Life Insurers Profits Up But You Still Pay More

SYDNEY: 07 October, 2015 – The recent reporting season has revealed that, despite crying poor, life insurers’ profits are still increasing, according to lifeinsurancedirect.com.au.

LifeInsuranceDirect.com.au CEO Russell Cain said, “AMP reported one of the highest increases in profit – a 33% rise in statutory net profits, as at 20 August – and they’re not alone.”

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The reported profits of some of the top life insurers appear below.

  • AMP – posted a 12 per cent rise in first-half underlying profit to $570 million. Reported a 33 per cent rise in statutory net profits to $507 million from $382 million in the year-earlier period. As at 20 August, 2015.
  • TAL – Financial results released by TAL’s Japanese parent, Dai-ichi Life, reflect that TAL’s premium income was up 21% to $2,234.9 million and underlying profit after tax rose 12% to $146.6 million. TAL’s embedded value grew by 32% to $2,584 million over the financial year. As at 19 May, 2015.
  • ClearView – Posted a 4 per cent rise in underlying profits to $20.5 million for fiscal 2015. Although it reported a 10 per cent drop in reported net profit to $12.5 million due to amortisation of intangibles and integration costs associated with financial advice group Matrix’s merger into the company. As at 26 August 2015
  • ANZ – Statutory profit after tax of $3.5 billion up 3%. Cash profit of $3.7 billion up 5%. Profit before provisions (PBP) up 4%. As at 5 May 2015

“Consumers should rightfully be asking how life insurers can say they are increasing life insurance premiums because their businesses are not sustainable, when their own evidence clearly shows they continue to make substantial profits,” Mr Cain said.

If sustainability is of such serious concern to life insurers, Mr Cain argues there is much more they could be doing to maintain, or further increase, profits than increasing premiums and pushing for commissions paid to financial advisers to be slashed.

“If life insurers do have a sustainability problem, then the onus should be on them to solve that problem,” he said. “Amongst other things, they could be innovating on product design and lobbying the government to ensure that things like stamp duty are removed from life insurance to make it more affordable,” he said.

LifeInsuranceDirect.com.au has produced a paper which is below on why do your life insurance premiums keep going up?

Why do your life insurance premiums keep going up?

Despite crying poor, the last reporting season revealed that life insurers have continued to make substantial profits. So why do they keep hiking up your premiums? Here are some possible explanations.

Up go the premiums

Life insurers would have you believe they have to keep increasing premiums on the life insurance policies you already hold because they are paying more out in claims than they ever have in the past. As a result, they have put up the cost by as much as 20 per cent.

We know of one large insurer that has increased premiums on one of its products by 43%. We believe this is an attempt to force people to cancel their policy (also known as ‘anti- selection’). You see, insurers know if they put the premiums up high enough you will cancel your policy. This will leave you high and dry if you can’t get another policy because of, for example, your past medical history.

You are paying for past decisions made by insurers

Some time ago, in an attempt to win the business of superannuation funds, insurers began discounting ‘group’ policies (policies that cover members of the super funds). The premiums were very low and the policy terms, which required little or no medical assessments, were very favorable. This is what led to them paying out substantially more in claims than they did in the past. And this is one of the reasons they are now dramatically increasing premiums and downgrading terms on group policies.

However this still doesn’t seem to be enough for them as they now want to further bolster their profits by increasing premium rates on individual policies, like your’s. This is not right – they should not have offered unsustainable polices in the first place!

Poor product design

According to life insurer, TAL, 91% of current life insurance policies have ‘stepped’ premiums[1]. This means your premium increases as you get older. It makes sense (to insurers) because the older you get, the greater the risk of dying. It makes less sense to you because the older you get the more unaffordable the premium becomes and therefore the more likely you are to stop paying and lose your life insurance cover.

stepped life insurance premium

We believe products designed with stepped premiums are flawed and the time for life insurers to design new products that meet the needs of 21st century consumers is long overdue. So shop around and compare life insurance policy options before taking out a policy. And when you do, seriously consider opting for level premiums as despite recent increases they remain more affordable than stepped premiums in the long term.

CPI increases

Most insurers default to increase your cover by CPI or five per cent (whichever is the greater) each year. More cover means more cost.

Policy fee increases

Every year insurers also put up their policy fees by CPI.

