Risk insurance: a market in bloom

Janine Mace examines the risk insurance industry and discovers a buoyant market set for continued growth.

“It’s a great business to be in, with double-digit growth predicted for years to come.”

When you hear financial services professionals talking about those sorts of figures, you know there is plenty of money being made. And that is clearly the case when it comes to Australia’s life risk sector.

Far from being a dull market where little happens, life risk is facing some dramatic challenges and changes – even if many are the result of its current success.

As Deloitte partner, Paul Swinhoe, explains: “Insurance is still a rapidly growing market and there is no end to that in sight. It is growing at 10 per cent per annum and so it is a very attractive market to be in.”

The latest figures from Plan For Life Actuaries & Researchers support this view, with the risk market enjoying solid growth and experiencing a 13.4 per cent increase in inflows over the 12 months to 30 September 2010.

Within the total market, the individual risk lump sum sector (term life, total and permanent disablement, and trauma) saw inflows rise 11.7 per cent, while inflows in the individual risk income market (income protection, sickness and accident, and business expenses) grew 10.8 per cent.

Growth in the group risk market was even more dramatic, with inflows jumping 17.6 per cent on the back of strong business growth, according to Plan For Life.

Although these figures paint an attractive picture, it is not without its challenges. One of the biggest of these is the wave of regulatory change facing the market.

“We are at a very interesting point in the cycle,” says MLC head of advice product for insurance, Sean McCormack.

From the Future of Financial Advice reforms to new capital provisioning and accounting standards, there is potential for a dramatic reshaping of the industry.

“We are just seeing reform and regulatory change everywhere at the moment. Some of it in the advice area, some in the capital space and some in the regulatory area,” McCormack says.

“This is pulling the life business in many directions at once,” explains Zurich Life Australia chief executive officer, Colin Morgan. “There is an emergence of multiple trends all at the same time and there is a lot going on.”

These forces are making old distinctions less relevant, according to OnePath insurance head of product and marketing, Gerard Kerr.

“The boundaries between group, direct and retail are blurring a little. Limited advice will blur things and bring it closer to direct and telesales, while in group they are lifting their offer too and that is bringing it closer to the retail market,” he notes.

Competing for the dollars

One trend in life risk that nobody disputes is its competitiveness, with everyone seeking to grab a slice of the action.

“The market environment is leading to renewed competitiveness across all channels. We expect to see the advised market experience a good growth rate, but we could see better growth rates in other channels,” McCormack says.

Morgan agrees: “We are seeing 10 per cent growth year-on-year in the retail market, while in direct it is 15 per cent,” he says.

The growth is keeping insurers working hard to improve their product offerings. Both Zurich and MLC have upgraded their online services, while AIA Australia has launched WeCare, a phone and email support service.

Advisers have benefited from many of the improvements. “There has been an increased focus on IFAs [independent financial advisers] and refreshed product offers to the IFA space,” McCormack notes.

An example is BT’s new IFA end-to-end solution, BT Protection Plans, which provides immediate decisions on applications with no signatures required, real-time access to client information, an in-house chief medical officer and tele-claims assessment.

In the group market, competition is fierce. “Group insurance has been driven hard by super fund consolidation and the drive for membership and this has led to very competitive pricing,” Morgan notes.

Swinhoe agrees: “Group is growing faster and is highly competitive to the point where some concerns have been expressed about it,” he says.

Despite this, nobody expects the current competition to disappear any time soon.

“The consolidation that has recently occurred has not led to a reduction in competition in the life market and it remains highly competitive,” McCormack says.

“The success of some of the newer entrants in the past few years has shown you can gain market share in life risk quite quickly. We don’t see a lessening of competition ahead.”

In fact, the continuing underinsurance problem will reinforce competition.

“There is still a significant underinsurance problem, and while that exists there will be a competitive drive to capture those segments. There are seven million Australians insurance has failed to reach, so if we can capture a small part of that, growth prospects are good,” McCormack says.

Pressure on pricing

The competition has also led to strong pressure on pricing.

“In both the group and retail market it is very competitive in terms of pricing. There are some very sharp margins coming out at the moment,” McCormack says.

