in the world in per capita terms.

“Over the past 10 years we have seen unprecedented expansion of accessibility (courtesy of open-offer industry funds) and benefits in the context of pricing that must now be considered irrational; group risk became a substitute for retail at least for younger lives,” it said.

“Proving causation is difficult, perhaps impossible. But if we sell a product that is prone to high lapse rates, maybe what we’ve seen since 2008 is just an unwind of the structural factors that held lapses down?” the analysis said.

“We can see that from 2006 – 2008 younger demographics began to take advantage of expanding group cover and opt out of retail, just as older demographics retained cover given the reality of longer working lives and debt loads. If the demographics of the retail life pool shifted (fewer younger, more older lives) that would explain higher premium lapses and higher claims, particularly as the post-GFC crunch hit affordability.”