The Life Insurance Industry
Peter Ramjan
Conference Paper: AIDS – Have we got it Right?
A conference organised by The Australian Doctors Fund Ltd.
Hosted by Professor Fred Hollows & ADF Chairman Dr. Bruce Shepherd
Sheraton Sydney Airport Hilton
May 14th and 15th, 1992
The Life Insurance Industry is one of the major financial industries operating in Australia. The industry currently invests in excess of $85 billion per annum and insures over 9 million policy holders or about 50% of the full-time working population.
In 1991 the Life Insurance Industry paid over $685 million in claim benefits to widows, widowers, beneficiaries, retirees or individuals who suffered a sickness or accident.
The Industry plays a vital role in the community providing security and financial comfort to policy holders and their families whilst investing billions of dollars in the Australian economy. Investments which provide jobs for large numbers of Australians.
In addition to the economic benefits provided by the industry it also performs an important community role by alleviating the drain on public funds in the event of death, retirement, sickness or accident.
Before we address the question of “AIDS – have we got it right?” it is important that you have a good understanding of how the industry works. Let me demystify how the Life Industry works.
A Life Insurance company is no different to any other commercial enterprise operating in the service industry. It attempts to win and retain customers by providing a high level of service whilst endeavouring to generate a satisfactory profit for its Shareholders.
A Life Insurance company collects a group of individuals called policy holders, and collects from each of them a particular amount of money called a yearly premium. The money is put into a pot and this pot is filled. Out of that pot is taken money to provide claim benefits, pay employees wages and pay commissions to agents. At the end of each year, the money left in the pot is the Shareholders profit.
But what happens if at the end of the year there is no money left in the pot because claim benefits were greater than expected?
The answer is really very simple – keep the same number of policy holders and buy a bigger pot for them to fill. In other words, charge each individual more money for their insurance.
What happens if at the end of the next year there is still no money left in the pot because claim benefits were again greater than expected? Buy an even bigger pot, of course!
If an individual or a group of individuals receives more than their share of claim benefits it will be at the expense of all the other insured individuals. When an individual or group of individuals receives more than their share of claim benefits it is usually as a result of what is called anti-selection. Anti-selection is where the policy holder is aware that they have a far greater chance of claiming than the average individual but does not disclose this to the insurance company.
Anti-selection places an enormous financial burden on all policy holders. Anti-selection could represent up to 80% of all AIDS claim benefits paid.
Statistics that clearly show anti-selection is taking place include:
- 35% of AIDS claim benefits paid were on policies that had existed for less than 3 years.
- 73% of Group Life AIDS claim benefits paid were on individuals who had been in a superannuation fund for less than 5 years.
- The $62,263 average AIDS claim benefit paid is high in relation to other causes of claim.
- 20% of the individual AIDS claimants received 62% of the AIDS claim benefits paid.
The Life Industries Response to Anti-Selection
From a Life Industry perspective, it is not how or where AIDS started that is important, but how does the industry cope until a cure is found. The Life Industry must continue to serve the majority of its policy holders and remain viable in the face of massive claims which may result from the AIDS epidemic.
In the year ending 30the June, 1991 the Insurance Industry saw a massive 47% increase in the total AIDS claim benefits paid. The industry has paid $31.8 million in AIDS claim benefits as at 30th June, 1991.
The industry has tried to eliminate anti-selection by treating AIDS identically to any other serious medical condition. We currently take into account whether a person is suffering from or has an increased risk of suffering from Cancer, Diabetes or Heart Disease so it is only reasonable that we should also take into account whether a person is suffering from or has an increased risk of suffering from AIDS.
There are two ways we determine whether a person is suffering from or has an increased risk of suffering from AIDS. Firstly, all individuals are required to answer questions, or sign a declaration, confirming they do not have AIDS or any of the recognised symptoms of AIDS. They must also confirm that they do not engage in activities which represent a significantly above average risk of infection. Secondly, all companies require a mandatory HIV antibody blood test to be performed at certain sum insured levels.
To ensure an individual who is requested to undergo an HIV antibody blood test fully understands the implications of having the test and what is required, the Life Industry developed a brochure titled “What does an AIDS test mean to me?”
The brochure clearly and simply sets out:
- That undergoing the test is voluntary.
- The consequences of not undergoing the test.
- The reasons why we have requested the test be performed.
- The medical, legal and social consequences of having the test.
- The consequences for the current proposal if the result of the test is positive.
- The desirability of having counselling from the person’s own doctor or an AIDS/Sexually Transmitted Diseases clinic if there are other questions to which answers are desired.
