ClearView’s chief actuary and risk officer, Greg Martin, has published a white paper on income protection insurance in Australia. The paper looks at the economics of income protection, saying the industry needs to evolve its thinking to make meaningful changes for everyone’s benefit.
Rising premiums and rising claims costs are making both insurers and their customers unhappy, Martin says, with a fundamental issue being ignored: macroeconomic forces, like slow wage growth, unemployment, underemployment, and individual differences.
White paper overview
The paper is split into four sections, with the first explaining the history of income protection in Australia. The second discusses how life has changed quickly in the past two decades, causing a split between product design and customer needs. The third section discusses cycle management, while the fourth is the argument for change.
The paper explains how retail income protection policy profit margins have seen substantial losses in the past five years, despite a growth rate of 8.9 per cent each year in premiums, and a large stake of 22 per cent of income protection in the personal insurance sphere. Growth has been falling away recently, likely due to ongoing media scrutiny, increased regulations, consumer distrust, disengaged customers, and a lack of product innovation.
Martin questions the profit decline narrative of insurers - that the decline has come from increased claims cost and inefficient product design (generous benefits), along with anti-selective behaviour (higher-risk customers obtaining these generous benefits).
Martin then goes on to discuss societal and economic trends. Societal trends include more knowledgeable customers, we work longer hours (often unpaid on our own time), higher debt-to-income ratios, and minimal savings. Work has become less secure (e.g. the gig economy). With all these factors, stress is higher overall. Mental health has become a major issue, with mental health claims rising.
These factors, Martin says, are more relevant than ever, but product innovation has stalled and a disconnect has appeared with customers. Insurers are taking steps to help customers with increased access to rehabilitation and prehabilitation, however this comes at a cost.
More claims are paid out during economic downturns, and conversely claims go down when wage growth is occurring.
The argument for change
Martin recommends cycle management of income protection using data integrity, reinsurance, and reserving.
The report suggests tracking of average income replacement ratios at policy commencement compare to those at claim, and the income replacement ratio at any point in time and how it might change in the future.
Reinsurance should be used as a mechanism to reduce the seesaw of high profits and reductions in prices, versus low profit times equating to price hikes. Martin suggests an automatic credibility adjustment be added - if a reinsured profit/loss is seen in one year, the reinsurance premiums are adjusted in future years.
The final suggestion to industry is that of reserving. Insurers could start allowing for mean reversion for both incidence and termination rates based on wage growth, underemployment and unemployment rates are sitting relative to long-term trends.