Stamp duty

Life insurance products attract stamp duty and we believe insurers are not doing enough lobbying to government to remove stamp duty to make them more affordable.

Direct Offers

At the same time, big brands are flooding the market with advertising in attempt to sell their products to you direct. While it might be quicker and easier to buy life insurance this way, rather than via a financial adviser, it isn’t always the best value for money.

Our research revealed that buying direct can be as much as 100% more expensive than taking life insurance up via a financial adviser. This leads to high cancellation rates of up to 40% [3] as the premiums are less affordable. You can read our research here https://www.lifeinsurancedirect.com.au/quote-index/

When it comes to life insurance, Australians are seriously underinsured, costing the government billions of dollars.[2] By putting up premiums, we believe life insurers are only making a bad problem worse.

[1] https://www.tal.com.au/voice-for-life/insurance/stepped-level-premiums

[2] https://www.professionalplanner.com.au/cut-and-paste/2015/07/13/rice-warner-releases-underinsurance-in-australia-report-2014-38429/

[3] http://riskinfo.com.au/news/2013/07/23/heavy-lapse-rates-reported-on-direct-insurance/

Author: Russell Cain
Published: October 7, 2015

Ask an Expert?

2 Comments

  • Facts Please |

    Dear Life Insurance Direct

    Can you please explain why you are using statistics in a clearly biased way?
    Have you looked at profits over a number of years? What if AMP profits fell by 50% last year. Rising by 30% this year just means they have recovered somewhat?

    Did you consider looking at APRA stats for the industry as a whole? What do they tell you? Are you still happy with the message you are stating based on these facts?

    Did you consider that life insurance is capital intensive and that the life companies will be trying to reach a return on capital? Are they reaching in excess of reasonable returns on capital? Or do you only care about a sensational headline, whether it’s accurate or not?

    Have you just plucked a few numbers and used them in a biased way?

    I’m also puzzled why you think that life companies are putting premiums up to try to get people to cancel their policy? This is not consistent with the rest of your points. If Life companies are making huge profits as you say, it makes no sense to get policyholders to leave. It therefore appears that you have an internally inconsistent argument in your article!

    I have no issue with using facts and figures to raise points, but some reality would be nice. You have some points I agree with (eg selling unsustainable products), but you’re use of misleading statistics and arguments discredits anything that you say that may be useful.
    Less is probably more. I think also run by compliance – I know you probably already have.

    • Russell SPECIALIST
      Russell |

      Thank you for your feedback.

      The information and quotes we used were correct at the time of writing; and the profit statements were released by the insurers themselves, so I don’t believe presenting them again is misleading. I appreciate your position that looking at the Insurers’ current position might not accurately reflect their historic position and you may well be right. I’m not presenting a history of the life insurance industry but simply pointing out the inconsistency between announcing big profits and arguing for structural changes in distribution to promote sustainability and reduce costs.

      In the examples I highlighted, it’s clear that some Insurers’ profits are increasing and I believe since they’re doing well they should be doing more to promote the sustainability of the industry.

      I do accept your view that there a number of possible reasons why premiums may be increasing and I’ve highlighted my thoughts on some of the mechanisms I think life insurers use to increase premiums.

      I don’t think my opinion is internally inconsistent but I’m happy to explain it more. If an insurer only had a single, current, properly-priced and appropriately underwritten insurance product, then, I agree, there would be no reason to drive clients out of that product; but if you have multiple products (including legacy products) that are either becoming less profitable over time or represent some significant (or potentially significant) liabilities, then it is rational for the Insurer to address these challenges by either closing these products or encouraging clients not to renew (or take out new cover). Personally, I believe that life Insurers have been increasing premiums to reduce renewals for a number of years on these products. As you’re aware, if an unprofitable product lapses or is cancelled, the Insurer benefits. A lapsed policy is less of a cost to the insurer than a current claim. I think this strategy is often used where the benefits on the policy series are too favourable to the Insured (eg lifetime benefits), where premiums for the policy are “too affordable” relative to the insurer’s claims experience on the series, and or where cover was provided with little to no effective underwriting of the applicant.

      If you would like to discuss this further please don’t hesitate to contact me on 1300 135 205. Likewise, if you have historic data that provides relevant context or suggests that the Insurers are not achieving the profits they’re declaring publicly, I’d love to hear from you.

      Thanks again for your feedback.

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