The next chapter in life: Simple, clear, fast and fair

The next chapter in life: Simple, clear, fast and fair

Major changes to the design of life insurance are around the corner. With 1 October looming, Gerard Kerr, General Manager, Life Insurance at ClearView explains what advisers and their clients can expect.

Life insurance is a category that includes a range of covers including death, trauma, total and permanent disability, and income protection.

However, as the name suggests, it was originally a mortality-based product.

Since the 1980’s, life insurance has moved from paying when someone dies to focusing more on disability through morbidity.

The shift to morbidity and living benefit products reflects vastly improved life expectancy rates due to advances in modern medicine, better healthcare and the changing nature of work including safer employment conditions and the transition from a manufacturing economy to a services-based economy.

The focus on morbidity also reflects the growing awareness of health and health-related illnesses along with the acceptance and prevalence of mental illness.

Over time, product enhancements and pricing changes have been made around the edges but they haven’t gone far enough. If anything, some of the product and pricing changes in the last decade or so focused too heavily on short-term gains and not enough on long-term outcomes.

Basically, societal attitudes and behaviour changed but the design of life insurance products did not keep pace (perhaps even going in the wrong direction).

This has led to significant financial underperformance and the Australian Prudential Regulation Authority’s unprecedented intervention in late 2019.

While the life insurance industry provides a great community benefit, paying around $10.5 billion in claims per annum, the industry’s risk products lost $492.3 million in the year to 30 December 2020.1

This extended five-year losses to over $5 billion.1

As a result, change is coming.

This October - the deadline for life insurers to implement new Design and Disclosure Obligations (DDO) and the Australian Prudential Regulation Authority’s Individual Disability Income Insurance (IDII) sustainability measures – a raft of changes will be rolled out.

From an adviser and client perspective, the most pertinent change will be the introduction of new products that aim to address current shortcomings, particularly instability in existing disability products.

APRA has been very clear: Specific features, particularly with income protection insurance, are a major driver of the industry’s spectacular financial underperformance and need to go.

One key offender, Agreed Value contracts, went in March last year and attention is now focused on addressing what APRA describes as features inconsistent with the principle of indemnity and those that “contribute to moral hazard and higher inherent risk”.2

What does that mean?

Introduced more than 120 years ago, the principle of indemnity is still fundamental to life insurance.

It says cover should indemnify against loss but it should not allow people to gain from a loss.

Any type of indemnity insurance, be it general or life, is not about providing a windfall. It should put the insured back in the same financial position had the incident or loss not occurred (but not better). 

This principle aims to regulate compensation and stop people from gaming the system for profit. It aims to minimise anti-selection – either before or after taking out a policy – or anti-selecting while on claim whereby a claimant leverages terms and conditions to selectively stay on claim longer than their health conditions warrants.

Returning to the core principle of indemnity, supports the accurate pricing of products and underpins the sustainability of life insurance, enabling insurers to meet their long-term obligations to customers and other stakeholders. It also ensures the proceeds from policyholder premiums are distributed among genuine claimants.

In summary, a circuit breaker is needed for income protection, and new IDII is the beginning of a new phase for the industry.

What can advisers expect?

Come October, the market can expect to see the introduction of more transparent solutions with greater risk controls and a greater onus on customers to regularly update important details such as their income, occupation, past times and activities.

Given ongoing steep price increases, the industry is focused on delivering greater premium stability on new products. New IDII products should improve affordability, reflecting their more moderate features and tighter terms.

The following table provides a summary of potential changes.

ClearView’s path forward

Following the March 2020 launch of our Indemnity 60 IP option, ClearView has been focused on offering a simplified, fit-for-purpose solution to meet the needs of our current and future customers.

We are investing heavily in product and technology, as part of a multi-year transformation program.

Our focus is on delivering a solution and adviser/customer experience that is simple, clear, fast and fair.

The cornerstone of the project is an integrated life insurance policy administration system, underwriting rules engine and adviser portal to ensure that we remain easy to do business with.

As part of this project, ClearView conducted considerable market research and consumer and adviser testing. This feedback has been incorporated into the design of our new product, systems and processes.

In addition to new product design changes, APRA has imposed capital charges and tougher data management requirements on life insurers.

Overall, life insurers are being forced to modernise and bring in step changes over the next 12 months.

These changes should result in greater certainty around premiums and a fairer outcome for all customers, not just those who claim.

Gerard Kerr
General Manager, Life Insurance


1. APRA Life Insurance Profitability Statistics December 2020
2. APRA Sustainability Measures for Individual Disability Income Insurance, 2 December 2019