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 
10 Comments
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.
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Comments from our readers
Unfortunately I am not convinced of the push to commoditising. I agree policy documents generally are not very readable. Asteron was the first to help and made a good attempt (not Partners).
Partners brochures are frightening and confusing before you get to the policy document. I think more effort needs to go onto the point of sale material. Plain english, simple and straight forward, acknowledging the complexities you speak of.
Chubb brochures come close to readable and understandable.
I would would welcome more simplification and less client confusion. I also think what would help is culling out novel, twinkly products like, Household Expenses Cover! Next we will be marketing payment protection plans for cell phones and household items.
@Backstage, I agree we don't want to push to commoditising; it's terrible for everyone except the insurers.
I agree with the product brochure comments, though Asteron Life has a habit of not telling the rest of the world about what they're doing and keeping things secret.
Asteron Life's brochures are better, but their wording approach is painful to work with, especially from a digital document perspective, where you're not flicking physical pages.
Partners Life launched on easier-to-read policy wordings, though the worst I have seen has to be some of the old AIA policy wordings where you have multiple references to trace through for every paragraph to understand them. And good luck finding old brochures!
Yeah, that last line, pass on that, though haven't these been generally run out of town as harmful to consumers?
wonder which smart alec came up with the term "risks". it's always been known as life and general, or life and non-life worldwide. the man in the street don't understand what a risk adviser do, but they certainly know a life insurance adviser.
The number of clients I have met who tell me they have mortgage cover when in fact they only have life or accidental death cover is large.
I think Life Cover is commoditised whether we like it or not. It is at the core, quite plain, almost like petrol although an additive may be added to flash it up a bit but really, its plain and price is the issue. Although, advice or help over amounts could help.
Anything other than this great advice is required and it should not be commoditised. This doesn't take away from the need for very clear and easy wordings and collateral to help clients (and advisers).
You are so right about old brochures JP and I don't understand why these can not be available.
Clients often have cover in an old obsolete policy that they can’t move from because of recent health issues. They really like a competitor insurer’s “Specific Injury Benefit” but can’t move their cover to benefit from it. Buying it as a standalone benefit can be expensive when you add on policy fees.
When clients can buy different coverage from multiple insurers, they must navigate the differing policy numbers, policy wordings, and ways each insurer operates. Getting a handle on exactly what they're covered for at any time can be time-consuming for them, or their adviser.
Life advisers could run something akin to an investment wrap account provided by a central organisation. Insurers become true manufacturers of great cover options, not at the policy level but at the individual benefit level. Rather than launch a new policy, they can launch a new, improved Non-Pharmac drug coverage or a new sick leave benefit that pays a pre-determined amount if an insured is off work for more than two weeks.
The insurance wrap account would charge a policy fee that might differ if multiple coverages exist from different insurers. All policy wording, descriptions, communication and invoicing are generated at the wrap tool level, with major input from each insurer, ensuring uniformity of description with clear and concise, simple language.
Insurers would stop charging policy fees, as all communications would be generated at the wrap account level. Clients would receive the same kind of communication no matter which insurer is writing to them. Clients and their advisers could log in at any time to see exactly what they are and aren’t covered for.
One-off communications that are very specific to an individual client would be handled the same way MyIR sends letters to taxpayers.
The client's medical records could be connected to the account. If they ever want to add a new benefit to their coverage, they simply tap ‘apply’. The tool pre-populates their last disclosure and allows them to check this against their medical records to see if anything new should be added. Insurers, with the client’s express approval, could get access to the medical information without a Kinnect-type arrangement.
Commission payments could be handled at the wrap account level.
Insurers would devote their time to developing the best benefits. Advisers would be empowered to provide comprehensive, truly holistic advice for their clients. Clients would win with the right coverage, better understanding and lower costs.
Just a thought… maybe something for next century?
We all know pricing needs to be supported by actuarial evidence, but what is less well known is that this actuarial evidence is nowhere near sophisticated or granular enough to actually price out individual conditions or even product components to enable modularity.
In terms of connecting medical records to a client's account, I would wager that this is being worked on, at least to some extent, in every single insurer right now. The missing link has been centralised medical records, however there are at least a couple of different companies working on bridging the technology gap to allow for digital administration of centralised medical records.
Maybe AI will help deal with the complexity in the future?
Most people look at life insurance and expect underwriting to be building things with the equivalent of technic Lego, and a quite surprised when its more like duplo Lego.
The harsh reality is individual risk is hard to predict, but population risk is far easier. What results is very coarse answers from underwriting at the individual level, the 25%/50% premium loadings that happen rather than the 1%/2% approach people expect.
As to the connected health records, ideally having this would reduce a significant component of non-disclosure, but largely it doesn't dramatically change how underwriting works.
Too much information becomes the bottle neck where significant numbers of conditions are managed and historic and irrelevant to underwriting. Application forms are designed to discover whats needed without having every stubbed toe and bee sting ending up in underwriting.
AI is going to help sort through the information, at the same time the job of underwriting is just as much art as science, when you get into more interesting combinations of things, the human intuition (and adviser negotiation) becomes the reality.
Some products are easy for the application of AI, medical and life cover, trauma and disability products not so much.
There's another piece on medical notes, and that's the privacy act with the privacy commissioner directive from 2009 still in place, insurers cannot request full medical notes from a client.
They can request specific medical notes for disclosed conditions, and that is where the non-disclosure issue we presently have is coming from. Insurers cannot ask for a snapshot of health for a client that would mitigate most non-disclosures, because they haven't been told of the “other” conditions to be able to ask. Yes, it’s that stupid.
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Written by arguably one of NZ's premium Life & Health Insurance Advisers, it's no surprise this hits the nail on the head.