At a macro level, the disruption experienced across the advice and life insurance sectors has created a substantial mismatch between demand and supply, which represents an opportunity.
The headline stories around recent trends in life insurance sales don’t tell the true story. Certainly, the number of lives insured, summed across cover and channel types, has decreased by 10% over the last year and by 23% over the last two years11. A confluence of recent factors has made it hard to get a true read on the forces at play, with most evidence from around the world suggesting:
In Australia we have seen coverage impacted by the PYS and PMIF legislation, and the reduction in distribution capacity as adviser numbers continue to fall.
If we dig deeper and examine fundamentals, the need and demand for life insurance remains extremely strong.
The extent of the need is neatly summed up in the size of the underinsurance gap, which has been measured in several different ways.
Rice Warner’s 2015 review of life underinsurance suggested the gap between life cover held and cover required to maintain current living standards was $2.2 trillion for death cover, $7.9 trillion for TPD and $589 billion for income protection.
Median life cover was only 37 per cent of the income replacement level – the level required to replace the expected net income of the insured and maintain current living standards until the insured would have reached age 65.
A more recent review by global consulting group NMG used a different methodology, instead basing their analysis on the gap between actual cover held and the levels of cover the community expected should be held.
One of the more surprising elements of that research was that the levels of cover consumers felt were adequate for the needs were relatively high, as the table below shows.
Note: Lump sum is multiple of primary earner annual income; Income Replacement is either short, medium, or long term (LT).
At an overall level, NMG found the cover adequacy gap relative to community expectations was close to 50% for those aged 35 and over who only relied on group cover. In other words, people in those age cohorts generally had only half the cover the community expected they should have. (This was not true for advised clients).
Thankfully, many people are aware of these gaps, and this awareness – combined with the frequency of the trigger events explained above – helps drive continued strong proactive consumer demand for life insurance.
Furthermore, as demonstrated by Zurich/Oxford University research15, when Australian consumers are seeking life insurance, their number one preferred and trusted source of help with that insurance is a financial adviser (ahead of insurers, their employer, online comparison sites and even consumer advocacy groups).
The contraction of adviser numbers has been well documented , with the current 17,000 registered advisers representing a decrease of more than a third compared to three years ago.
The combination of commission capping, and new educational requirements has seen a disproportionate impact on those advisers recommending purely risk, and so whilst the overall adviser population may be down 40%, the population of risk specialists has decreased by closer to half, with Investment Trends data from 2019 suggesting the proportion of advisers specialising in risk had dropped from 34% to 15%.
(This downward trend may well have bottomed out, with a 14.1 % of respondents to an XY survey classing themselves as risk specialists).
Zurich has found that over the past three years the number of advisers who have written an insurance policy has decreased at a far less significant rate.