PPS Mutual Report Card – First Mover Advantage?

PPS Mutual offers a differentiated proposition in the Australian life insurance market due to its mutual status. Riskinfo asked PPS Mutual Australia’s chief, Michael Pillemer, to reflect on how he sees the benefits of this status manifest itself for advisers and the consumers it serves…

Core Principles

Insurers in Australia have moved away from their core principles, according to Pillemer, which he says means they’ve moved away from doing what’s in the best interests of consumers. He says this development has created an environment in which the regulatory interventions over the last decade or more have addressed what he believes to be the symptoms associated with failing to serve the best interests of the policy holder. “It hasn’t been a big surprise for us to see this continued regulation,” says Pillemer, adding:
“These were the symptoms we identified when we set up the business and we saw the opportunity for a first mover advantage to set up a mutual, and we strongly differentiated ourselves on this basis,” he says, adding that, ideally, there would be an opportunity for the industry to return to the past – that is to a mutual insurance model – “But that’s not going to happen.”
Given self-regulation is off the table, however, Pillemer says it’s important to get the balance right between sensible regulation and regulatory over-reach.
Mutuality requires a different mindset, says Pillemer, and he wants to send this message to the adviser community: “We want to make sure that advisers who are recommending PPS Mutual understand mutuality, because it really does require a different mindset.” By way of explaining what this means, Pillemer says “When we need to make a decision, we always ask ourselves the question: ‘Will this be in the member’s best interests?’”
Pillemer identifies three distinct behaviours associated with a mutual business model and a ‘mutuality’ approach to business:

Behaviour 1: Serving Members’ Interests

Genuinely serving members’ best interests “…gives advisers and clients more certainty about how we’re going to behave in response to the changing market dynamics,” says Pillemer. For example, in terms of how he says PPS Mutual behaves differently, “…advisers tell us we’re the only insurance company that they know of to pass back premium reductions to clients.” He reminded Riskinfo that in 2021 the insurer passed back double digit premium reductions for Life and TPD cover to some of its existing members: “That’s a perfect example of how we behave differently, because most insurers do the opposite. …They discount fees for new members and charge higher fees for existing members.
“As a mutual we focus on different principles – and that translates into different behaviours because of our values and our principles. So, advisers can have more certainty going forward into the future as to how we’re going to behave.”

Behaviour 2: Premium Increases

Another example of differentiated behaviour, according to Pillemer, is how PPS Mutual spreads premium increases over three years to make them more palatable for advisers and their clients.
“We don’t know of any other insurers that have done this,” he says (see: Adviser Thumbs-Up for PPS Mutual Premium Changes).

Behaviour 3: Profit Share

Pillemer points out that the profit share arrangement with PPS Mutual members is unique in the Australian market:
“So, mutuality is a strong differentiator, …and this translates into tangible benefits for our members,” says Pillemer, pointing to the fact that there is now over $4 million in the PPS Mutual profit share pool “…and that profit share pool has been growing for each of the last five years.”

Member Equity

“One of our principles is equity between members,” says Pillemer, explaining that the combined result of these and other behaviours associated with mutuality has been reflected in recognition of PPS Mutual in the most recent Plan For Life/AFA Life Company of the Year Awards (click here for more details). But more importantly, according to Pillemer, the insurer’s ‘mutuality behaviours’ have been reflected in its low lapse rates. According to data released by NMG in its Risk Distribution Monitor Statistics, PPS Mutual experienced a retail advised lapse rate of 1.9% for the year to 31 December 2021, compared with the overall retail advised industry rate of 13.3%1 (see also: Stunning PPS Mutual Lapse Rate).

Given Pillemer’s premise that client retention goes to the heart of sustainability, he offers this lapse rate outcome as proof positive that PPS Mutual is not just differentiating itself in principle but that it is also walking the talk. He contrasts this approach with other insurers who he says compete for and chase market share, which he says has resulted in a race to the bottom, which in turn has led to the industry lapse rates that currently exist, together with spiralling premium increases because insurers have moved away from the core principles of putting the members first.

Member Growth

Another positive indicator for PPS Mutual in Australia is its strong growth in member numbers, from around 800 policy holder members in 2017 to over 4,300 at the start of 2021. By February this year, member numbers had increased to around 7,700, with PPS Mutual working towards achieving the 10,000 individual member milestone soon.

Commenting on his ability to adopt a different approach to decision-making, Pillemer notes: “One of the things that attracted me to the mutual model was that you’re not tied to the stock market. You’re not worried about what your next annual return will look like.

“You can really focus on a long-term strategy and on what’s in your members’ best interests,” he says, adding that PPS’s model has proven to be one of the most successful mutual insurance models in the world. “It’s such a great story and easy to tell [and is] turning out to be a great journey for our whole team.”

In terms of adviser numbers, the PPS Mutual model had around 700 on its panel in 2021, including paraplanners, and this number has since grown to over 1,000. At the same time, however, Pillemer is keen to stress that the insurer holds more of a ‘narrow and deep’ strategy rather than maximising adviser numbers. He says they prefer to work with those advisers who operate in the ‘professional’ sector and are also prepared to take the time to understand the mutuality proposition and mindset.

Regulatory Reform

Pillemer says PPS Mutual remains a strong supporter of continuing risk commissions under the Life Insurance Framework reform model, because he says this model removes any potential conflict in terms of product bias (ie same remuneration irrespective of product choice), “…and we think that consumers deserve to have a choice of how they pay for advice. There’s not an issue any longer around conflicts.”

Looking ahead to the outcome of the Quality of Advice Review later this year, Pillemer believes past reforms have delivered unintended consequences, for example, around compliance requirements, which are very cumbersome, leading in turn to higher costs to deliver advice – for advisers and ultimately for clients.

He says this cost increase has resulted in less access to advisers for consumers – not more access as intended by the various reforms – and has also led to declining levels of life insurance coverage: “And I think the entire financial services industry is suffering from reform fatigue,” says Pillemer, who adds that pausing consideration of the five-year maximum term for individual income protection insurance products was a positive development, allowing the industry to catch its breath (see: APRA’s IP Contract Term Decision Welcomed).

One oversight in relation to the Quality of Advice Review, says Pillemer, is that “…it doesn’t appear to be addressing other big issues around spiralling premiums and high lapse rates which are due in part to insurer market share chasing. It would be better if the review also addressed retention, sustainability and pricing.”

Pillemer would also like to see the review focus on what needs to be done to ensure a vibrant advice industry. He subscribes to the argument that advisers are key to consumers receiving high quality, accessible and affordable advice.

Back to the Future

One of the ironies in reporting the progress of PPS Mutual in Australia in recent years has been the characterisation of the insurer as a ‘first mover’ in the sector. The irony lies in the insurer being the first to effectively ‘move back’ – to adopt a mutual life insurance company model which served Australians very well for over a hundred years. Only time will tell whether other organisations will follow this same path of returning to a mutual life insurance company structure which disappeared from the retail sector in Australia thirty years ago.

¹NMG Risk Distribution Monitor Statistics – Industry rate does not include NEOS Life’s lapse rate