The Australian Prudential Regulation Authority (APRA) recently released its second set of claims data (as at June 2018) following the introduction of a more comprehensive claims data reporting regime. It makes for interesting reading and there have already been a slew of comments and inferences off the back of this data. Some of these come from learned colleagues using the data to support a position that life insurance sold via advisors has a better outcome for consumers than that sold directly. Some of these are from the media, looking for a story following the recent publication of the Royal Commission reports.
The data has certainly increased the transparency, but like any data it can be interpreted in many ways, and since it is aggregated data, it does not come with context. The context with respect to the specific workings of the products underlying the respective cover types is important because without it the data is subject to misinterpretation. And any misinterpretation is surely not good for consumers.
(Note that I have only taken account of Advised and Non-Advised/Direct in this post although the data also includes comparison of these channels against Group Super and Group Ordinary channels).
At face value 9% more claims are declined for Non-Advised business. This should however be offset by the 2.2% of additional claims that are withdrawn in Advised. Typically (although not always) withdrawn claims would likely have been declined hence the claimant choosing to withdraw. Further, some proportion of the 4.6% difference in Undetermined claims may also decline once their investigations have been completed and this should also be included in the offset (for argument sake I will assume approximately a quarter of these will be declined). The 9% thus reduces to just over 5.5%. Still a gap but given the differences in product construct and underwriting approach one can come to terms with it.
The Advised vs Non-Advised construct
Some of my colleagues have indicated that the statements in the report accompanying the data such as “Generally, advised business shows higher admittance rates than Individual non-advised for the same cover type”, and indeed some of the macro level statistics, imply that a customer is more likely to have a claim admitted if sold via and advisor than direct. At the face value this appears to be the case. The APRA data comes from the source and it clearly shows this.
But let’s be cautious.... when looking at things at face value, here be dragons….
This comparison fails to take account of the fundamental differences in the underlying product constructs and the mechanics of underwriting and claims assessment within the same cover type for the respective channels (guaranteed acceptance products aside).
It is true that early versions of products sold via direct channels were riddled with exclusions for pre-existing conditions (PEC Products). They were generally poor products in that customers only really found out what they were “not” covered for at claim time. The standard approach was to do an investigation at claim time to determine whether the customer suffered from one of these excluded conditions and claims were often declined on this basis. These PEC products, which were a major contributor to declined claims (and still are for in-force books containing these products), are less prevalent now and direct products are constructed and priced to balance the need for a relatively short and straight forward customer journey doing underwriting upfront via questionnaires vs a very rigorous underwriting process including physical examination, medical reports and blood tests usually found for advised products (along with the increased cost for this).
As noted, typically underwriting for advised products is more comprehensive and thus individuals who may be covered under a direct product based on how they answered the questionnaire, may be rejected at the outset under an advised product based on more comprehensive investigation at inception.
Irrespective of which channel, at claims time some degree of investigation is usually done. This can range from simply understanding and confirming the cause of loss (e.g. suicide vs natural causes from a coroner’s report) to a full investigation into the circumstances leading up to the claim to rule out fraud, misrepresentation and so forth.
For direct products, given that underwriting is based on trust and the duty of disclosure that the insured has, to answer the underwriting questionnaire truthfully, additional diligence is applied at claim stage to confirm what was disclosed (and not disclosed) by the insured during the underwriting process. For example a recent case we worked with for an Income Protection (DII) claim, identified that the insured had failed to truthfully answer underwriting questions about a diagnosed condition. This came to light when he lodged a claim. Had he been truthful he would not have been offered cover under any terms. In an advised scenario a request for medical reports would likely have been made as part of the underwriting process and the cover would never have been offered as this condition would have been detected early. This is one of the the trade off's between the advised vs the non-advised construct.
The APRA claims numbers
When expressed relative to the number of lives insured
Overall (looking at Advised and Non-Advised only) there are approximately 7 million lives insured. Approximately 27% of these are via the Non-Advised channel. The total number of claims received in the reporting period is roughly proportional between the two channels based on the number of lives insured, indicating that there neither channel is proportionally receiving fewer or more claims overall than the other.
At the cover type level however, there are significant differences for:
At the cover type level however, there are significant differences for:
- Trauma where there are double the claims in Advised;
- DII (Income Protection) where there are 45% more claims in Non-Advised; and
- Accident where there double the claims in Advised.
Viewed at an Aggregate level
When we analyse the data provided by APRA at an overall aggregate level, we see the following:
At face value 9% more claims are declined for Non-Advised business. This should however be offset by the 2.2% of additional claims that are withdrawn in Advised. Typically (although not always) withdrawn claims would likely have been declined hence the claimant choosing to withdraw. Further, some proportion of the 4.6% difference in Undetermined claims may also decline once their investigations have been completed and this should also be included in the offset (for argument sake I will assume approximately a quarter of these will be declined). The 9% thus reduces to just over 5.5%. Still a gap but given the differences in product construct and underwriting approach one can come to terms with it.
Consider the Declined Reasons
If we interrogate the reasons for the declined claims to try understand the difference between advised and non-advised (again at an aggregate level) and further illustrate the differences in the construct another interesting picture emerges:
Significantly more claims are declined due to Eligibility or not meeting Contractual Definitions in Advised than Non-Advised. This is interesting because one would expect that since this is Advised that the advisor would be assisting the the claimants through the claims process and advising them on the nature of the cover and whether they are eligible to claim or not.
Significantly more claims are declined due to Eligibility or not meeting Contractual Definitions in Advised than Non-Advised. This is interesting because one would expect that since this is Advised that the advisor would be assisting the the claimants through the claims process and advising them on the nature of the cover and whether they are eligible to claim or not.
In Non-Advised more claims are declined due to Exclusions and Other Reasons. This is understandable given the construct and a likely run off of the older PEC style products that are no longer available.
In Summary
What’s the point of digging into these numbers and the construct… simply to show that there are differences between the channels in many respects.
The differences do not necessarily indicate that one channel has a better outcome for consumers than another. The reason each channel exists and has different product and commercial constructs is to serve different parts of the market and the needs of different types of customer.
As an industry we should be considering the needs of our customers in a manner that is commercially prudent so that we can provide them with products that address those needs via channels that they choose to be served in at prices that makes sense to them.
Neither channel should be seeking a moral high ground because the entire industry needs to do a much better job of meeting customer expectations through better education, simpler language and better products.
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