Jenny Oliver reflects on the Australian Prudential Regulation Authority’s (APRA’s) recent draft Prudential Standard 250 on data quality in group life insurance, and what these reforms mean for both trustees and the insurance industry.
It’s no secret that the key to unlocking accurate pricing for group life insurance policies is high quality data.
However, a gap currently exists between the levels of data quality desired and the actual quality received. And for a long time the regulation of this area, through self-regulation within the industry and from the Government, has been relatively non-existent.
This looks set to change, with APRA’s draft Prudential Standard SPS 250 providing guidance that trustees will soon be responsible for data accuracy.
Trustees have a duty of care to their members and are obligated to ensure they act in their members’ best interests.
So it follows that a trustee is under an obligation to ensure any insurance held within their fund is priced appropriately and sustainably – priced too high, and members’ account balances can be eroded; priced too low, and the sustainability and financial health of the insurer will be questioned, presenting serious implications for the fund.
Why is data so important to the pricing outcome?
When an actuary looks to price an insurance scheme, the largest single determinant is the fund’s past claims experience. With the past experience as a base, they will then consider how the experience may change in the future.
When looking at past experience it is not unusual for actuaries to look back to five years or more of claims and membership data to build their understanding of a given fund.
Any inaccuracies or errors made during that time will impact on the pricing of the scheme, making it critically important to ensure the experience on record is accurate.
But how hard can it be to get the right number of claims that have been paid, and the amount?
The ease with which this data can be obtained will vary fund by fund; however there is also the matter of how well a fund can demonstrate the quality of its data.
Other claim and membership attributes are also important for actuaries to take into account, and they can be even harder to get right. When looking at claims history, actuaries should be evaluating:
- Claim causes;
- Occupations of members;
- Employment conditions;
- Location of claimants and members;
- Length of time on claim;
- Age at claim time;
- The delay between the occurrence of a claim and when it is reported to the fund; and the list goes on.
Each of these attributes is becoming more important over time.
The industry has more than doubled in size over the last five years, and with it the sophistication of actuarial analysis.
By understanding the relationships between the economy, notification delays, causes of claim, demographics etc., actuaries can now more accurately predict where pricing needs to be.
However, the accuracy of this analysis relies on accurate data, and as noted earlier we may be reliant on data captured up to five or more years ago.
The input of this precious data is often manually captured by members, administrators, funds or insurers, so it’s open to the risk of natural human error.
Let’s consider the following
Today funds are often made up of multiple divisions or categories. They may offer similar benefits, but they are designed to be distributed to different segments of the market with different characteristics.
If claims are not attributed to their correct division, the underlying claims data of that fund can be misrepresented.
This means actuaries cannot accurately determine the experience of different divisions or categories of members, leading to incorrect pricing of the fund’s insurance premiums.
The knock-on effect of this could lead to the introduction of cross-subsidies within a fund and could affect the overall competitiveness of one particular division in the market.
So, where do we go from here? Everyone in the industry has a role to play – trustees, insurers, administrators and regulators.
We need to raise awareness of just how critically important claim and membership data is when reviewing insurance arrangements.
APRA has signalled that it is intending to hold trustees responsible for the delivery of accurate and complete data.
Trustees will need to work with their insurers to understand what control mechanisms are in place, and understand the level of accuracy that exists both today and historically. They will also need to consider whether any controls are absent and address gaps.
As an industry, insurers need to work together to build common data definitions, processes, and control.
We need to increase transparency around the quality of data that is received as part of a tender process to allow for a more appropriate review of the experience and the determination of accurate and sustainable pricing.
It’s a simple equation: better data equals better pricing. And it’s never too late to start making things better.
Jenny Oliver is head of commercial at TAL, Group Life Division.
