The life insurance sector, like much of the financial services industry, is currently under great scrutiny. But the full picture, while not rosy, is a lot healthier than many might believe.
KPMG’s Life Insurance Insights Report 2018 finds that in the 12 months to 31 March 2018, gross policy revenue increased by 6.6 percent to $24.7bn – which equates to 1.4 percent of Australia’s GDP. Based on premium volumes, the life insurance industry is now of comparable size to health insurance and about half the size of the general insurance sector.
It is worth pointing out that $14.8bn of benefit payments were paid out to policyholders and super fund members. By contrast, just $2.2bn went in profits to shareholders.
Risk product profitability, a key indicator of the industry’s health, bounced back to a more normalised level in 2018, earning $1,307m, up more than double on a disappointing performance last year.
KPMG’s study confirmed the growing role played by reinsurers in this market, with the level of reinsurance increasing from 23 percent to 30 percent over the past five years.
So what do we see as the future for the industry?
In the immediate future, it is hard to look past the Royal Commission and the public trust debate that inquiry exemplifies.
Life insurers will be only be able to achieve sustainable growth going forward through switching fully to customer-centric business models. We can expect increased regulatory pressure for life insurers to demonstrate that their products represent true customer value and provide a transparent customer experience through the full service life cycle.
Compliance and remediation costs will increase in the shorter term, and insurers will be expected to adapt their compliance operating models to manage costs effectively.
There is also the significant problem caused by the Federal Budget’s changes to insurance in superannuation – which proposed moving insurance from a default framework to an opt-in arrangement for young people, inactive accounts and members with low balances.
This move, which has now passed Senate, could significantly reduce revenue in the sector, as previous KPMG research has shown
Superannuation has been the engine for growth in life insurance for a good part of a decade, delivering growth, and above average profit. This trend could be reversed when the changes are introduced in 2019, as both revenue and profitability could be impacted.
Looking further ahead, there will also be important structural changes in the market. M&A activity continues to see a shift in ownership from local financial services conglomerates to global life insurance specialists, which are looking to diversify their global business models and are attracted to the strong growth dynamics of the Australian risk market in a mature regulatory setting.
Mega-platform players such as Google, Amazon and Facebook can also be expected to hit the Australian market, causing significant disruption.
The lower cost of capital of some of the new parents, together with a longer term investment horizon, is expected to change the manner in which the sector is invested in for improved operational efficiency and more customer-centric product offerings.
From a channel perspective it remains to be seen whether Australia will finally see an improved performance of the much-debated bancassurance channel on the back of recent landmark third party bank-insurer strategic alliances. Key to the success of these new partnerships will be seamless integration of life insurers’ protection offerings into banks’ omni-channel customer channels – and leveraging the banks’ knowledge of the customers’ life-stage needs.
Australian life insurers will increasingly look at global capability accelerators in the areas of: structured and unstructured data management, artificial intelligence, legacy technology management, and machine learning to pursue genuine transformations in their operating models. Improved claims customer experience, customer retention, smart underwriting, and regtech to manage compliance will be key.
Legacy system transformation is another important issue – while they fulfilled previous business needs, legacy IT systems have become a major roadblock in responding to the rapidly changing environment. As a result, many life insurers are seeking to transform ageing IT platforms, especially in the core administration area.
It would be wrong to paint too rosy a picture of the life insurance industry – there are significant issues to deal with.
The challenges for disability income business, to take one area, were masked in 2017/2018 to some degree because of the increase in the risk free discount rate over this period, but in our view, the underlying profitability level of that portfolio is still poor. But neither is the life sector the problem child it is often portrayed as. It has challenges but growth potential is still strong.