Super domination

The degree to which superannuation has grown to dominate the Australian life insurance industry has been exemplified in the latest data published by the Australian Prudential Regulation Authority (APRA).

The data has been published in APRA’s latest Insight publication, and makes clear that in the absence of superannuation the industry would be facing considerable challenges with respect to sustaining growth.

The APRA publication said that total life insurance assets backing Australian policyholder liabilities had increased by 75 per cent to the end of December, last year, from $116 billion at the end of June to $202 billion at the end of December.

Importantly, however, it said that all of this growth had been driven by the increase in superannuation business.

“Superannuation now dominates the assets of the life insurance industry,” the APRA publication said. “Over the last 10 years, superannuation assets within life insurance companies have grown from 70 per cent of total life insurance assets to 87 per cent, and this percentage is still increasing.”

APRA said the growth in superannuation assets tended to disguise the fact that non-superannuation assets had declined in both percentage terms and absolute size over the last 10 years from $35 billion (30 per cent) to $27 billion (13 per cent).

“This decline is expected to continue given the tax benefits of the current superannuation regime, and the withdrawal of various taxation and age pension incentives that encouraged non-superannuation life policies in the past,” it said.

APRA said that notwithstanding this growth in superannuation assets, the life insurance industry’s share of total superannuation assets had fallen from 40 per cent to 26 per cent over the past 10 years.

“The decline in the life office share of superannuation assets reflects the faster growth of alternative superannuation vehicles, particularly industry superannuation funds, which increased their share of total superannuation assets from 4 per cent to 14 per cent over the last 10 years,” it said.

“It also reflects the volume of superannuation assets held outside the life insurance regulatory regime in managed investments, often by companies that are part of the same wealth management group,” the APRA publication said.

It said that while total life insurance assets had continued to grow, premium income from life insurance products had been relatively static over recent years, with investment-linked products being the main source of premium income.

Premium income from conventional business, such as whole of life and endowment products, had continued to decline.

“Premium income from risk insurance has grown steadily and now accounts for around 13 per cent of total premiums,” it said. “The split of risk premium between lump-sum benefits, income benefits and group risk insurance has remained constant over the last six years at 50 per cent, 23 per cent and 27 per cent respectively,” the APRA publication said.

While the life insurance industry might now be dominated by superannuation, it has clearly done nothing to undermine its profitability, with the APRA research pointing to the fact that the industry’s operating profit after tax had risen from $2.5 billion in 2003 to $3.7 billion in 2004.

It said this had largely been as a result of the recovery in investment earnings on retained profits and capital.

APRA said the emergence of planned profits across the industry had declined in recent years as traditional higher margin business had been replaced with lower margin, but higher volume, wealth management business.

With many spokespersons in both the life insurance and superannuation industries expressing concern at the degree to which Australians remain under-insured, the APRA publication points out that product innovation and development have been drivers for change, but have also led to higher levels of product complexity.

“The progression of the life insurance product from the traditional whole-of-life contract to a fully diversified range of services offered by wealth creation products has led to the emergence of a new risk — the lack of expertise and sufficiently trained staff,” it said.

The APRA publication said that this, in combination with the shortage of expertise with legacy products, was requiring the life insurance industry to step-up efforts to train and retain experienced staff.

It said that high-level operational risk also arose directly from the increased diversity and complexity in products and systems.

“Life insurers which have a large range of products face the challenge of maintaining associated systems, processes and procedures, administration support and key personnel,” the APRA publication said.