The risk insurance market has taken a battering and now stands at a crossroads faced with a decision to keep trending towards a focus on premiums and definitions or doing the hard yards and improving neglected practices and process to boost profitability.
Sounds a bit harsh? Not according to Harvest Partners Risk Industry Market Evaluation report, which covers the major insurance disciplines, actuarial, underwriting, product claims, and the attitudes of senior executives.
The annual survey of Australian risk product providers and life insurers states that while the industry has moved away from the pursuit of market share through low premiums and liberal benefits, many life houses still hang in the balance, particularly in the areas of disability income and trauma insurance.
And, it says, there is no magic new formula out there to change the fortunes of the market.
Senior executives have flagged changes that need to happen over the next five years and the news is mixed for financial planners and risk writers.
Around 85 per cent of senior executives in the life houses surveyed said that further market rationalisation will occur.
In fact, 61 per cent of those executives felt there would be only 11 to 15 life companies operating in 2008, while another 31 per cent said the crunch would be bigger with only six to 10 companies still standing in five years.
Two thirds of executives saw the rise of distribution branded products, a higher proportion of level commission products and technology related delivery all become big drivers in the next five years.
“These are attractive to executives because they will create a positive impact in controlling expenses and retaining business,” Harvest Partners’ Steve Davidson says.
Distribution also received further notice with just over half of the senior executives covered by the survey seeing multi channel distribution becoming a major factor as the importance of advisers themselves in distributed product also increases.
One of the major changes in attitude has been a swing to outsourcing some of the function usually kept in-house at life companies with information technology being seen by all executives as an area to be passed on. This was closely followed by administration at 92 per cent and surprisingly, more than half show the need to outsource the claims and distribution arms of their business.
Back office functions, such as underwriting and product development, rated much lower as companies sought to find their own competitive advantages.
Much of this searching for an advantage is linked to product with disability income benefits, features and underwriting being seen as areas which will provide a boost.
But most life companies felt positive that the coming year would be beneficial, and profits would continue to be generated as they took action to stem profit leakage.
In the area of disability income, 58 per cent of companies in the survey felt they would meet their profit criteria continuing a trend from the last three years.
Trauma scored much higher with 82 per cent of companies predicting profitability would be maintained while TPD and term also returned similarly buoyant responses with 84 and 88 per cent respectively.
It would be easy to pass this off as bullish behaviour by each respondent so Harvest Partners also considered these responses in comparison with the wider market and each group’s top three competitors. This step revealed that only two per cent of respondents felt the overall market would meet profit criteria for disability income insurance and only 14 per cent saw their top three competitors doing so.
However, the future of the life insurance industry lies in the hands of those at the helm and Harvest Partners asked executives if the industry had the will to implement initiatives to overcome negative profit issues and improve profitability for each product category.
When it comes to disability income and trauma, these executives were very confident change would take place with 92 and 67 per cent answering in the affirmative respectively.
TPD and term responses did not score as highly but indications bode well for the future with 58 and 50 per cent of executives stating there was a will to change.
In fact, 75 per cent of executives stated their own organisations were prepared for change to tackle product profitability issues over the next five years.
And it is here the circle has gone a complete revolution with distribution strategy identified as the most common way of lifting profits. As such, adviser service and support, together with remuneration and incentives, were also rated highly by those at the top. This means financial advisers and risk writers can look toward a better future with risk.
