The aggressive chase for retail life customers through front-loaded discounts has resulted in “highly undesirable outcomes” for consumers, a study commissioned by PPS Mutual has found.

Such discounts, which are offered in the first year of a policy to attract new clients, have proved to be unsustainable, with insurers forced to jack up premiums in the third or subsequent years onward to cover their costs.

The study, conducted by Rice Warner, says policies with front-loaded discounts have significantly higher premium increases relative to the first year of a policy.

As an example, customers of an insurer that offers a 25% up-front discount could be in line for premium hikes of at least 50% in the second year if account age-based increases and indexation are taken into consideration.

PPS Mutual urges the industry to reconsider the practice, which is producing “highly undesirable outcomes” for consumers.

“Increasingly, in a bid to secure market share, the retail insurance industry has adopted initial short-term discounts for new business premiums,” CEO Michael Pillemer said.

“The research demonstrates how over five to 20 years policies with front-loaded discounts have significantly higher premium increases relative to the first policy year."

Front-loaded discounts have hurt the industry in other ways as well, most notably in the form of high lapse rates.

Last year the industry suffered a 17% lapse rate, as policyholders switch to a new cover with a lower premium in the first instance.

Click here for the report.