Life/Risk 2019: Consolidation, regulation and a Royal Commission

Relative to other sectors of the financial services industry, Australia’s life/risk insurers emerged from the Royal Commission largely unscathed but that does not mean they are not facing significant challenges in the months ahead.

The major changes impacting life/risk insurers in the aftermath of the Royal Commission will be the likely changes to the Corporations Act, which will see claims-handling treated as a financial product and limits likely to be put on direct, phone-based sales regimes but, beyond that, the challenges are largely commercial rather than regulatory.

And those commercial challenges are pressing in on the life insurers notwithstanding the changing competitive dynamics driven by the Commonwealth Bank’s ongoing sale of CommInsure to AIA Australia Limited, TAL’s just-completed acquisition of the Suncorp Life business and Zurich’s on track acquisition of the ANZ OnePath life insurance business. On top of that, Integrity Life has now entered the market with objectives in both the advised and group life space.

These factors must also be weighed against the seemingly doubtful future of Freedom Insurance Group which closed down much of its phone-based life/risk sales in the aftermath of its appearance before the Royal Commission and found its restructuring options limited when the Bank of Queensland declined to sell its St Andrews Business.

At the time of going to print, Freedom remained in trading suspension on the Australian Securities Exchange having announced in late February that its preparation of its half-year accounts was ongoing and that it was in discussions with key stakeholders regarding its financial position.

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At the same time as Freedom seeks to sort out its position, the latest data published by the Australian Prudential Regulation Authority (APRA) has served to underline the commercial challenges facing the big insurers.

The December quarter data revealed that total entity net profit after tax was a loss of $519 million, with Individual Lump Sum risk products contributing a profit of $10 million, Group Lump Sum contributing a profit of $19 million, Group Disability Income Insurance contributing a profit of $9 million and Individual Disability Income Insurance contributing a loss of $260 million.

In the 12 months to 31 December, net profit after tax was $593 million, with Individual Lump Sum Risk products contributing a profit of $408 million, Group Lump Sum Risk products contributing a profit of $101 million, Group Disability Income Insurance contributing a profit of $57 million and Individual Disability Income Insurance contributing a loss of $474 million.

The APRA commentary noted that the industry’s after-tax loss of $519 million was significantly down from a profit of $189 million for September, with the main drivers of the loss being adverse movements in financial markets in the December quarter which negatively impacted life insurers’ investment revenue, along with an increase in expenses caused by a discrete write-off in goodwill for one insurer.

It said that next to the write-off, individual risk products comprised the bulk of this loss, continuing the negative trend seen in the preceding four quarters with the largest drop in profits being in Individual Lump Sum (from a profit of $111 million to a profit of $10 million), caused by reductions in both net policy revenue and investment revenue, as well as an increase in tax outlays. 

Reflecting some of the commercial realities confronting the sector, ClearView announced in mid-February that it would be introducing a new pricing structure which reflected “the realities of underlying claims experience (across the industry), the economic environment and an aim for ClearView to be more consistent in its competitive position across the range of benefits”. 

What are the challenges?

Conscious of the APRA data and some of the changes to premium pricing regimes, Money Management went to each of the major life insurers and asked them what they believed were the major issues confronting them as they moved deeper into 2019.

TAL chief executive, Brett Clark referenced the need for the insurers operating in the sector to pursue sustainable change.

“The life insurance market in Australia continues to undergo generational change and rapid transformation.  These changes are driven by changes in consumer expectations and behaviours, the regulatory environment and the competitive landscape,” he said.

Referencing the recent issues discussed before and after the Royal Commission, the TAL CEO said the industry had spoken for many years about putting customers first and customers in control but while some progress had been made, more was necessary.

“We need to work harder to build trust and confidence in the community, with our customers and financial adviser partners,” he said. “Alongside these ambitions, it is important that industry focus is on implementing the change required to ensure long term sustainability of the life insurance industry which is vital to the community and economy.”

For its part, MLC Life Insurance’s chief customer officer, retail insurance, Sean McCormack described the industry as being in a turbulent period and facing a number of fundamental challenges, including regaining customer trust in the aftermath of the Royal Commission, high levels of regulatory scrutiny and dealing with the challenges facing financial advisers.

We believe the life insurance market is set for significant innovation over the next five years, particularly in technology and transformation to overhaul legacy systems, which is where we are focusing our attention. We think companies that don’t do this will struggle to compete and attract new customers.

Despite all this change, what hasn’t changed is the need that Australians have for insurance and the security, protection and peace of mind that it provides.

The chief executive of relatively new entrant, Integrity Life, Chris Powell agreed with TAL’s Clark that one of the challenges confronting the industry was responding to the recommendations of the Hayne Royal Commission.

