Regulatory developments following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (FSRC) call into question the appropriateness and viability of current insurance business models, product structures and distribution arrangements. Of particular note, recommendations pertaining to the removal of exemptions and capping of general and life insurance commissions from the conflicted remuneration requirements may result in industry wide configuration of insurance distribution approaches. This could also have flow-on impacts to product structures.
The increased public awareness of the failings across the financial services sector and the heightened need for insurance companies to consider community expectations could result in a wholesale reassessment of product offerings.
Lifetime Insurance Cover is one such hypothetical concept that could emerge, envisioned as a product that bundles common insurance products into a single insurance offering that provides cover for the majority of exposures that an individual may face across their lifetime.
In conjunction with the disruptive outcomes of the FSRC, the increasing availability of data and the associated insights could potentially facilitate the technical pricing and implementation of Lifetime Insurance Cover products, to replace the segmented purchase of insurance cover for particular assets and exposures that arise at various junctures over an individual’s life. On the other hand, there are a number of emerging risks and developments that may disrupt historical data patterns and the ability of insurers to price Lifetime Insurance Cover with a sufficient degree of confidence.
Pace of Change
The increasing pace of change and disruptive innovations increase the difficulty for insurers to accurately predict future trends and potential insurance exposures. Game changing examples include: driverless cars; continued growth of the sharing and gig economies; robotics and automation of business processes; and escalating housing affordability issues. In terms of the business landscape, “organisations and their boards face an accelerating pace of change influenced by political events, government regulations and environmental concerns. These changes come with a number of challenges including financial, cyber, operational, and reputational risks” (Deloitte, 2017).
A number of challenges would also be faced by insurers in determining a practical and acceptable pricing approach given the widening economic inequality gap, transitions of individuals between socio-economic groups and potential cross subsidies between various cohorts of policyholders. “The gap between rich and poor in Australia continues to widen, with the top 20 per cent of households receiving half the income, while the bottom 20 per cent gets just four per cent. Social demographer Mark McCrindle’s analysis of Australian Bureau of Statistics wealth and income data paints a grim picture for Australia, which he says is fast losing its reputation as the land of the middle class thanks to income inequality” (Schipp, 2016).
The existing insurance structures that have evolved over an extended period of time create obstacles in the implementation of a lifetime cover approach, including the annual view of risk applying to the majority of insurance policies currently available and the associated need for ongoing disclosure. The distribution of the majority of life insurance policies through superannuation schemes and the existence of a number of mutual health insurance providers in Australia would also create substantive implementation issues. As a result, any transition to a Lifetime Insurance Cover approach incorporating general insurance, life insurance and health insurance elements would likely require the involvement of policymakers and legislative provisions set down by the Federal Government.
Trust in Financial Institutions
An increasing lack of trust in financial institutions has emerged over recent years, driven by the number of significant conduct risk events in the banking sector, including the provision of poor financial advice and questionable life insurance claims management practices. According to the EY 2016 Global Consumer Banking Survey, “thirty percent of Australian consumers surveyed report decreased dependence on traditional banks and established financial companies and increased excitement about alternatives”, and “Australian respondents were significantly more likely to trust alternative financial service providers than traditional banks” (EY, 2016).
There are also risks associated with insurer credit worthiness over the extended term of an individual’s entire lifetime. Consumers may have concerns in relation to committing to a lifetime cover arrangement, with reduced flexibility to change providers or adjust their insurance arrangements on an annual or ongoing basis. Appropriate mechanisms to facilitate the portability of lifetime cover between alternative providers would be required, but this may not entirely allay consumer concerns about the long-term nature of the product.
Given all of the complexities discussed above, lifetime coverage does not appear to be viable in the foreseeable future. A substantive shift in collective mindset would be required before any revolution to move to an obligatory lifetime cover approach, subject to certain pre-agreed criteria, could materially progress.
One significant change in mindset that could potentially support transition to a lifetime cover structure involves the acceptance of a greater degree of mutuality in the shared outcomes of a large portfolio of exposures across multiple insurance lines of business. Insurers and policyholders alike would need to accept a new paradigm whereby premiums charged do not clearly align with individual risk characteristics at any given point in time. Rather, portfolio level pricing methodologies would be required to allow for the diversification of risk across general, life and health insurance lines of business and the potential transitions of individuals between wealth and income cohorts over time. This would require the development of a high degree of trust in the relevant financial institutions to allay consumer concerns with respect to potential price gouging by lifetime insurance cover providers and inequities between policyholder cohorts based on the pricing methodology applied.
Business model design and product development within the insurance industry currently appears to be at somewhat of a crossroads. A number of established providers in the Australian market are developing product offerings with more granular pricing for specific exposures. Suncorp launched individual item insurance coverage in conjunction with Trov in 2016, allowing customers to obtain insurance coverage via smartphones for individual valuables such as a laptop. Youi has been challenging traditional insurers for a number of years by advertising its personalised underwriting approach and allocation of premiums based on a greater number of individual risk characteristics.
At the other end of the spectrum, Lemonade in the US establishes cohorts of individuals that share an interest in a given ‘cause’; uses premiums to pay for claims from the cohort and reinsurance for excess exposures; and donates any residual amounts to the common cause of the group. Similarly, the German FriendSurance approach leverages the share economy and returns excess funds to policyholders through an end of year bonus where individual insurance cohorts or pools remain without claim.
The application of a collectivist type approach could potentially provide the necessary level of trust to facilitate a shift towards lifetime cover. Alternatively, policyholder engagement, portability arrangements and consumer protection provisions could also be leveraged to develop the necessary level of public support and trust in any proposed lifetime cover scheme.
Substantive analysis and consideration would need to be extended towards dealing with the more significant differences in risk exposure that exist amongst different cohorts of policyholders - which may arise from economic inequality; geographical distribution across flood and cyclone prone areas; and key health indicators such as smoking status. Pre-agreed criteria and surcharges could be applied for policyholders upon notification of excess risk exposures such as the purchase of luxury items; relocation to high-risk geographical areas; or the uptake of adverse health behaviours.
To the extent that the issues detailed above could be overcome, a vast collection of datasets would be required to assist insurers and their actuaries in accurately pricing the portfolio risks associated with any genuine cradle to grave insurance policy structure.
It is clear from the discussion above that substantive collaborative efforts would be required across the insurance, public and private sectors to design and implement an effective lifetime cover approach, particularly in an increasingly volatile, uncertain, complex and ambiguous (VUCA) world. Even then, lifetime cover could still be just a pipedream if the consumer is unwilling to make the necessary leap of faith to purchase an extremely long-term insurance product, particularly in the context of deteriorating trust and confidence in financial institutions.
While Lifetime Insurance Cover is just one hypothetical example of how insurance products could evolve, we can expect that the FSRC and resulting increase in community expectations will provide the further impetus required to drive industry initiatives forward.
Deloitte, 2017, Courage under fire: Embracing disruption, https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Risk/dttl-directors-alert-2017.pdf, p.24.
EY, 2016, Lack of trust and non-traditional offerings threaten bank relevance, http://www.ey.com/au/en/newsroom/news-releases/news-ey-lack-of-trust-and-non-traditional-offerings-threaten-bank-relevance
Schipp, D., 2016, Income inequality means we’re no longer land of the middle class, http://www.news.com.au/national/income-inequality-means-were-no-longer-the-land-of-the-middle-class/news-story/90821b0b0b013babd29d2ac4c5dfd304