Protection churn challenge down under

Having just returned from Australia, it might be an interesting exercise to compare market practice in their protection market with the UK because the two countries are radically different. Australia may even have a problem that the UK market doesn’t have to grapple with. Protection policy premiums in Australia tend to step up with age rather than being sold on a level basis. This means that a young Australian does not necessarily subsidise their older self as you could argue is the case in the UK. The pricing is therefore more accurate age wise in any given year.

It might be tempting for the UK industry to consider such policies because it could allow very cheap initial rates to be offered to younger people and there is certainly an argument to say this is a good way to get them into the protection insurance habit.

However, in Australia it also brings problems. Insurers find it very difficult to make a return on a product in less than seven years, which could discourage new entrants. Even existing insurers are probably more likely to lose their enthusiasm. Commissions can be as high as 110 per cent of the first year’s premiums and switching and churning levels are very high. The answer for Australia would appear to be a shift to longer term contracts and more stable premiums. However, it also shows that once you have a system that works after a fashion, it gets difficult to shift to another without at least some degree of regulatory intervention, as perhaps the UK is learning with pensions and investments.

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