Since early death has been so reduced as a contingency in working life in today's most advanced economies the focus has shifted to people living through events that would have killed them - hence the rising importance of living insurances: income protection, trauma, and private medical cover.
Alongside that trend, is another, newer one: the host of businesses that have sprung up to serve people that have been through or are going through serious illnesses. These are fascinating, see BBC item about several innovative businesses. Link.
While it is true that there are some significant problems, some of them are well described by the NZIER report to which Parker refers, the industry cannot be said to be 'dying.'
The NZIER report is based on FSC data and overall is a solid description of some facts about the industry. It has not been able to lift the proportion of people insured. Most of the growth in the industry stems from a combination of rate-for-age increases and inflation indexing. Costs appear to be high and do not reduce much with scale. These are all true.
Some aspects of the report are difficult to interpret without understanding some oddities of the insurance industry. When NZIER points out that the value of net new business is much lower than the loss of existing business they describe a phenomenon which will nearly always be true of a market dominated by products with rate-for-age pricing. The method of reviewing the FSC stats identifies administration, marketing, and commission costs together as what remains after deducting claims costs. In most places in the report they carefully label this basket of costs, but the casual reader falls easily into the trap of reading 'distribution' costs as the same as 'commission' when only about half of those costs are commission, and that is only an estimate. The comparison of commission to total in-force premium is a simplification which has the effect of making an insurer with little new business look very efficient, and one with little in-force, as very inefficient.
Some parts of the industry appear to be in great health. Bancassurance has been growing rapidly, now accounting for about a third of all new sales. Direct insurance likewise, albeit off a low base. Group insurance looks flat. The number of people with private medical insurance (not part of the NZIER review, but definitely part of the wider sector) has been falling for some time - and has been grateful to just flatten out. Take a longer view and the growth has been, even in aggregate, quite remarkable:
Comparing premiums with GDP, excluding group insurance:
Premium in-force at the end of period $000
GDP (nominal) $million
Comparing products with population
Products in-force at end of period
Population (mean in period to June 2015)
Which means that the number of policies or benefits has risen. NZIER rightly points out that there is no easy way to understand how many policies relate to actual people. It could be that many of the same people have added a benefit while many people remain uninsured. We know that is a problem from other research (such as the Massey University paper prepared for the FSC a few years ago). Look a little closer and you can see that the product mix is changing as well. The growth rate for life cover alone was a lot closer to population growth, but number of living benefits (income protection and trauma) more or less doubled over the decade. In that context the insurance industry has fewer problems than, say, dairy farming, and no one thinks that is 'dying'.
The industry has problems, but quite specific problems, definitely not a general malaise in which it is dying. Costs are too high. Grappling with a combination of 'no advice' sales, underwriting complexity, and increasing demands for the professionalization of advice from the regulator, there is plenty of work to be done.
Goodreturns has some commentary by Susan Edmunds in this Goodreturns article.
Partners Life are hosting post-product launch workshops in regions around the country in June. They will be exploring the differences in how Indemnity, Loss of Earnings and Agreed Value calculate disability benefits, and the effects of tax on benefits paid.
This chart is from our quarterly life industry review for the last quarter of 2015. The green line shows how many companies announced price changes in the quarter, the purple line shows how many lines of business were changed. The blue line shows the rolling average of the number of lines of business re-priced. You can see it was a very busy final quarter to 2015. The first quarter of 2016 was very quiet, but we have just had an announced of a general repricing of most on-sales lines of business by Partners Life. More details on that next week.
The words "Consumer Capability and Preference" are used like a mantra by our compliance guru, Rob Dowler, in describing the customer input into the advice process. I like the phrase and I think it underlines some imbalances in current thinking around advice.
A lot of customer input is gathered around their personal situation, especially financial situation, but also objectives, in most good risk planning processes. The element of capability which tends to get less focus, is literacy, but even this has had more attention recently. More advisers are adding a formal review of cover types, for example, into the start of the risk planning process. A neglected aspect of capability assessment is perhaps the testing of assumptions: a recent media case highlighted that an older client thought that insurance 'always' had a surrender value. Of course, it may have done 30 years ago, but it rarely does now. A good case of the need to test assumptions, a dimension of capability.
But the most-neglected area is preference. Although customers can always choose not to buy that is an extreme form of expressing their preference. Most advice processes still lack a polite question such as 'Can you please tell us any providers you would prefer not to deal with and why?' Even at the level of product features, provided the client has been properly informed about the value of features relevant to their situation and goals customers are allowed to exercise their preference. A good adviser warns them when it might get them into trouble or mean the proposed plan fails to meet their goals. But accepting that ,it is safe for them to exercise a preference provided it is properly recorded in the implementation documents.
Customers are, after all, allowed to simply prefer something.
Although Quotemonster passed four years in April a lesser known birthday occurred in May - the anniversary of getting together a group of industry people: product managers and a couple of others from a range of insurance companies together to set the criteria for a new research option. In the months that followed came the value-based methodology we use today.
This article from thisismoney.co.uk gets under the hood of many short-term travel, parcel, and warranty insurance products. You should read it. I have several colleagues in this industry who are convinced of the value of 'micro-insurance' of this type to re-start the engine of growth in the industry. But not if the policies are all this bad. The other thing that struck me was the use of long documents almost designed to have the consumer skip over them. Take this example:
"[in the]...terms and conditions 40 items are exempt, including electrical goods, antiques, jewellery, food and anything made from metals, ceramics or glass. It means barely any items will be insured under the policy. Its website does ask for details of what will be included in the parcel, but it won’t stop the customer buying a policy if they list an item that’s excluded"
Well, that simply is not good enough. The reputation of the insurance industry will remain low and continue to fall with sales practices such as that.