The Life Insurance Industry via the Life Insurance Federation of Australia has adopted a responsible and sensible approach to the AIDS problem by implementing a code of practice that all Life Insurance companies comply with. The code states in part:
“no adverse decision should be based solely on:-
- The known or suspected sexual orientation of the proposed insured.
- Previous consultation about HIV infection, or testing for it with a negative or unknown result.
- A positive HIV result, unless it is from a laboratory and procedure approved by the Commonwealth Department of Community Services and Health.”
A third method of preventing anti-selection has recently been introduced by the industry. For group life plans, this involves an ineligibility period for AIDS claims. For disability insurance there is now a choice of an AIDS excluded policy or a policy with full AIDS cover. The AIDS excluded cover offers a discount on the premium because no claim benefit will be paid in the event of the individual suffering AIDS.
AIDS and Insurance
There have been a number of Lobby Groups and Committees who have considered the issues of AIDS and Insurance. Some of the comments made by certain groups have highlighted a complete lack of understanding of the basic principles that underpin the financial viability of Life Insurance companies. In other words, they just have not done their homework and as a result their comments are ill-founded. The other alternative is that they are operating with a hidden agenda.
A typical example of this is the recent report into HIV and AIDS Related Discrimination undertaken by the New South Wales Anti-discrimination Board. It is bitterly disappointing to see the New South Wales Anti-discrimination Board make recommendations to the New South Wales Government on Superannuation and Insurance without even consulting with the Life Insurance Industry body.
How an independent body can confidently make recommendations to the New South Wales Government without first having fully investigated the alleged incidents with the Life Insurance Industry is beyond my comprehension.
The main areas of the report that cause me concern are:
- The statements that:
- “unwritten policies: decisions to refuse insurance or superannuation may be made on the basis of policies (for example, insurance will not be offered to a man perceived to be gay) without this (policy) being made explicit.”
- “stereotypes: decisions may be made on the basis of stereotypical assumptions about applicants (for example, an unmarried male over thirty-five living in the inner city may be assumed to be gay).”
These statements are at complete odds with the AIDS code of practice laid down by the Life Insurance Federation and followed by all Life Companies. The code states very clearly that no adverse decision should be based solely on the known or suspected sexual orientation of the proposed insured.
- The statement that:
- “There are no Codes of Practice relating to forms of insurance other than life insurance: for example, travel insurance, disability insurance, income protection insurance.”
This statement is manifestly incorrect: The Code of Practice applies to life insurance, disability insurance and income protection insurance.
- The statement that:
- “A further matter for concern is the questions insurance companies ask policy proposers about ever having sought a medical consultation or investigation about AIDS related conditions, having had a test for HIV antibodies.”
“Indeed the questions themselves may act as a disincentive to prospective policy holders seeking medical advice.”
- “A further matter for concern is the questions insurance companies ask policy proposers about ever having sought a medical consultation or investigation about AIDS related conditions, having had a test for HIV antibodies.”
The Code of Practice is once again very explicit on this point. It states that no adverse decision should be based solely on previous consultations about HIV infection, or testing for it with a negative or unknown result.
To suggest that the questions themselves may act as a disincentive to prospective policy holders is an absolute nonsense. It is akin to suggesting that because a Life Insurance Company asks, have you received treatment for chest pain, hypertension or blood in sputum, that it will act as a disincentive to prospective policy holders seeking medical advice for these conditions. This is not, and never has been, the experience of Life Companies.
Finally the report concludes “The Insurance and Superannuation industries have been slow to respond to HIV and AIDS in an appropriate way.”
The industry introduced a Code of Practice in April 1988, produced and currently uses a brochure on what an AIDS test means for an individual, introduced questions into the application for insurance to identify individuals who have the AIDS virus or are significantly above average risk of infection. The Life Industry has basically treated AIDS as being identical to any other serious health problem an individual may suffer.
On the basis of this I don’t believe any reasonable person could concur with the conclusion of the report.
The Future
The AIDS epidemic is the greatest challenge the Life Insurance Industry has faced in the last half century. AIDS has the potential to bankrupt the largest Life Insurance company in Australia if Life companies are prevented from applying the general principles of risk classification and the setting of premiums.
I believe there are only two likely scenarios.
Scenario one is where lobby groups continue to threaten the very essence of Life Insurance business resulting in the financial viability of Life companies being destroyed. This will mean ordinary citizens will be unable to obtain Life Insurance.
Scenario two is where Life companies continue to maintain a responsible and sensible approach to AIDS and the general principles of Life Insurance are adhered to resulting in the financial well being of policy holders being maintained.
Only the future holds the answer.