“Fundamentally, this is about culture as every one of Hayne’s recommendations are based upon the six behavioural norms outlined in the Royal Commission report,” he said. “Changing behaviours means changing cultures. This is a big piece of work for large institutions and one that will take time to effectively put in place. Board’s will need to measure and monitor progress.”

As the CEO of a new player in the space, Powell also pointed to technology and the fact that many large, established players would need to follow the lead of MLC Life Insurance and actively start replacing their old legacy systems.

On the broader question of the changing shape of the industry, he said that the integration of acquisitions would be a challenge for the acquirers, while on the regulatory front the Government’s recently-introduced Protecting Your Super initiatives and the Productivity Commission’s recommendations would see superannuation fund trustees and their insurers implementing further compliance measures and making tactical decisions around strategy.

Industry consolidation. Is it over for now?

According to Integrity Life’s Powell the recent flurry of merger and acquisition activity in the life/risk space is probably over but that does not mean the consequences have fully revealed themselves.

“Based on the current landscape, it appears that the consolidation and/or sale of bank owned insurers is nearing completion,” he said.

“With the sale of AMP Life to Resolution, the withdrawal of AMP from writing new business will dramatically alter and further concentrate the Life Insurance industry. It is also yet to be seen how advisers will respond to the AMP book effectively being placed into run-off,” Powell said. “Consolidation of several of the largest life insurance institutions will mean that both consumer choice and customer service will likely be reduced in the short term.”

“New players will provide fresh alternatives in products and services, but it will take time for them to be accepted by advisers, superannuation funds and corporates. There are also several new distributors in the market that may challenge for market share,” he said.

TAL’s Clark described recent merger and acquisition (M&A) activity in the domestic life insurance market has been unprecedented noting that the competitive landscape has been rapidly re-shaped through multiple transactions, including TAL’s own acquisition of the Suncorp Life business.

“This activity has been driven by a combination of factors, including a local and global shift toward specialisation in financial services, a more complex operating environment requiring scale to compete, and access to capital to support sustainable growth,” he said.

“Life insurance businesses require capability and capital today to support promises to customers for many years to come.  Without scale and access to capital it is difficult to see how businesses can continue to invest to meet customer, community and regulatory expectations.

Financial services and life insurance are long term businesses requiring long term commitments. This has been proven in both global and Australian markets time and time again.”

MLC Life Insurance’s McCormack said the company expected the consolidation to continue, with a greater presence of foreign-owned life insurers in Australia, and fewer but bigger players.

“The middle-tier of life insurers is disappearing, and new players are entering the Australian market,” he said. “We think this will be good for competition and, ultimately, better for customers, because running a stable, sustainable life insurer requires significant investment and scale.”

“MLC Life Insurance was one of the first of the recent divestments of life companies, when we became a member of the Nippon Life Group of Companies in 2016. That’s enabling us to invest significantly in our people, processes and technology and, therefore, be better able to compete with our more established competitors.  Our customer will be major beneficiaries of this thrust.”

What is the future of direct life sales?

Given the problems confronting Freedom Insurance Group, Money Management asked each of the major insurers whether there was a future with respect to direct life/risk, with each of them giving a qualified answer of “yes”.

McCormack said he believed there was a future for direct life insurance, especially in the Consumer Credit Insurance (CCI) market.

“Direct life and CCI products fill a consumer need that is only going to grow if the Royal Commission recommendations are implemented as Commissioner Hayne intends,” he said. 

“Clearly, work needs to be done on the model of how direct life products are offered to customers but we think this is not only possible, but a good thing,” McCormack said. “We have long believed it is not ok for consumers to be contacted when they have not expressed any interest in a product. There are alternative distribution models which operate safely within both regulatory and community expectations and the Royal Commission gives an opportunity for these to come to the fore.”

TAL’s Clark also suggested direct life had a future but only within certain structures.

“The ASIC Direct review and the Royal Commission have exposed practices in the direct life insurance channel that resulted in poor customer outcomes.  These issues must be fundamentally addressed by industry,” he said.

“However, the direct life channel can be a convenient and accessible way for some customers and customer segments to buy life insurance. Most well-developed financial services and product markets have some form of direct channel for consumers, and it would seem strange that life insurance would be an exception.

Integrity Life’s Powell believes direct life risk sold via warm leads and high-pressure outbound sales techniques is dead together with products that do not have adequate claims risk to the insurer but he sees other avenues for direct sales. 

“However, this does not mean that all direct sales will cease,” he said. “Direct sales in response to advertising, whether they be white-labelled or not, will likely continue.”