Jessica Wilson is a researcher and writer who works on consumer law and other issues.
OPINION: Insurance companies are constantly inventive in their efforts to attract new customers. In recent years, making products aimed at appealing to younger audiences has taken up more of their time.
Among the latest offerings to emerge are income protection-type policies designed to appeal to tenants’ financial insecurities.
These policies promise to cover your weekly rent payments if you are off work. Introductory offers – “get the first month free” – help sweeten the deal.
What’s not to like?
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As with most income protection policies, coverage is limited to situations where you become ill or injured and cannot work (there is no payout in the event of layoff). And it doesn’t start right away. There is usually a “waiting” period: you must be off work for a month or more before you can make a claim.
The lifetime costs of coverage – that is, the amount you would pay in premiums for the duration of the policy – are rarely disclosed. Premiums will increase with age, and if you cancel after a few years because costs have increased, there is no refund.
Equally problematic is that these policies may be marketed to those who are least likely to need them – single young professionals with no dependents.
Data available indicates that workers who quit their job due to poor health or injury are likely to be 55 or older, have low incomes and live with a partner. Notably, age limits set by the insurer may mean that people over 55 are not even eligible for coverage.
The life insurance companies behind these types of products are eager to bet claim that New Zealanders are underinsured. One industry estimate puts the gap in the billions of dollars.
But the flip side is that companies haven’t covered themselves in glory by offering fonts that offer value for money to their customers.
Industry shortcomings were highlighted in the 2019 review of the sector by the Financial Markets Authority (FMA) and the Reserve Bank. Among other things, he found limited evidence of products “designed and sold with good customer outcomes in mind”.
Behind the sales pitch
It would be easier to sift through marketing claims to determine if a particular policy is worth our money if insurers disclosed key details such as their policy lapse rates (a sign that customers don’t see the cover as good). value) and their loss ratios – this is the amount they pay out in claims compared to the amount they earn in premiums.
The loss ratio can be as low as 10% for some policies on insurers’ books, meaning only 10¢ is paid out to customers in claims for every dollar the insurer earns in premiums.
This is the case with bank card refund insurance, a product that regulators here and in Australia referred to as “poor value for money”. This insurance provides coverage if you lose your income and can’t pay off your card debt, but exclusions and claim limits mean few customers benefit.
Companies have been embarrassed enough by the bad publicity to stop promoting this insurance, but they are still earning an estimate $20 million per year of the 200,000 policies already sold to New Zealanders.
A close rival for bad value is accidental death insurance.
These policies only pay if your life is cut short by an accident, not by illness or disease.
Australian Securities and Investments Commission found customers can recover as little as 16¢ in claims for every dollar insurers earn in premiums.
By comparison, auto insurance pays about 67¢ in claims for every dollar paid in premiums.
The planned legislative changes could help shed light on the industry’s offers.
Bill – in the form of the Insurance Contracts Bill – includes the power for the government to make rules requiring insurers to disclose inconvenient details such as their cancellation rates.
The least welcome news is that these new rules are unlikely to be in place anytime soon. This means that it will be up to customers to extract this information from insurers.
A high cancellation rate and a low loss ratio are clear signs that it is better to put the money you would have paid in premiums in your own bank account.