Life Insurance 'Model' Implosion

I’m finding the Life Insurance Industry response to ‘business retention (profitability)’ a little bit bizarre; to say the least.

You see, there’s a problem with the length of time that Term Life Insurance business is staying on the books because the product is being re-written every two or three years.

In the majority of situations the policy is moved to a different insurer by an intermediary and justified on the basis that the ‘new’ insurer is cheaper ; fair enough. As Insurers keep tweaking/reducing their Term Insurance rates, it is probably no harm for the consumer to benefit from the reductions, so long as the terms and conditions of the policy are identical.

Those consumers that avail of the commission rebates on first years premiums via discounted life insurance websites can save money by moving around this market on a regular basis also, provided they are in good health.

So, who’s ‘benefiting’ from the current model? The Consumer - because they are getting a cheaper premium. The Intermediary - because the commission structure is such that it is lucrative to re-write the policy every few years.

If the break-even for an Insurer is 7 years on a Term Insurance Policy, how are they ever going to make it profitable for themselves; and when will the current model implode?

To acquire this type of business, Insurers have resorted to i) Price matching i.e. our ‘real’ premium is €100pm but if another insurer is quoting cheaper, we’ll match it ii) Increase initial commission and override to Intermediaries & iii) Spreading higher commission out over longer periods of time.

God forbid that the Insurers ‘offend’ the Intermediary market by putting the Consumer at the top of the priority list but, in my humble opinion, these actions are not going to solve the problem.

Insurers (and Re-Insurers) need to get their act together and come up with a different business model for these products.

I’m sure that they are worried about the extent of how much re-writing will take place when the latest European Court of Justice ruling on gender equality on insurance premiums. Good for some consumers, an income bonanza for intermediaries and another nail in the coffin for Insurers.

Government 'Policy' in Savings/Investment Market

It would appear, to me, that the Irish Government is systematically distorting the savings market. It seems to be a case of ‘We’ve blown ours and now, we need yours’. They are running out of road in terms of the options they have, to deal with the Exchequer Deficit ie raise taxes, cut spending, growth, default/restructure and now enforced buying of Government Debt.

You may have been prudent enough to save for your family’s future but the last two budgets have provided us with an insight into how desperate the Government have become in trying to relieve you of your hard saved cash.

It’s being dressed up as a sense of ‘civic duty’ so that you don’t feel too bad about helping them out of a sticky situation.

Increases in DIRT & Exit Tax, introduction of a 1% Tax on Unit Linked Savings/Investments, Inflated Deposit Rates from Government controlled banks and building societies, Solidarity Bond MK 1 (with MK 2 on the way), and Sovereign Annuities.

These are all designed to force companies and individuals to buy Government Debt via savings/investment and pension products. It seems that the Government savings policy is that you should bet the house on Ireland Inc., with a total disregard for any sort of diversification.

The Solidarity Bond is being flogged on the basis that your investment will help with “stimulating economic recovery and assisting in the maintenance and creation of employment”. Of course there is no disclosure requirement, or annual update, on how the punters money is being spent. How many jobs were created from the €350m invested in 2010?

The Government also tell us, in relation to Sovereign Annuities, that “This type of investment in ourselves is vital to our national recovery” Not a ‘Wealth Warning’ in sight, it’s all good stuff because “...there is absolutely no risk of Ireland defaulting on its sovereign debt”.

Perhaps, if the Solidarity Bond and Sovereign Annuity products were regulated by the Central Bank, the Government would not be so bullish in their comments regarding security/guarantees and how fit these products are for purpose and how they distort competition.

‘Errors’ at AVIVA Life & Pensions

It would appear that there is no end to ‘errors’ being uncovered at AVIVA Life & Pensions. The following is a list the type of ‘errors’ that have surfaced in the last 6 months :

29th June 2010 -

We have identified an error in relation to how tax provisions for net funds were accounted for...The number of units on your policy was calculated incorrectly. As a result, your unit holding was understated.

29th October 2010 -

We have undertaken a review of claimed pension policies and have identified an error...The policy was eligible for a bonus, which was not included in the calculation of the policy value. The claim amount was understated as a result of this error.

20th December 2010 -

We have identified an error where the Guaranteed benefit and/or Guaranteed bonus were incorrect on your pension policy, following an alteration. As a result, the benefits and/or bonus were understated.

What is truly remarkable about these errors is that they are not specific to any single company that went to make up the AVIVA company. The June ‘error’ was in respect of a Hibernian Life policy, October was a CGNU policy and December was a Norwich Union policy.

The ‘understatements’ / ‘errors’ for the above policies have had a monetary value of between €9 and €6,400. I haven’t been informed as to whether any ‘errors’ identified by AVIVA Life & Pensions were overstated, in favour of the clients.