APRA asked whether premium discounts are reigniting churn

The Australian Prudential Regulation Authority (APRA) has been challenged to explain why life insurers who offer premium discounts in the first and second years are not encouraging the type of policy churn sought to be addressed by the Life Insurance Framework (LIF).

The regulator has been asked whether it is aware that the combination of large premium increases and first year or first three years discounting practices is making it very difficult for financial advisers to provide advice.

APRA has yet to answer the question which has been posed by West Australian Liberal Senator, Benjamin Small as part of the Senate Estimates process.

In placing a formal question on notice, Senator Small said that he had asked during an Estimates hearing in June about “very large life insurance premium increases for existing clients occurring at the same time as the life insurers are discounting the premiums for new clients”.

“Seemingly this is a cross subsidy between existing clients and new clients. I also asked whether these discounts encouraged product replacement by financial advisers, which is an issue that the Parliament addressed through the LIF legislation?”

“The answer was that seemingly APRA was not aware of these discounting practices. I understand that a number of the life insurers are currently discounting premiums in the first year or first few years. One life insurer advertises that they offer a 25% discount in the first year. I am aware that a number of others also do this,” Senator Small said

“How is it that APRA would not be aware of this practice, and given that clients will incur a substantial increase in year 2, isn’t this going to incentivise both clients and advisers to move to another product to get the benefit of another upfront discount?”

“Isn’t upfront discounting of risk pooling products, like life insurance, a poor business practice? What is APRA doing to address these practices? Is APRA aware that the combination of these large premium increases and first year or first three years discounting practices is making it very difficult for financial advisers to provide advice?”