The purpose of this fact sheet is to answer some common questions AFCA receives about insurance premium increases. This fact sheet covers both life insurance and general insurance, including superannuation complaints.
Contents
- Complaints AFCA can consider
- Reasons for premium increases in life insurance
- Reasons for premium increases in general insurance
- What type of remedies can AFCA award?
- What can you do to reduce your premiums?
- What information may AFCA need?
Complaints AFCA can consider
AFCA can only consider complaints about insurance premium levels when it is about:
- non-disclosure, misrepresentation, or incorrect application of the premium
- a breach of law by the financial firm
- medical indemnity insurance.
AFCA cannot consider a complaint about premiums merely because a complainant is dissatisfied the premium has increased or is unhappy about the amount of the increase.
Non-disclosure of the premium
AFCA can consider the firm’s disclosure of information about premiums, including:
- what the firm said about premiums and premium increases in the policy documents when the policy started
- what the firm said about premiums and premium increases in annual statements or renewal notices
- how much notice was given of premium increases.
Misrepresentation of the premium
AFCA can consider whether the firm made misrepresentations or misleading statements about premiums or premium increases.
Fact Sheet – Insurance premium increases
Incorrect application of the premium
If AFCA considers there may have been an error in the application of the premium, AFCA may review the firm’s calculations.
For example, this may have occurred if:
- there has been a disproportionate increase in the premium and the firm has provided no justification for it
- a firm has not correctly applied policy discounts or other benefits (e.g. no claim bonuses)
- a firm has not re-priced the policy in accordance with the policy terms.
Breach of law by the financial firm
Insurance policies usually include terms about how premiums will be calculated and increased. The firm must comply with those terms.
Firms have a range of legal obligations, in addition to what is in the policy documents. Insurers have a legal duty to act with utmost good faith. In some very limited circumstances, it might be a breach of this duty for an insurer to increase premiums.
In a complaint against an insurer, we cannot consider whether the premiums are affordable, or how the policy compares to other policies on the market. However, we can consider whether the premiums were correctly applied and if they were properly disclosed to the complainant.
Complaints about financial advice
In a complaint about the advice to obtain an insurance product, AFCA will consider whether the advice provided was in the best interests of the client. We may also consider whether the adviser properly disclosed the costs of implementing the advice to the complainant. Determining whether the advice was in the client’s best interests could also involve assessments of affordability and/or potential impacts on cash flow and superannuation over time.
Reasons for premium increases in life insurance
Most life insurance policies give the insurer the ability to raise premiums. Premiums increase for three main reasons:
- age of policy owner (stepped premiums)
- changed premium rates (premium re-pricing)
- increased benefit amount (CPI increases).
Stepped and level premiums
Complainants often say that a premium structure which has much higher premiums at older ages is unfair or unethical. Insurance is about risk. Statistically, older people are much more likely to die or suffer an illness or injury than younger people. That difference in risk means that it is not unfair or unethical for a firm to charge higher premiums to older people than to younger people.
This premium structure is called a stepped premium and is very common in the Australian life insurance industry. It means the premium generally starts lower and increases as the chance of a claim and the life insured’s age increases. Stepped premiums generally increase annually based on the individual’s age.
The other common premium structure is a level premium, where the premium starts higher, but does not increase every year with age. In some level premium policies, especially in superannuation, the amount of cover reduces as a person gets older.
Premium re-pricing
Most insurance policies allow the insurer to increase premiums, even for level premium policies.
These changes are made for multiple policyholders, rather than singling out an individual policyholder for an increase. Insurers usually justify changes by referring to factors they did not anticipate at the outset, such as unfavourable investment returns or higher than expected claims.
Insurers rely on sufficient premiums being paid to cover potential claims. If the amount paid out in claims increases, then the firm may need to adjust its premiums to cover that increase. If a firm does not do this, then its ability to pay future claims may not be sustainable. While customers do not want their premiums to increase, they need their insurer to be in a financial position to pay benefits when they need them.
Losses sustained by life insurers have been widely reported. The Australian Prudential Regulation Authority (APRA) has published statistics showing large losses in income protection insurance and has said it is concerned about the sustainability of this kind of insurance. Other kinds of life insurance have had similar problems. This means many insurers have had to increase their premiums.
