Group insurance – prices soar as risks come home to roost

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To many in wealth management, group insurance is about as exciting as watching paint dry. But strange things are afoot in the group insurance world which will reverberate across the industry landscape. Many funds with external insurers – especially not-for-profits – have announced premium increases of 30-50% on their life and TPD policies in a single year. If you need legal advice to dispute an auto insurance claim click here. That’s a massive move, even for the least interested person in insurance.

What’s going on? Group insurance used to be a quiet corner of super. It wasn’t a major area of contention between funds, which tended to compete principally on investment performance, features, and service.

That started to change a few years ago. Group insurance – both pricing and terms – became an important point of differentiation and competition between funds, particularly for big company plans with large numbers of members, and assets of $1bn or more.

Pricing of standard cover also fell sharply, with the apex (or nadir if you prefer) probably the AustralianSuper deal with TAL in 2009. AustralianSuper negotiated what was at the time an amazing level of cover, pricing, and terms – opening a significant gap over competitors in the process. We know of IFAs who felt compelled to recommend AustralianSuper for certain clients as a result, although it may also have created a free-rider effect with some members opening very small accounts for insurance coverage only. This would have been particularly attractive for members representing poorer risks, who could avoid underwriting.

The heated price competition between insurers was great for members, but less so for the insurers, and has turned out to be unsustainable. Insurers buy large amounts of their own form of insurance (reinsurance). Insurance executives could see the dark clouds appearing too. From NMG Consulting’s annual study of Australian life reinsurance, today’s chart indicates the market’s view that pricing has been too low for some time.

For us, warning bells started going off a year or more ago when we noticed increasing media advertising by law firms, soliciting actions from members for claims against their fund’s insurer. This was new. There were rumblings of increasing claims activity. It was all anecdotal. But now the numbers are showing up – in the financial results of reinsurers who stand behind the group policies – and they are all bad.

The world of reinsurance is an esoteric one (please refer questions to Mark Prichard at NMG, not Andrew Baker, for a well informed answer). But the numbers are clear, including a recent $300m reserve strengthening by RGA, recognising losses mostly in respect of Australian group TPD business.

We believe RGA’s experience is likely representative of conditions in the overall group market. Their loss announcement implies that the pricing and design of underlying terms and conditions in insurance contracts are unsustainable. We expect to see significant changes in terms as well as pricing, such as limits on claims submission periods for TPD, where insurers are seeing claims submitted 10 years or more after the event.

Large increases in premiums could cause instability in group arrangements. Members may respond by dropping out, as well as being less likely to take it up in the first place (where opt-out is possible). While this does not sound like a big deal, it could create selection problems in a market where high participation rates are required for minimal underwriting and low pricing.

Repricing creates something of a competitive rebalancing in super, particularly for larger plans where insurance is important. Retailers, which have generally been less affected than the not-for-profits, will see their competitive position improve.

Industry funds on the other hand may need to revisit their approach to group negotiations of cutting prices and watering down terms. While their commitment to member outcomes is not in question, it might be argued that this focus has reached its limits. It will be interesting to see whether the largest funds might alternatively respond by entering this part of the value chain in some form, as they have done in many other parts.

Of course there remains the question of whether the recent premium increases will prove sufficient, and how reinsurers’ requirements will change moving forward. We believe it is quite possible that, as large as the recent increases have been, this may be just the first round.

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