How insurance would be cheaper if everyone stopped lying

Life insurers and financial advisers encourage ‘customer dishonesty’ – and that’s keeping insurance costs higher.

There is strong evidence that insurance premiums could drop by 20 per cent if everyone involved just told the truth.

“If you would just stop lying everything would be better.” It might just be a mantra for the insurance sector where everyone from industry executives to customers – not to mention financial advisers – just won’t face the facts.

That’s the remarkable conclusion from an academic project which has examined why life insurance premiums keep rising yet the industry’s retail revenue is virtually stagnant – nobody is telling the truth.

What’s more, there is strong evidence that insurance premiums could drop by 20 per cent if everyone involved came clean.

The core of the problem is that many investors do not tell the truth when applying for life insurance.

It seems they are even more likely to lie if they are using a financial adviser (advisers still get commissions from the life insurance industry). The research shows “adviser-screened applications” have a lower rate of declined contracts.

The report comes just a few years after the scandals that rocked the life insurance sector when CBA’s CommInsure arm was ultimately charged in 2019 over unscrupulous practice.

Four years later it is now clear that the life insurance industry absorbs the fabrications of dishonest customers by penalising all customers.

“Everyone just goes along with it instead of trying to fix the fundamental problem. We have shown in our work that the big insurers could cut this down if they make an attempt to grapple with the problem,” Doron Samuell of the University of Sydney says.

Dr Samuell found that if life insurers under test conditions tried new techniques to “remind customers about their core values” it improved smoking disclosures by 40 per cent.

The admission of smoking – and the volume of smoking – is one of the biggest problems inside life insurance as official statistics show the prevalence rate for smoking is around 16 per cent. However, if life insurance statistics are examined where applicants were “adviser-screened” the figure falls to 9.2 per cent.

A life insurance company would have to undertake extensive medical tests to determine if a customer was telling the truth, and even with modern technology the testing would be incomplete. In reality, the big life insurers don’t do anything.

In a recent paper titled ‘The adviser effect on insurance disclosures’, Dr Samuell and co-author Demetris Christodoulou suggest: ‘‘All insurance customers suffer

from under-disclosure. On the one hand, high-risk customers who fail to disclose their true risk profile are exposed to serious legal remedies and may have an unreliable contract when it is needed the most. On the other hand, the failure to separate high from low-risk customers invokes the law of large numbers, with the resulting pooled risk elevating baseline premiums for all.”

“The ethical problem of pricing for dishonesty, is that honest people ultimately suffer,” Dr Samuell says.

Across Australia the biggest life insurers would include TAL, AIA and Zurich. Inside the industry, the retail side of life insurance is showing virtually no industry growth as customers recoil from ever rising costs.

The majority of life insurance sold in Australia remains “advised” – that is it comes through to the insurers from the financial adviser network – and though the Hayne royal commission covered advice and insurance scandals, the life insurance industry remains exempt from the wider ban on commission-based selling.

The issue of how life insurance is sold and the role of financial advisers in linking customers with insurers is set to re-emerge next year after a surprise move by Financial Services Minister Stephen Jones to allow insurers – along with banks and large superannuation funds – to offer “qualified advice” under a new industry plan.

“In the insurance area, I think this is inviting more conflict of interest issues into the sector,” Dr Samuell says.

Originally published as How insurance would be cheaper if everyone stopped lying