Point of view: The end of life as we know it...?

The Australian life insurance industry is entering a period of legislation-driven change. The past 10 years has been marked as period of restructuring and expense control with a high level of takeover and merger activity as major play-ers have aggressively sought consolidation opportunities. The increasing demands of system changes and the wide scope of regulatory change facing the life indus-try has prompted several recent sales.

The industry has been heavily reliant on systems for more than t

The Australian life insurance industry is entering a period of legislation-driven change. The past 10 years has been marked as period of restructuring and expense control with a high level of takeover and merger activity as major play-ers have aggressively sought consolidation opportunities. The increasing demands of system changes and the wide scope of regulatory change facing the life indus-try has prompted several recent sales.

The industry has been heavily reliant on systems for more than thirty years and now faces the countdown towards Year 2000 compliance. The impact of Year 2000 compliance on its own has resulted in some companies freezing product develop-ment until after January 2000.

While the industry has been focused on these issues, wide-ranging legislative reforms have been implemented or proposed. Companies have the following legisla-tive issues to address:

1. The change in regulator from ISC to APRA (or ASIC in some areas). Reporting and supervision regimes have been amalgamated and restructured. This has re-quired life companies to develop revised reporting systems.

2. The CLERP 6 changes to be regulated by ASIC will impact on distribution. While these changes will create a common legislative regime for all financial services, they will result in a substantial restructuring of existing relation-ships with life agents. Life companies will be faced with two choices: either establish and own a dealer or abandon any direct involvement with distribution and rely solely on third party dealer groups for new business.

3. The Managed Investment Act. Life offices involved in funds management are now working through the complex and time consuming process of moving to a single re-sponsible entity.

4. The Ralph Review of Business Taxation and the possible introduction of a GST. Substantial changes to ways in which pooled trusts, existing savings plans and annuities are to be taxed have been proposed. These proposals will substantially increase the amount of tax revenue raised and have been justified in the belief that the existing legislation has led to wide spread tax avoidance. Superannua-tion and retirement incomes appear certain to be the target of further tax pro-posals.

5. Potential choice of fund legislation in superannuation together with the usual ongoing regulatory changes in this market. Having been on the table for some time, it is still uncertain as to which form it will take and what amend-ments may be introduced to gain the support of the Democrats or Labor to enable the legislation to pass. It is therefore impossible for the industry to plan with any certainty for the introduction of this legislation.

All of the above are significant and will impact on all aspects of every com-pany's business. These proposals have been introduced at a time when there is ongoing debate about the adoption of international accounting standards for life companies.

Most of the business of life companies is now superannuation. At the end of 1998, total ordinary business assets were $30 billion and represented 18 per cent of the life industry total of $166 billion. This compares with the $89 bil-lion held in unit trusts (ignoring cash management trusts). Clearly, non-superannuation savings have shifted away from the life industry.

Already the life industry is being segmented into risk business and investment-linked savings. There is convergence towards a unit trust business structure.

Some of the proposed changes set out in the Ralph report will have a negative impact on the life industry. Not only will taxes rise sharply, but the cost of providing some products such as annuities and capital guaranteed investments will also increase.

In the event these are adopted, it would be reasonable to question whether it is worthwhile maintaining a life company structure given the complexity of legisla-tion including the Margin On Services actuarial valuation requirements and the shrinking opportunities for growth.

The growth of master trusts and the emergence of wrap accounts offers an alter-native, more flexible business structure. Under these services, life insurance can be introduced under a group life arrangement, perhaps directly through a re-insurer. If the trend towards offering group life to individuals through master trusts accelerates the existing life industry will increasingly become margi-nalised as a wholesaler rather than a retailer of risk benefits.

The move to a uniform licensing structure for intermediaries will also mean that life agents will become financial advisers and will be able to sell unit trusts. In many cases, it will be simpler for companies to offer savings products through a unit trust structure than as life policies.

Ultimately the life industry may contract to a handful of offices offering risk products with a substantial portion of their new business reliant on group con-tracts. For those who remain in the risk market, the challenge of converting a largely unprofitable disability portfolio into profit will remain.

In this scenario are we then witnessing the gradual wind-up of the life insur-ance industry in Australia? Not a victim of market forces, but of relative over-regulation.

There will be some life in the future - but clearly not as we now know it.

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