Should we be commoditising life insurance?

There's been a long-term push to simplify life insurance, which I agree with in principle. However, in practice, this has some gnarly implications that those outside the industry don't appreciate.

Monday, February 10th 2025, 6:00AM

by Jon-Paul Hale

There's been a long-term push to simplify life insurance, which I agree with in principle. However, in practice, this has some gnarly implications that those outside the industry don't appreciate.

Take, for example, medical insurance. You're not going to simplify medical insurance to cover everything; that would be too costly and result in things being paid for that probably shouldn't be. As a result, we have exclusions.

We have to take a sectioned approach, with what's covered overlaid with what is excluded. This makes it complex immediately.

A typical comment from those who don't know is: Why don't they state what's covered in a list?

That sounds reasonable until you consider that over 25,000 medical conditions are currently listed in the medical diagnostic guides, and every one of those conditions has a variety of treatments.

If you tried to do it this way, your policy wording would be significantly longer and more complex, and it would miss out a whole lot of stuff that is either new or intentionally missed out, making the overall policy document far more complex to navigate. The simple approach is to define each general section with what is covered overlaid with what is not.

If it falls into the bucket after the list of exclusions doesn't filter it out, it's covered. That is about as simple as it gets.

Can insurers make policy wordings easier to read? Definitely.

Partners Life started off with this basic approach of readable policy wordings. They have strayed away from this with some of their recent documentation, but overall, their policy wordings are generally straightforward most of the time. (Yes, I'm talking about the mess that is the cover letter for policy changes)

Southern Cross has recently rewritten its policy documents and has done an excellent job of making them plain English. This is a stark contrast to its 2021 changes and shows that insurers can get things tidied up.

The real challenge with policy wording occurs when we move away from medical coverage and into more traditional life insurance contracts.

Because these fall under commercial contracts, they require all parties to agree on changes, so older and historic policies cannot be updated or changed without the policyholder's sign-off. Not to mention that various reinsurance treaties impact these policies where the reinsurer is no longer that insurer's primary reinsurer.

The implication is that making changes to legacy policies would result in increased premiums for policyholders, driven by both the change of risk and extensive systems development costs.

Take a look at the difference between a modern trauma policy and one from the 1990s. You'll get the idea fairly quickly of the implications. The modern policy has a more expansive cover and is double the premium.

There is no argument that more coverage for people is a good thing. However, as a result of the premium increases, the current cover may be significantly reduced or cancelled when the existing unchanged policy would have continued to do the job it was intended to do.

There are some insurer implications here, too, where the cost and energy required to update and change legacy systems become prohibitive for the number of policies or premiums involved. AIA has a significant problem with this, and this has driven some of their business decisions on policy administration. (I've covered Policy splits for their products elsewhere.)

It's not that there aren't ways to change the issues in my last few paragraphs; it's more that it will require regulator and law changes to force the issue. Even then, do we want to impose increased costs on older clients already finding premiums a challenge?

The reality when it comes to life insurance is life cover is pretty simple and straightforward; the real challenges emerge with trauma and disability, the most complex product we have.

Disability is a product that is not as well understood as advisers think; the nuance of occupation, income, underwriting, and various product flavours means disability coverage is complex.

When people talk about simplifying life insurance, they usually mean simplifying disability coverage.

Taking a brief look at this, the situation of an employee without any other side hustle or investment income is already pretty straightforward. The problem is that most employees don't see the risk due to their perceived job security.

This gets complex and technical fast when you have self-employed income through companies and trusts. When large enough, residual investment income is also a problem I think many overlook or ignore.

The technical skill needed to implement disability cover is significant; if you consider it easy, you may want to look at a research paper written by Dunning and Kruger.

The implications of TPD alongside this and the other interactions across product ranges just add to the mess that is disability.

Emerging products in the accidental injury space, the added levels of trauma with moderate and severe versions, and cancer products in medical and trauma spaces all add to the complexity.

My question is, given the complexity, should we be dumbing it down and "simplifying" it?

My view is no. Sure, make policy documents more readable, but the complexity of the products is fundamental to ensuring policyholders have the best coverage.

Does this result in a level of job protection for advisers? Sure.

However, the addition of AI to the mix means that consumers have more tools available to help them understand these products and improve their knowledge.

This means that as advisers, we're going to be pushed into more specialisation and increased product knowledge, which I think is a good thing.

In the last couple of weeks, I've had multiple examples of ChatGPT 4.0 using my website for content in its answers and noted sources. This is being provided to me by clients.

Simplifying policy wordings for readability absolutely, simplifying products, but not so much.

We all know simple products mean less coverage, and that's the message that those outside financial services need to hear.

Tags: Jon-Paul Hale Life insurance medical insurance Southern Cross