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Not pricing for risk was an accident waiting to happen

There are a number of worrying parallels to the lending market developing in the accident, sickness and unemployment insurance industry and I wonder if it is destined to make similar mistakes.

Until a few years ago, like the mortgage industry, the ASU market was experiencing significant growth.

An increasing number of providers entered the market and distributors focussed on ever more ingenious ways of selling the product, whether as an add-on to loans or built into credit card repayments. In many cases, these providers were earning more of their profits from these lucrative riders than the main sale.

But even in the face of a recent significant claims spike, the increasingly precarious pricing of ASU to gain market share brings to mind the competitive cycle the mortgage industry went through as rival lenders sought to gain a foothold. All the time they were avoiding fundamental issues surrounding the toxicity of products, preferring not to address these until forced to do so.

Only last week an ASU provider brought out what it termed an ‘innovative’ cover product, highlighting the fact that it was underwritten at the point of claim. The company has clearly learnt nothing from the significant criticism and scrutiny the sector has been subject to in the past year or so.

Many ASU providers made healthy profits for years but little or no investment in the future. They are now having to reprice on an almost monthly basis to cope with the claims wave that is hitting them. In this process they are missing the point – it’s the rates on their back books that are problem, not their new business.

Had they repriced prior to the economic storm they would be in a stronger position now. I’m not saying that there would have been no need for them to look at repricing but the point is that pricing for risk was never considered in th first place. Now where have we heard that before?


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