Find Out Exactly Why Life Insurance Has Become More Expensive in Recent Years

Uncovering the cause of life insurance premium increases in Australia

Have you seen an increase in your life insurance premiums over recent years? You're not alone...ongoing challenges facing the insurance industry in the rate and type of claims being made has lead to an increase in insurance premiums with much debate over whether this rise will only continue.

But it’s the cause of these increases that might surprise some, with many insurance providers having to pay out substantially more insurance claims due to stress. A rise in mental health and disability claims over recent years has had a significant effect on the bottom line of many in the insurance industry. And rather than blue collar workers who work in hazardous occupations driving the surge, it’s white-collar office workers who are struggling to cope with stress and the many related conditions and illnesses it can cause.

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So, what are the underlying causes behind this rise in stress-related life insurance claims and what does this situation mean for policyholders and those looking to take out cover? Read on to find out.

What exactly has lead to the increase in premiums?

A growing number of industry bodies have been attributing the spike in mental health cases across both group and individual life insurance policies was kickstarted by the Global Financial Crisis (GFC). Not only did the worldwide financial meltdown wreak havoc on the finances of millions of Australians, but it is still having an effect on our hip pockets several years down the track.

The GFC saw stress rates rise among white-collar workers,which in turn has led to a greater number of mental health related claims under life insurance policies. In addition, it has been reported that lawyers for plaintiffs have begun encouraging their clients to lodge mental health claims, which has also contributed to the rising cost of premiums.

Of course, this recent trend can further be linked to an increased understanding and acceptance of mental health issues across the general public. In the past, people with mental health issues would simply soldier on and suffer in silence, with any admission of a mental health problem seen as a sign of weakness. Now, however, there is much less of a stigma attached to this sector of health care and more people are getting the help they need for problems which are often serious.

Churning moving under the spotlight

The rise in claims has only been intensified by policy churning by financial advisers, whereby policyholders are moved to another product by their adviser without any real benefit than to pocket the commission for signing them up to a new policy.

So just how much have claims increased?

Statistics from the prudential regulator show that group life insurers, which sell insurance policies through superannuation funds, paid out $5 billion in claims in 2015 up to March, a noticeable rise from $4.3 billion the previous year.

In a KPMG study of 30,000 life insurance claims made between 2007 and 2011, more interesting data was revealed about the nature of life insurance claims lodged by Australian policyholders. A 45-year-old woman is 94% more likely to make a disability claim than a man of the same age, but she is 22% less likely to make a claim for accident. Male, white-collar smokers are also driving up premiums, with data showing that they are 50% more likely to make a claim due to sickness, while smokers are 12% less likely to return to the workforce than non-smokers.

What does this mean for policyholders and applicants?

Of course, rising premiums will have significant effects for a wide variety of Australians, regardless of whether they already hold a policy or if they want to take one out. As insurers gather more data on the nature of claims and the driving forces behind them, they can start assessing risk more effectively and also pricing their policies accordingly.

Unfortunately, this has led to rising premiums in recent years, which have had a significant impact on the budgets of many Australians. While these price rises may discourage some from taking out insurance protection, those in the insurance industry are working hard to promote the benefits of having some form of cover in place.

End in sight?

Happily, premium increases, especially for those policies sold through super funds, are expected to ease in 2015. Spurred into action by an increasing number of mental health claims and litigation action by lawyers, insurers have raised their premiums to ensure that they continue to turn a profit. This strategy has had its desired effect on their bottom lines and price rises should not be as large as in recent years. In addition, churning is coming more and more under the spotlight with calls for a flat commission structure where upfront commissions are the same as the ongoing trailing commission received by the adviser.

Criticism for Discrimination

The rise in mental health-related insurance claims has also led to suggestions that some insurance providers may now be discriminating against customers who have experienced mental illness of some kind. A 2011 report from beyondblue, Mental Health, Discrimination and Insurance: A Survey of Consumer Experiences, found that people who had suffered from mental illness, including stress, anxiety and depression, had a hard time finding an insurer willing to offer them cover. In addition, survey respondents also found it difficult to lodge a successful claim.

Results from the report include:

  • 35% of 424 respondents said it was difficult to obtain any form of insurance because they had experienced mental illness
  • 45% had applied for income protection insurance and had their application declined due to their history of mental illness
  • 50% of respondents were issued a policy but were either forced to pay more or had to deal with exclusions when it came to mental health claims

In addition, issues of mental health are often handled with a great deal of insensitivity and a lack of tact during the application process. When it comes to life insurance and income protection insurance, it seems that there is still a stigma attached to mental health issues.

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Steps to address issue?

Beyondblue and a range of other groups have been lobbying for change across the insurance industry for years. And as general public awareness and perception of mental health issues increases, it’s hoped that these changes will start filtering through to the insurance industry. As the number of claims for mental health related issues has increased, so too has insurance providers’ knowledge of these issues and how to deal with them.

Whereas once consumers who had previously suffered a mental health issue were all lumped together in the one basket, more insurers are starting to assess the history and needs by each applicant on a case by case basis. If you can prove that your mental illness is under control and not an ongoing issue, you’ll have a far better chance of avoiding paying extra for cover.

In addition, an increasing number of insurance providers and superannuation funds are forming stronger relationships with employers. Working together, they’re able to offer the necessary support services to employees to help improve mental health in the workplace.

And when you consider that one in two Australians will be affected by mental illness in their lifetime, the importance of addressing any problems with discrimination and access to life insurance becomes immediately apparent.

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Looking to review your current policy?

If you have had the same policy for a number of years or are looking to take out a new policy, it could be worth making an enquiry with an insurance consultant. You may be able to find a more competitively priced policy that still offers the level of cover you need. This is especially the case if your situation has changed in recent years i.e. you recently became married, your kids have moved out of home. Whats more, a growing number of insurers are now offering a range of incentives for new applicants and current policyholders.

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Maurice Thach

Maurice is a publisher for finder.com.au. Daily research of Australia's insurance offerings allows him to breakthrough the noise of the many policies out there to uncover what can (and can't) be covered. Maurice hopes to make finding the right insurance easier for all.

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