More cheap tricks! In COVER's April 2009 issue Nuts and Bolts highlighted two techniques insurers could use to reduce premiums. Anthony Burpitt now outlines two further techniques insurers use to reduce their premiums
Having already examined (1) cherry picking the healthiest lives and (2) using as precise an age definition as possible, two other premium reducing tricks commonly considered are:
Removing optional extras
Every optional extra or rider benefit adds to the price of a protection product. Reinsurers are often asked by insurers what the impact would be if some or all of these were removed. The answer varies enormously.
Every insurer or product offers different optional extras. For those who do have very similar or ‘standard’ option lists there are many different maximum payout limits, differing eligibility criteria, differing eligible causes of claim – there’s no ‘one size fits all’ answer. By stripping out all of the optional extras (guaranteed insurability options (GIOs), immediate cover, terminal illness) on a term assurance product the client could save around 3% on the total premium as a ballpark figure.
In the real world, if the insurer were to remove all of the options and rider benefits and win business based on being the cheapest quote, there’s nothing to stop them asking the client at a later date if they would like to add any optional extras (which might increase premiums above the original quote available from other insurers whose products included the options from the start).
Most advisers know about the implications of selling policies without optional extras. They know what might happen if a policy that they’ve recommended doesn’t allow an increase, or doesn’t pay out when another policy would have done. Advisers know they run the risk of being accused of not giving the best advice to their client. However, with an ever increasing consumer emphasis on buying the cheapest cover, more clients may choose to buy stripped down products – against the adviser’s recommendations.
Stricter policy wordings
It’s not too surprising to learn that increasing the criteria in policy wordings results in fewer claims paid, which in turn reduces the risk and can result in cheaper premiums when compared to the competition (if the provider chooses to pass on the saving to the client).
Take terminal illness for example. Typically with terminal illness benefits an early payout will be payable if it can be proved that the insured, though still alive, is certain to die before the end of the policy term. Typical wordings will state that expectation of life should be no more than twelve to eighteen months and that the terminal illness benefit cannot be applied in the final twelve to eighteen months of the policy.
The second exclusion is used to effectively prevent policyholders from having a free extra year’s worth of cover at the end of the policy. i.e. without it, on a twenty-five year policy, a policyholder likely to die in years twenty-six or twenty-seven could make a claim – so long as they could prove that they were certain to die within twelve to eighteen months from year twenty-five of their policy. The extra period of cover would of course add to the cost of the policy.
One way for the insurer to reduce the risk, and therefore premium, could be to extend the exclusion period at the end of the policy for as long as possible.
Again, most advisers are mindful about suggesting a policy with harsher criteria or wordings. They know what could happen if a policy which has an eighteen month terminal illness exclusion at the end of it is recommended and their client develops a terminal illness in the final year of the policy. Was that policy the best advice for the client? It’s probably a safe bet that the client would not think so.
In summary, insurers and reinsurers can use a number of tricks to reduce the risk, and therefore costs of cover. Some choose to pass those reductions on to the client while others may choose to retain some of the reduction in risk to make their products more profitable.
We could have come to an impasse on the price of protection in 2010. Some experts are starting to claim that the major improvements in mortality, which have helped to drive down premiums, have all but happened. Have prices bottomed out? We could be at the end of the price war, if it did ever exist in the first place? If that is the case, then where do we go from here? No single insurer will want to be the first to have to increase their prices. Will we see more insurers reverting to removing benefits or changing to harsher policy wordings in order to retain their competitive position on price?
Anthony Burpitt is research and development manager at Munich Re
