The future of disability income insurance - an Australian analysis. Brad Louis Alex Threlfall

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1 The future of disability income insurance - an Australian analysis Brad Louis Alex Threlfall

2 Agenda 1: Australian market overview - General 2: Australian market overview Product View 3: Australian DII Experience analysis & Insights 4: Sustainable DII Product 5: Australian DII A behavioural view 6: Next Steps 2

DII Experience analysis & Insights 4: Sustainable DII

3 Competition Law compliance reminder The purpose of this meeting is to allow Munich Re to share observations that it has made about our industry in its capacity as reinsurer provider to many of you. The information shared at today s meeting has been aggregated or deidentified where necessary. Whether or not this is applicable to you and how you may wish to address any issues (if at all) is a matter for your company s independent consideration. At no time should you indicate in any way to others in this forum your company s intentions regarding pricing, product terms or other strategic information. Munich Re is in no way suggesting a collective response. 3

Whether or not this is applicable to you and how you may wish to address any issues (if at all) is a matter for your company s independent consideration.

4 Section 1: Australian market overview - General The cost of doing the same old thing is far higher than the cost of change.

5 The Australian market Market Share March 2015 Metlife, 4% BT / Westpac, 6% Others, 7% AMP, 16% Suncorp, 7% OnePath, 9% TAL, 15% In force annual premium Australia AIA, 13% 16.0 NAB/MLC, 12% Source: Plan for Life CommInsure, 12% Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Total Individual Risk - Lump Sum - In Force Total Individual Risk - Income - In Force Source: Plan for Life Group Risk - In Force 05/08/2015 5

0 NAB/MLC, 12% Source: Plan for Life CommInsure, 12% 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.

6 Best Interest Duty Life Company Licensee/Dealer Group APL Adviser 05/08/2015 6

7 $m Profit (after tax) Where is the Industry at today? Industry quarterly profit retail DI Mar 2009 Sep 2009 Mar 2010 Sep 2010 Mar 2011 Sep 2011 Mar 2012 Sep 2012 Mar 2013 Sep 2013 Mar 2014 Sep 2014 Source: APRA Quarterly Life Insurance Performance 7

Mar 2009 Sep 2009 Mar 2010 Sep 2010 Mar 2011 Sep 2011 Mar 2012 Sep

8 The industry is making losses on retail DI 2014 $569,000,000 Source: APRA Quarterly Life Insurance Performance 8

9 Section 2: Australian market overview Product View The cost of doing the same old thing is far higher than the cost of change.

10 Question Male employee, managing a shopping centre. Insured for $22,000 per month. diagnosed with testicular cancer less than 1 week off work to undergo an orchidectomy a couple of intermittent days off when he was having cycles of chemotherapy. in aggregate, he had 5 weeks off work, equivalent to approximately $36,000 in lost income 100 days of accrued sick leave, which covered the lost income Insights to Action: Product Design 10

intermittent days off when he was having cycles of chemotherapy.

11 Question What benefit payments would be reasonable over the course of his illness and treatment? A B $0, He was not totally disabled for at least 14 days during the waiting period and he had sufficient sick leave for the time off work so he suffered no loss of income. Approximately $27,500 in partial disablement benefits equating to the 5 weeks that he was absent from work while undergoing treatment. for the time off work so he suffered no loss of income. C $132,000, being 6 months worth of benefits under the IP Trauma Benefit. Insights to Action: Product Design 11

12 The Munich Re view Causes of poor DI experience Features and benefits The claim experience Focus Complexity Insights to Action: Product Design 12

13 The Munich Re view Causes of poor DI experience Features and benefits The claim experience Focus Complexity Insights to Action: Product Design 13

14 Direct office survey Features not reflecting the principles of insurance 80% 70% Features 60% 50% 40% 30% 20% 10% 0% A B C D E F G H I J K L M N O P Insights to Action: Product Design 14

15 The distribution channel Insights to Action: Product Design 15

16 Section 3: Australian DII Experience analysis & Insights The cost of doing the same old thing is far higher than the cost of change.

