BY ANNABELLE DICKSON | TUESDAY, 18 AUG 2020 11:41AM
New research, commissioned by PPS Mutual, found that front loaded discount policies draw in clients with lower premiums in the first year but have higher premiums from the third year onwards, leading to financial advisers copping the brunt of lapses.
PPS Mutual chief executive Michael Pillemer said that a customer of an insurer who was offered a 25% discount up front could face 50% more in premiums once the account aged-based increases and indexation is added in the second year.
“The effect that these sharp premium increases have psychologically on a client, and the increased likelihood the client will lapse as a result, should not be underestimated,” he said.
In addition, the discounted policies are more likely to lapse due clients wanting to continually switch to a lower first year premium.
“In 2019, life insurers lost $1.3bn, lapse rates for traditional life insurers remained stubbornly high at about 17% and policyholders have had to endure significant and repeated increases in premiums (in some cases by more than 35% year on year),” Pillemer said.
“We must also not allow the inevitable criticism for poor risk management and product design to be sheeted back to advisers. All too often it is financial advisers that bear the brunt of these poor insurer practices.”
The retail life insurance industry has adopted these discounts to gain market share but the research demonstrates how over five to 20 years, policies with front loaded discounts have significantly higher premium increases relative to the first policy year.
PPS Mutual asserts that the poor outcomes are a result of the life insurance industry grappling with issues based on the macro socio-economic environment which has led to an aggressive chase for market share by various insurers.
The report also demonstrated the difference between non-true level premiums and true-level premiums in medium and long-term cost. The premiums are very similar for the first five policy years, but by the eleventh policy year the most affordable non-true level premium is higher than the least affordable true level premium.
Pillemer said: “We recommend the findings of Rice Warner’s study to financial advisers and their licensees to assist in providing advice that is in the best long-term interest of the client.”
