Designing Life Insurance Products for Increasing Consumer Expectations

Over the course of the recent year, the life insurance industry has come under increasing regulatory and media scrutiny. A key theme emerging is that products are not performing to consumer expectations, with the balance tipped in favour of the insurer. The industry now faces the challenge of addressing and restoring the imbalance between consumer and industry

An Insights event “Designing Life Insurance Products for Increasing Consumer Expectations” was held at the Actuaries Institute in Sydney on 17 October, with Elizabeth Baker (Directory Advisory at EY) leading the discussion, along with Dale Jackson (Associate Director Advisory at EY) and Darryl Pereira (Partner in the Insurance and Financial Services team, TurksLegal).

The session discussed the background of events leading to the current situation with Dale recapping the numerous investigations into the industry that have led to a string of findings such as the Parliamentary Inquiry report, the proposed Federal Budget changes for Insurance in Super, the ASIC 587 Direct Life report and most recently the Royal Commission hearings.

The policy questions arising from the Royal Commission Round 6 hearings were summarised into the following key themes:

• Low value products
• Unreasonable exclusions
• Out of date legacy definitions
• Confusion over default coverage
• Confusion over claim thresholds
• Imbalance in rights / obligations and lack of transparency

Insurers need to question the drivers underlying these themes that have led the industry to where it is today.

Dale referenced an article[1] that posed the following 10 questions a customer should be able to answer about their life insurance:

1. Are you paying for multiple life insurance policies?
2. Do your premium costs align with your cover?
3. What is covered?
4. What is excluded?
5. Is there a risk loading?
6. What do income protection and trauma insurance cover?
7. How much life insurance do you need?
8. What does TPD cover?
9. Insurance default schemes – do they meet your needs?
10. When should cover be reviewed?

The nature of the questions suggest consumer understanding is low and that this further drives the gap between expectations and reality.  

These findings mean the accountability to design products that are suitable to the customers who are sold them is greater than ever. With further legislative proposals being put forward and placing further constraints e.g. limiting access to medical information at time of underwriting and claims assessment, it is imperative that product changes occur to ensure sustainability.

The legal perspective

Darryl continued the discussion by sharing a legal perspective on life insurance product design. The legislative changes focus on member value and the misalignment between actual cover and perceived cover that result in “illusory” cover.

Regulators are also considering member value through the prism of inherent restrictions on cover. Examples of current restrictions which are not always known or understood include TPD cover definition flip, Limited Cover, IP deeming clauses, end of cover provisions due to insufficient account balances and offset provisions.

The speakers also noted that the current opinion based TPD definition has the highest rate of disputes amongst all benefit types and courts often place significant scrutiny on the insurer’s decision process.

Other notable legislative updates include the proposal to extend unfair contract terms protection to insurance contracts, the introduction of the Design and Distribution Obligations Bill and a Parliamentary Inquiry into allowing life insurers to fund rehabilitation.

Product design in life insurance

Elizabeth proceeded to share some approaches to improve the balance of life insurance product design, where the aim is to promote better consumer decision making around insurance cover.

Principles to consider when designing life insurance product should include:

1. The product itself (should meet consumer needs and not be overly complex).
2. Product level metrics (should be reasonable and not too high / low).
3. Individual benefit levels (should meet consumer needs and not be overly complex).
4. Data (should support pricing, product features and any exclusions).
5. Product features and eligibility (need to be clear and not create confusion).
6. Product exclusions (must be necessary and reasonable).
7. Pricing factors (should be reasonable now and into the future).
8. Claims (should produce consistent customer outcomes across the customer segments).

Taking up the challenge

The audience were challenged on long standing practices and to think about product design and pricing from the bottom up.

A customer and insurer “value exchange” framework was also suggested. Under this framework, the various attributes of a product are assessed and then classified as either meeting, marginal or not meeting customer expectations. Using this framework, the insurer can then determine and agree action items to address areas that do not meet customer expectations.

The life insurance industry has recognised the need to improve awareness and value to customers and initial steps have been taken such as the implementation of the Voluntary Code of Practice. However, as customer expectations continue to grow and evolve, the challenge remains for insurers to re-evaluate existing products by placing a customer lens over the end-to-end process of product design. To do this, a shift in mindset is required from “what can be done” to “what should be done”.

[1] Source: Australian Financial Review 21 September 2018 Duncan Hughes: “Ten questions that could save your life (insurance)”

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