When premiums rise 50%, are you vulnerable on insurance?

During 2014, and in likely for some years to come, super fund members will be getting letters advising them that their insurance costs are rising – substantially.

We looked at the de-stabilisation of group life before Christmas, which you can find here.  Now letters from some of the big not-for-profits are starting to go out.  So we will start to see over 2014 whether there is any change in member behavior as a result.

We could see members reducing or dropping their insurance cover.  We might even see some members leaving the fund entirely, given that cheap cover has been an appealing aspect of collective funds.  Or we might see nothing.  It could turn out that the cost of insurance is something that members don’t worry about (or indeed are even aware of). If you are paying a high insurance rate visit https://www.kanetix.ca/auto-insurance.

That seems slightly wishful thinking, if members get out their calculators and work out how much their premiums are increasing. Those with higher levels of cover are also often higher value account members.  If they’re sensitive about fee levels – this is how they are often contested by SMSFs – there’s a good chance they’re going to be interested in the cost of their insurance.

So what do the numbers look like?  Well let’s take mine.  A pretty typical risk – middle age, white collar, non-smoker.  Above average levels of cover for sure, but nothing crazy, death-only cover and income protection (no TPD).  On those two components, I’m looking at increases of:

– Death-only: up 35%
– Income protection: up 75% (yes, that’s 75%, not 7.5%)

Ouch.  I knew it was going to be bad, but I wasn’t expecting that bad.  The increase in my annual premiums will be over $800.  Here’s the issue – the premium increase alone is roughly triple the total annual fees on my account.

An increasing number of members are going to find that they spend more on insurance than they do on all other fund costs combined – sometimes a large multiple.  For higher balance members, and large employer accounts, insurance costs are starting to add up to serious numbers.

Do valuable employer and member accounts become any more vulnerable to competitors as a result?

An interesting question is whether market participants will – or even can – compete more so on insurance than has typically been the case.

Theoretically, rapid changes in pricing should create new opportunities for competing – but it’s not as simple as that.  The market is faced with declining reinsurance capacity, we estimate that recent losses on Australian business now exceed $1bn, and it will progressively re-price over several years as contracts expire.  So any price advantage which could be used to attack the employer market may prove to be temporary.

Alternatively, it may be possible to attack individual high value members on the basis of insurance, as they become aware of large premium increases.

The threat is not necessarily about competing funds developing more attractive insurance offers for high balance members, although that is certainly possible.  Equally, we might see concerns about 50% premium increases added to the cocktail used to seduce higher balance members away from collective funds.  At present the proposition used to compete for high balance members (the usual destination being SMSFs) consists mostly of control and fees.  In communicating the message about insurance costs, as part of their overall approach to their high value members, funds need to be careful they avoid adding another ingredient to the cocktail being waved in front of their members.

Beyond managing the message, what else are funds to do?

Clearly this is a problem for a value proposition based on low cost, even if it’s probably the case that higher group prices are still lower for most members than retail prices.

To defend the proposition, ultimately we think the insurance product is going to have to change.  With group life, what was originally a simple, core insurance product for default members, has ended up competing with fully featured retail products, but without the typical inbuilt protections of retail.  Consequently we have an explosion of claims, largely unexpected by funds in terms of both size and scope.

If costs are to be reined in, we are looking at having to make tough decisions about core vs tiered cover (with much tougher acceptance conditions), the amount of core cover available, and the eligible benefit categories.  Big funds need to lead here, or the solution will ultimately be imposed by the re-insurers.