How could we avoid a potential 'tragedy of the horizon' in Australian life insurance?

Applying climate economics to realign industry incentives.

At the 2025 All-Actuaries Summit, Actuaries Institute President Win-Li Toh challenged actuaries to collaborate across disciplines to solve "wicked problems". The concept of a wicked problem stood out to me, with its web of interdependent contributors and lack of neat solutions. As Win-Li pointed out, often the solutions come from marrying our expertise with other disciplines.

The state of the Australian life insurance industry qualifies as a wicked problem on all fronts. And we’re not alone – wicked problems abound, and every discipline is applying its own toolkit to them. One such concept from climate economics is worth considering in the Australian life insurance context.

In 2015, then Governor of the Bank of England (now Canadian Prime Minister) Mark Carney coined the phrase "tragedy of the horizon", a play on the "tragedy of the commons".

He was describing the system of incentives that led to unchecked carbon emissions despite our knowledge of the harm they cause. Readers who remember their first-year university economics will be familiar: if the cost of using shared resources is not factored into economic decision-making, these resources will be depleted at an unsustainable rate. This is the tragedy. Rational, individual decisions lead to an outcome where everyone is worse off.

The pattern is everywhere. Overfished oceans, overgrazed fields, polluted air and climate change. In all cases, the mechanism is the same. The environment (the "Commons") provides a buffer that allows us to ignore the true cost of our actions until that buffer is exhausted. By the time the bill arrives, the resource is gone.

The tragedy of the horizon is the same principle applied across time. The benefits of a decision are enjoyed today, but the costs are felt tomorrow – often beyond the decision-maker’s accountability period. When these costs are discounted or ignored, resources are consumed faster than is sustainable in the long term. We enjoy the benefits now, but we pay the price in the end.

Systemic problems

Australia’s life insurance industry is in the same bind. The benefits of more generous product features are immediate and visible: higher ratings, stronger sales and short-term market share. We know that some of these features come at a cost, but that cost is uncertain, can be distant, and is often someone else’s problem. Behavioural economists call this "present bias".

In practice, it can mean a less rigorous focus on meeting customer expectations, and a willingness to be optimistic, including in our assumptions. When this happens, we risk polluting the product ecosystem with unsustainable features.

Ultimately, customers pay through large unanticipated price increases and reduced access to the cover they need. We have experience with disability income and now in total and permanent disability (TPD). 

If we treat these outcomes as failures of judgement, we will keep being surprised when they recur. Economics suggests a different diagnosis. This is the predictable result of the incentives in the market, a pattern of behaviour that shows up reliably when we have a shared resource, whether spatial or temporal. The life insurance industry exists to create a shared resource – a pool of premiums which cover common risks across policyholders’ lifetimes. This makes it susceptible to the same incentive dynamics.

We know what sustainable products look like. We want to get there. But first-mover disadvantage is potentially powerful and short-term business needs are real. The network of different actors and incentives means we can end up in gridlock.

APRA broke this gridlock in 2020 with the sledgehammer of the individual disability income insurance (IDII) capital charge and explicit product requirements. It worked, at least in the short-term. It did so by overriding market incentives. It did not fix them. A real solution to one specific symptom, but it didn’t treat the underlying disease.

We do not need to wait until the industry reaches a crisis point and the regulator steps in. Economics gives us room to hope.

How can we fix the incentives driving unsustainable life insurance products?

Our problem is textbook market failure. Economists can offer some compelling solutions that don’t just alleviate symptoms, but get to the core of systemic incentives and offer a tune-up so the entire system works as intended again.

Climate change is our most analogous example of the same tragedy of the horizon. For carbon emissions, one market-driven remedial action is supported by a broad consensus among economists. It’s not the whole solution and as Australians know well, it’s not always politically feasible,  but it remains a mainstay of a robust, efficient, market-led climate response. Simply put:

If the tragedy of the horizon arises from future costs being heavily discounted or ignored, price them in at the outset.

The carbon price provides the market with information about real costs that were not previously obvious up front. As a price, market participants naturally adjust their behaviour to accommodate this information without even needing to understand it.

The advised life insurance market can be more sophisticated. Information about these future costs or risks can be provided in other forms. Advisers can help consumers to balance this information against the price or product rating of the cover they are considering. The analogue of a carbon price in life insurance is not a literal price, but rather a signal that assists customers in considering long-run costs up front.

The challenge, therefore, is could we create an environment where innovation in sustainability is encouraged by helping advisers and customers to factor in the value of sustainable features up-front?

"Pricing" unsustainability

What could this look like? A credible signal that summarises the long-run sustainability "cost" of product features in a form that advisers and customers can actually use. The Disability Insurance Taskforce explicitly recommends amending product ratings to incorporate sustainability ( September 2024, Recommendation 8.2 ). The Taskforce also published a Sustainability Guide setting out a framework for sustainability assessment.

The tragedy of the horizon lens supports the same solution. A useful metric embodying the right information could overcome the present bias and lack of information, which creates the tragedy of the horizon.

In order to truly reflect future costs like a carbon price, the "sustainability cost" signal must be independent (of the provider), accurately assessed and genuinely useful for consumer and adviser decision-making.

If the signal is independent, accurate and useful, it has the potential to turn first-mover disadvantage into first-mover advantage, encouraging innovation toward product features that represent sustainable customer value.

Can life insurance align sustainability with customer appeal?

The tragedy of the horizon is a structural problem. When long‑run sustainability costs are hard to see, short‑term signals can dominate and shift costs to the future. A sustainability signal published alongside product ratings, as the Disability Insurance Taskforce recommends, would make those long‑run costs more decision‑relevant at the point products are chosen and advised. Right now, sustainable product design and customer appeal seem contradictory, but they don’t have to be.