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What Consumers Buy versus What Insurers Think They Should - Typically a $1.3 million gap
I doubt whether there has ever been a bigger gap between what insurers think you should buy and what consumers actually buy. This is the size of the disconnect: One insurer's life cover calculator quickly gets the recommended cover amount over $1.5 million, yet $500,000 is what most advisers start quoting, and consumers typically buy $200,000, usually from their bank.
The difference in methodology is astonishing.
Usually lump sum benefits are easy to assess: how much to pay off debt, create an emergency fund, and pay for the funeral - all numbers that can easily be suggested by the insurer, or supplied by the consumer, then add them up. The trick comes to 'other' things, the leading category appears to be funding the children's education. This is an emotive subject, and therefore ideal for discussion around the risk of early death. What better to leave your children than the gift of a good education? A shared goal of many parents is to see their children safely through a degree with no student debt. Do that and few people could say you have failed. Another leading contender is funding retirement for the survivor - leave your partner set up for retirement must surely rate as another worthy goal. So the calculators invite you to add all that up. It quickly gets expensive. Then the calculators invite you to work out how much income you would like to replace, for how long.
There are problems with this approach are more in what it does not do, that what it does:
It nearly always places life cover first as the main need, yet disablement is far more likely than early death, and in many cases more financially damaging.
Since a third of income typically services debt it is surprising that the calculator offers no suggestion to reduce the ongoing income to replace by the amount of mortgage repayments saved from the repaid debt.
Since education is usually funded out of income a similar - but slightly different - trade-off should be envisaged for ongoing income with that number too.
Pre-funding retirement income for a survivor is likewise going to reduce the call on their income - sometime substantially.
I thought that a calculator should make it easier to understand, not harder. By treating these items as separate, not goals that could all be met from future income, it is easy to arrive at silly numbers.
But if you want a really silly number, try the consumer's approach to setting their life cover amount. Unaided, when I ask them, they come up with two methods: take the home loan and divide it by two (there are usually two incomes these days). Alternatively they ask a friend how much they have and discover, more often than not, that they have about $200,000. So they buy that too. They don't even contemplate income protection.
The real problem with this method is that in most of the bigger towns and cities in New Zealand it means that the insurance package will fail in what I think is the baseline test: do you get to keep the house? It will fail if one of the income earners is disabled (more likely) or dies.
Important Industry Numbers
The value of in-force risk premium at the end of June 2015 was 2.233 billion, up from 2.115 billion (including WOL and group insurance, excluding them it’s about 1.986 billion, but the gain was similar) for a total gain of over 5%. That is pretty good when inflation was under 1%, and economic growth is about 3%. The industry is therefore growing at a substantially faster rate than the economy as a whole.
Insurers fret that the growth is confined mainly to increases on the premiums for cover already in-force, rather than increases in cover amounts, or increases in the number of people covered. That is a legitimate concern. Merely increasing premiums for the group of people that have insurance is not helping to get more of the people that do not own any insurance better protected - that is another important issue.
2015 was a very busy year: 24 products were re-priced in the year and 45 products had wording changes from minor technical things to meet new legislative requirements to major product upgrades. We do not expect that 2016 will be slower.
Life Insurance in the Digital Age: It Would be a Good Idea
Swiss Re's report on life insurance in the digital age includes many gems, you can find it at this link - do read it. Some highlights include:
Just how much the life industry lags behind others in satisfaction scores compared to other industries around deployment of digital technology
The importance of collecting good data throughout the business and using that well. Insurance has collected richer data than most other industries and yet few use less in an effort to create better customer engagement than we do.
But in other area it seems light: the poverty of ambition in the quoted examples of adopting automated underwriting systems is shown up by several much better systems I have seen recently.