Life Insurance in 2018

The life insurance industry could be due for some changes this year.

Both in terms of the the way technology affects your policy as well as how advice is given when it comes to buying cover.

In case you missed it: Machine learning

AI (Artificial Intelligence) is making inroads in a number of industries and one of its leading edge applications along with Big Data and The Internet of Things (IoT), is the field of machine learning. This is the practice of building systems that have the ability to learn from experience just as humans do, by accessing and analysing data and drawing independent conclusions without being programmed to do so.

The use of machine learning in the life insurance industry

One of the industries likely to be transformed by machine learning is insurance, which is ideally placed for the introduction of intuitive machines, given the industry’s need to make accurate and timely decisions based on large amounts of data.

New machine learning services and products already being introduced in insurance include algorithms that can translate handwritten documents into digital form with near perfect accuracy, phone apps that monitor driving behaviour and reward good drivers with discounts on their car insurance and systems that can issue property insurance quotes without the need for an onsite assessment.

Life insurance in particular is poised to benefit from machine learning applications, given the large amounts of data and statistics the industry processes to analyse risk and predict life expectancy. The following are just some of the ways machine learning could revolutionise the industry:

Reducing fraud

Machine learning can save time and money in the detection of insurance fraud by using algorithms which automatically validate genuine claims and fast track payment and red flag likely fraudulent claims for further investigation, in both instances by marrying key facts from the claim to the policy.

Improving underwriting

Machine learning algorithms are being developed that can analyse customer data collected from a diverse range of sources including in-car monitoring, vital signs monitoring and social media posts to construct a more complete picture of customers and better manage risk.

Improving customer service and advice

Machine learning chatbots are appearing that can streamline the customer service aspects of insurance, answering routine questions, performing basic admin tasks and monitoring and analysing sales calls to ensure compliance and improve operator performance.

Streamlining claims and transactions

Machine learning systems are being employed to handle simple claims sometimes without any human involvement at all, from the initial report to communicating with the customer. They are also responding to thousands of customer queries by phone, email and live chat, freeing up human employees for more important face-to-face roles.

Examples of insurers who have begun adopting change

While the adoption of machine learning is still in its infancy, there are a number of insurance companies already taking advantage of its benefits including;

• Japanese insurance company Fukoku Mutual Life Insurance. Uses a machine learning system that analyses data such as medical certificates, hospital stays, medical histories and surgical procedures to accurately calculate pay outs to policyholders.
• TAL Life. Uses two chatbots to improve the company’s customer experience; one which displays empathy with customers and is dedicated to the claims journey and another that helps people find the right policy, obtain a quote and make an appointment with a real person.
• AIA. One of Australia’s largest life insurers. Uses a machine learning system that assesses medical claims by ingesting policies and making decisions faster than any human could and with 99% accuracy.

As a heavily regulated industry handling vast amounts of data, the insurance industry is sure to benefit greatly from the coming of machine learning. But it is also important that the industry retains the key knowledge and skills only humans can provide to ensure compliance and fairness are not removed from the equation along the way.

The way advice is given when it comes to life insurance is also set to change.

Life insurance remuneration reforms are set to commence on 1 January 2018 and the implications for life insurance advisers and those seeking that advice will be significant.

So what’s set to change?

A new framework for advice known as the Life Insurance Framework (LIF) was created in 2016 following the recommendation by three seperate reports all highlighting the issues with upfront commissions within the life insurance advice sector and either recommended a reduction of upfront commissions or their abolition in favour of level commission arrangements. Many of these recommendations are set to take affect in 2018.

Commissions structure and quality of advice a key focus

The LIF includes a 14-point plan that covers the issues raised in the three reports, such as adviser remuneration, quality of advice, insurer practices and better enforcement and monitoring of the industry. It includes:

• A transition from high upfront commissions to either a hybrid commission, level commission or fee for service model
• Capping of upfront commissions at 80% from 1 January 2018, then a reduction to 70% from 1 January 2019 and 60% from 1 January 2020
• A reduction in clawback commissions from 1 January 2018, starting with 100% in year one, 60% in year two and no clawback in year three of a policy

Other requirements include

• Compulsory education for all financial advisers
• Supervision for new advisers
• A new code of ethics for the industry
• A ban on volume-based payments
• The development of a Life Insurance Code of Practice

What are the implications for advisers?

The results of the LIF reforms are likely to be mixed:

• The reductions to upfront commissions will result in some advisers choosing to leave the industry.
• This may lead to reduced access by consumers to life insurance advice in the short term.
• Advisers will face new compliance and educational costs.
• Life insurers will also face additional costs for updating technology and internal policies and procedures.
• On the upside, they will also focus on providing more assistance to advisers and becoming more transparent with policyholders.
• A higher level of professionalism and an improved public perception of the life insurance advice sector will also hopefully result.
• The new Code of Conduct will provide policyholders with a set of standards by which they can assess their insurer.
• Policyholders will also have greater access to information and be able to engage with their life insurer in ways not previously available.

Once the LIF changes are introduced on 1 January 2018, the government will wait to see whether the new reforms go far enough. They have requested an ASIC review in 2021 to consider progress and, if the results of that review indicate the industry has not shown sufficient improvement, further changes may be on the cards, including a move to level or no commissions for life insurance advice.