What does best interests really mean for disability insurance?
The insurance industry may have misinterpreted the best interest duty applying to financial advisers with respect to making disability insurance product recommendations, according to actuarial research house, Rice Warner.
In an analysis of the current state of the disability insurance sector published his week, Rice Warner noted that advisers were currently bound by the best interest duty which “mandated that they advise customers of the product that will be in their best interests, not just good interests”.
“The market has interpreted this to mean that it must be the best product available – and only that,” the analysis said. “In the wake of the Royal Commission into Misconduct, we are seeing various legal activity around interpreting this duty and the outcomes of this may have significant follow-on impacts.”
“We have seen high product development over the last ten years, although this has stalled in recent years due to the continuing losses. Most of the early changes focused on improving benefits, with many ancillary benefits added,” it said. “Whilst these were thought to represent only a very small proportion of the overall DII claim payout, their second order impact on reducing termination rates was probably not well understood at the time, and the additions were under-priced.”
The Rice Warner analysis suggested that there were no overnight fixes for the challenges associated with disability insurance products and that it might take up to a decade for the industry to work its way through the situation.
“Whilst it is critical for insurers and reinsurers to cease writing unprofitable new business, it is important to realise that there are few short-term improvements likely,” it said. “For insurers with established back-books, the unprofitable in-force policies will dominate the Profit & Loss outcomes for the next ten years, until the profitable new business sufficiently grows in relative size”
It said that this left the key question of what could be done with the back-book and pointed to a 2017 Rice Warner survey into retail insurance which found that in force DII policyholders had been hit with over 30 per cent premium increases over the last ten years.
“These individuals have been increased too much, and yet the new premiums are still not enough to cover the emerging claims costs,” the analysis said. “Selective lapsing is notoriously difficult to identify but surely must be already happening, contributing to the worsening claims for closed books. These lessons must be fed through into the new pricing assumptions to ensure this does not become an on-going cycle.”
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