David Gray

Transitory Inflation - A Persistency Problem

Actuarial
Life insurance

24 September 2021

The combination of rising energy and consumer goods prices is a blow to a vast number of people. David Gray, Consultant Actuary, suggests insurance providers carefully consider the implementation of indexation options to help customers hold on to their policies.

Many income protection providers offer an indexation option which adjusts the benefit each year in line with inflation and the policyholder’s premium will be adjusted in line with the change in benefit.  In October 2015, CPI inflation was below zero and has averaged 1.6% in the period since.  Some income protection providers offer level premiums that stay the same for the life of the policy and premiums that increase with age.  In the latter case, the premium rates may be unchanged, but where indexation is chosen, the cost is applied to a higher benefit, compounding the premium increase.   

The August bulletin published by the Office for National Statistics (ONS), reported an annual 3.2% increase.  Noting that the monthly increase is the largest ever recorded increase they remarked that this is likely to be a temporary change.

The Bank of England also expects above-target inflation to be temporary.  In the Bank’s August Monetary Policy Report, Consumer Prices Index (CPI) inflation was projected to rise to 4% in 2021 Q4 before falling back to close to the 2% target.  In yesterday’s monetary policy summary, the Bank revised their expected rise to slightly above 4% “owing largely to developments in energy and goods prices”.

In the light of these “extraordinary” rises in gas prices, many household finances are likely to come under pressure and savings may need to be found.  Any news of premium increases is unlikely to be welcome and policyholders may choose to cease payments on protection policies amongst other outgoings. 

Income protection providers could choose to adopt a more flexible position regarding any index-linked increases and make a range of options readily available to policyholders.  This could include the option to switch off indexation for the next increase and revert when difficulties have passed.  These circumstances may prompt the policyholder to review their level of cover, alongside their adviser, to ensure it meets their needs within their budget – a useful regular exercise in any case.  With the long term benefits of the insurance being recognised by the customer, a short-term squeeze, resulting in the closure of a contract may be an unfortunate result for all concerned.

David Gray

For more information
David Gray
Consultant Actuary

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