17 IAD disability table Pick the winners of 2015 world cup based on 1992 world cup? 17

18 18

19 Why we re confident in our results Huge technical analysis MRA Investigation Covers 70% of the market 10-year analysis Credible data volumes 19,321 incidences 15,616 terminations 19

20 A:E (MRA Table except Pol Dur.) Insight 1... Sickness incidence increases by policy duration Policy duration Sickness (amt) 250% 200% 150% 100% 50% Policy Duration (Years) 20

21 Policy duration Other sources Source: FSC Experience Analysis 21

22 A:E (MRA Table) Insight 2... Accident incidence is increasing Accidents by year 160% 140% 120% 100% 80% 60% 40%

23 Actual to Expected (MRA Table) Accident incidence is increasing across all portfolios Cedant experience by year Accident (Amt) 180% 160% 140% 120% 100% 80% 60% 40%

24 A:E (MRA Table) Insight 3... No systemic change in termination experience Year 1 claim duration by year 175% 150% 125% 100% 75% 50%

25 A:E (MRA Table) Insight 3... No systemic change in termination experience Year 2 claim duration by year 200% 175% 150% 125% 100% 75% 50% 25% 0%

26 $m Profit (after tax) Where is the Industry at today? Industry quarterly profit retail DI Mar 2009 Sep 2009 Mar 2010 Sep 2010 Mar 2011 Sep 2011 Mar 2012 Sep 2012 Mar 2013 Sep 2013 Mar 2014 Sep 2014 Source: APRA Quarterly Life Insurance Performance 26

27 Headline result of our message to industry 20% - 35% 27

28 A view on some factors that may influence pricing Assume prices 35% below where they need to be to meet claims costs 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Long Term Benefit Period Short Term Benefit Period 28

29 Benefit period has a big impact Price rise required to deliver a 35% increase: by benefit period 60% 50% 40% 30% 20% 10% 0% -10% Long Term Benefit Period Short Term Benefit Period 29

30 Section 4: Sustainable DII Product The cost of doing the same old thing is far higher than the cost of change.

31 An opportunity to improve Customers / advisers affordability, equity FEATURES & BENEFITS THE CLAIM EXPERIENCE FOCUS SIMPLIFY Claim triggers Aligned with loss Promote return to work behaviours More transparent & consistent outcomes Holistic engagement Focus on recovery Deliver on service promise through support and sharing of expertise Make it count Plain language that everyone can understand Terminology that is meaningful & helpful Insurers / reinsurers profitability, risk management Insights to Action: Product Design 31

32 Section 5: Australian DII A behavioural view The cost of doing the same old thing is far higher than the cost of change.

33 $m Profit (after tax) How did we get here? Industry quarterly profit retail DI % % -500 Mar 2009 Sep 2009 Mar 2010 Sep 2010 Mar 2011 Sep 2011 Mar 2012 Sep 2012 Mar 2013 Sep 2013 Mar 2014 Sep 2014 Source: APRA Quarterly Life Insurance Performance 33

34 How did we end up here? Version 1 Product & u/w enhancements Interest rate movements Other Factors 34

35 How did we end up here? Version 1 Product & u/w enhancements Interest rate movements Other Factors 10%+ 10%+ ~10% ~35% 35

36 Where is the Industry at today? Retail DI new business premium rate changes Source: RICE Warner 36

37 Where is the industry at today? Restrictive product changes

38 How did we end up here? Version 1 Product & u/w enhancements Version 2 Reinsurer support Interest rate movements Commitment to analyse claims Other Factors Reluctance to move prices Target Q1 product features Ignoring root cause 38

39 Section 6: Next Steps The cost of doing the same old thing is far higher than the cost of change.

40 Recap Industry Losses New analysis not using IAD Trends exist that may not be allowed for Action stations 40

41 Where does that leave us? Pricing and Product implications In Force Pricing Claims Ongoing losses New Business Pricing Claims Product Terms & Conditions Trowbridge 41

42 Recommendations for Oz Experience review using FSC or MRA Pricing review Product review T&C review Decide Price and Product Actions 42

43 NZ Considerations 1: Understand Experience - Duration Increases - Product change impacts slow build up - Claims efforts won t correct product/pricing issues 43

44 Questions

LIWMPC Life Insurance Industry Update. Adam Norman & David Millar

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