Consumer Price Index (CPI) increases
If the amount of the insurance benefit (the sum insured) goes up, the premium usually does too. Many policies have the option of automatic increases each year so that the sum insured amount keeps up with inflation, or CPI.
Even policies which have a level premium will have increasing premiums if the benefit is increasing with CPI.
Customers can opt out of automatic increases by contacting the insurer at their annual renewal.
Discount of premiums in initial years
Some firms offer a significant discount on premiums in the initial years, such as 50% for the first year. It is important to remember that the premium will adjust to the full 100% after the first year, and to factor the ongoing cost into the decision to purchase the insurance cover.
Reasons for premium increases in general insurance
Premiums for new policies
General insurance (insurance other than life insurance) includes home insurance and car insurance.
Insurers decide how much they will charge to provide cover for specific items or events. When determining a premium, an insurer may consider:
- the item being insured (e.g. its value, location, and use)
- the person being insured (e.g. their age, claims history, and criminal history)
- market conditions (e.g. the costs of repairing or replacing the insured items).
The policy premium amount is a business decision by the insurer and is generally not open to review by AFCA. If an insurer offers a premium that is unaffordable, a customer can consider purchasing a policy from another insurer or discussing their options with a broker or financial adviser.
Premium increases on renewal
General insurance policies are generally offered for renewal annually. It is common for premiums to increase when a policy is renewed. Recent significant natural disaster events such as bushfires, cyclones and floods have increased the cost of cover in many areas in Australia, even if the area has not been specifically affected by recent disasters. Premiums may also increase based on the assessed risk.
Some policies offer discounts, such as a multi-policy discount or no claim bonuses. If your policy includes a term that entitles you to a discount, AFCA can consider whether the insurer has complied with the term and provided the discount that it offered.
What type of remedies can AFCA award?
AFCA will consider the fairest remedy in all the circumstances. This can include the following:
- for life insurance – refunding any premium re-rate that has been incorrectly applied
- for general insurance – capping the increase to a percentage more consistent with previous years.
What can you do to reduce your premiums?
There are several options that you can discuss with your insurer, financial adviser or broker. This can include the following:
- for life insurance – review the policy terms such as the sum insured amount, the waiting period, duration of the payment term, indexation option. You may be able to save money by reducing your cover if you do not need as much insurance
- for general insurance – consider other available alternative policies (either directly or through a broker), increase the excess amount and make sure your insurer has considered up to date property details when estimating the premium amount.
If you are experiencing hardship and finding it hard to afford your insurance premiums, talk to the financial firm about this. Firms have several options they may be able to provide to help you keep your cover in place, such as a short-term premium holiday or premium waiver.
You should explore options to reduce your premium directly with your insurer, superannuation fund, broker, or financial adviser as they may have other alternatives.
What information may AFCA need?
When AFCA considers disputes about premium increases, we will need a range of information to help us resolve the issue, including whether we can consider the dispute at all. The information we ask for will vary depending on the type of increase.
Life insurance
For these types of complaints, we will usually ask the insurer for the following information:
- original policy document and schedule
- Product Disclosure Statement (PDS)/price guide/illustration/quote
- annual premium or renewal notices
- a detailed explanation from the firm about the basis for the premium increase
- confirmation about what the complainant has actually paid each year (as this sometimes differs from premium notices)
- whether any re-pricing was applied (if so, what year/s, percentage)
- full breakdown of how the premiums were calculated – ideally in an excel spreadsheet (this should include base rates, age, CPI, etc.)
- notices given to the complainant to inform them of any re-pricing/premium increases and when they apply
- evidence the insurer applied re-pricing to all policyholders in that group (de-identified statements to other policyholders, internal memo confirming the increase and who it will be applied to, etc.)
- recordings of phone calls with the complainant where premiums were discussed
- factors affecting and leading to any re-pricing.
General insurance
For these types of complaints, we will usually ask the insurer for the following information:
- relevant policy document/s and schedule/s (including renewal notices, if any)
- any promotional material about the premium offer
- a detailed explanation from the firm about the basis for the premium increase
- if possible, a full breakdown of how the premiums were calculated (e.g. base rates, location, CPI, sum insured, etc.)
- confirmation about what the complainant paid each year during their insurance history.
