Life insurance: alive and kicking

The life insurance market represented a driver for growth in the financial services industry last year and, according to Tower's Jim Minto, there is little likelihood the pace will slacken in 2011.

2010 represented a year of change and growth for the Australian life market.

After many years of relatively slow change, the past five years have seen the life industry go through higher levels of change and development than most other areas of financial services.

For example, the past five years have seen annual growth in premium volumes of 13.7 per cent against 1 per cent growth for superannuation and 4.7 per cent for banks.

General insurance has shrunk 3 per cent per year and health insurance has grown at 3.9 per cent off the back of premium increases in particular.

The good news from these growth rates in the life market is that the underinsurance needs of Australians are slowly being addressed.

But we still have a long way to go to completely address these needs. Pleasingly, the public policy and consumer benefits of life protection are now being more widely recognised.

Projecting ahead for the next five years, we can see growth in the life insurance market of 11.7 per cent a year against 7 per cent for superannuation.

Health insurance is expected to pick up at 6.2 per cent, banks to remain at 4.7 per cent and general insurance to grow at 2.4 per cent.

The life insurance market is projected to more than treble from approximately $9.1 billion today over the next 15 to 20 years. These projections are widely accepted.

The really interesting point is that not all life insurance company participants will enjoy these general market growth rates.

Only a few are large enough to meet consumer demands for access to protection through all channels and the barriers to entry in certain channels are now so much higher. Ultimately, we can see increasing specialisation.

Companies will either be large or alternatively ‘distribution channel’ specialists. Midsized non-specialists will most likely fail to achieve the growth rates they aspire to.

The group risk market (outside of the part dominated by in-house providers to their own channels) is likely to be dominated by three or four specialists with high levels of capability.

This is reflected in major mandate wins over the past few years.

Participation is not a matter of dollars spent but the development of high capabilities that can only be effectively developed and improved through active partnerships with major superannuation funds.

In the direct sales or distribution channel the same trends are emerging.

Mainstream advertised direct is narrowing in participation and new entrants are focusing on their own or business partner databases.

The keys to success are about the cost to write business, cost per customer lead and conversion rates. Very small differences in their performance will drive large financial differences for participants.

This business area will also become highly specialised.

The advice channel for the independent financial adviser has the widest participation and is the largest sector in the market today.

We all have our hopes that the talked about legislative changes coming to advice will not be ill considered and disadvantage the provision of advice to consumers.

In fact, getting access to advice for consumers remains one of the biggest challenges facing the industry today.

Present rules make advice too difficult and/or too costly for many. Providing good, sound life insurance advice to consumers remains the backbone of the industry and ensures the role of the independent financial adviser for those consumers with specialist needs.

Looking at the industry today, there have been huge market share changes in the past 10 years driven by the rapid evolution of this life insurance market and my prediction is this will continue.

Perhaps the largest issue for the next few years in superannuation will be maintaining consumer confidence in superannuation, and I believe this same issue applies to life insurance.

We need to avoid the type of market meltdown we have seen in the UK where poor distribution channel development has atrophied life business margins and consumers have lost confidence in insurers and some products in particular.

Standardisation of critical illness definitions has occurred in recent years in the UK to help rebuild consumer confidence. The same is now happening to their total and permanent disability definitions.

In Australia we have continued extending definitions and complexity. With multiple channels and different types of products, there are no simple rules for the public to understand and maintaining consumer confidence is a concern. We have neutrality of confidence today and we want to make sure it does not deteriorate.

What specifically should we expect in 2011?

1. The continued evolution of the life insurance market and the building of specialised channel skills and strategies. This will also see the withdrawal of some participant companies from channels where they are unable to compete.
2. More evolution in technological investments and capabilities. These will tend to be tailored partnering solutions rather than mainstream core systems. Advisers and the industry will rely more and more on technological solutions to meet customer demand.
3. The development of the life claims capabilities to new levels based around the recognition that the life industry will require a large increase in claims capabilities to meet the needs of its expanding customer base, especially around income protection claims
4. A period of high engagement with the Australian Prudential Regulation Authority as the industry discusses with the regulator what new capital requirements should apply. Pleasingly, there are no obvious economic or policy needs for more capital so hopefully increases, if any, will be kept to a minimum
5. A period of review around the changes required to the advice model. Once again, we hope any changes will be manageable and not make getting advice more difficult.
6. The continued evolution of the role of life insurance in superannuation. This will be particularly relevant to consumer affordability in a year when we expect consumers will experience tighter household budgets and affordability.
7. Continued recruitment into the life market and recognition that it offers attractive career opportunities for people who are oriented to high levels of change and opportunity.
8. The continued evolution of the role of the independent financial adviser in meeting specialist consumer life insurance needs. Alternative distribution channels should be seen as growing the market to the end benefit of all.

My best wishes for 2011 to you all.

Jim Minto is the managing director of Tower Australia.