This is particularly the case in the group market, Morgan notes. “The pricing power of industry funds is leading to members getting better benefits. This is good for industry funds and members, but for insurers some big bets are being made.”

He is concerned about the potential impact of several years of bad claims experience – something that may be behind the Australian Prudential Regulation Authority’s (APRA’s) close interest in the group market. “I can’t see pricing in group going much lower, as the big contracts now have incredibly low margins.”

Although price pressure is strong in group, it is reducing in individual risk, Morgan says. “In retail insurance there has been significant downward pressure on prices – especially on mortality rates – but I don’t expect to see the same downward pressure as over the last five years. With trauma policies, we are seeing increasing claims rates due to better diagnosis and detection and this may lead to upwards pressure on pricing.”

Despite the competition, further consolidation is not predicted and the recent AMP/AXA takeover is not expected to alter the market.

“The AMP/AXA deal doesn’t overly impact the market as it is very competitive with enough players to keep it competitive,” Kerr says.

However, the success of the merger is being keenly watched. “It will be very interesting to see how AMP and AXA come together as they are two very different organisations. AMP will be working hard to retain those adviser relationships and others in the industry will be working to pick them up,” McCormack says.

Morgan thinks the deal will be good for competition and for AMP. “It needed open marketplace products outside its tied product range, so it could be a good match.”

He believes additional mergers are unlikely following the takeover of Tower by the Dai-Ichi Life Insurance Company, as this deal removed one of the last non-bank owned insurers in Australia. “The strong will get stronger and the banks are always looking to increase their footprint in the wealth management market”.

Kerr agrees the major banks are looking to take advantage of rapid growth in the life market. “The banks have said they see the wealth market as a growth opportunity and there are good opportunities to leverage off their client bases.”

Technology changes everything

Another major force buffeting the life market is technology.

“We are seeing increasing use of technology by both advisers and insurers and this is a very strong trend,” Morgan says.

“The life insurance industry has been a slower mover in the emergence of straight-through-processing, with online quoting and electronic underwriting only now appearing. There is a massive trend towards the use of technology and this will make insurance more accessible.”

Kerr agrees: “The technology influence is massive. It provides an enabler to blur the lines between the different channels.”

He believes it will help the industry reduce costs and improve efficiency. “Insurers need to figure out ways to help advisers do transactions quicker and give underwriting and claims decisions faster.”

This process is likely to accelerate, according to Morgan. “The banks are now investing massively in IT platforms in wealth management to enable increased access for advisers to get to their products.”

Despite adding rules to underwriting engines, the impact of technology still has a long way to go, Kerr says. “We have not yet fundamentally changed how we do underwriting, or the claims process.”

According to Swinhoe, insurers are also planning to improve their use of individual customer data. “This is particularly the case for bank-owned insurers, as they know a lot about their customers from their other transactions with the organisation and this information can be used to segment customers and improve underwriting. It can also be used to drive lead generation and streamline processes,” Swinhoe says.

Life insurers are also responding to adviser demands for better administrative processes and more support.

“In the retail market, product is one part of the puzzle. Technology, the relationship and ease of doing business with the insurer are all important too. Advisers are looking at the broader view, not just the product per se,” McCormack notes.

This means helping advisers cope with an increasingly complex business environment, according to CommInsure general manager of retail advice, Tim Browne. “Assisting advisers to service their clients – especially in an opt-in environment – means we need to promote the value and service of advisers to clients.”

McCormack agrees: “What policyholder retention strategies you have and how you help advisers in growing their business are increasingly important. Advisers are saying, ‘Product is important, but what else are you as an insurer willing to do to help me grow my business?’ This is very important now.”

More weight is also being placed on client retention. “In the past 12-18 months there has been greater emphasis on loyalty and policy retention and this has led to the development of loyalty programs by some insurers,” Kerr notes.

He believes with capital harder to access, business expenses have become more critical. “The value of retaining business has come to the fore as companies have had to manage the business with finer margins. They are seeing greater value in their existing books of business.”

Another trend could be a move to improve product definitions. “Off the back of the natural disasters that have occurred, general insurers are moving to standardise definitions. It is possible to see the same questions being asked of life risk providers so consumers have greater certainty around what we offer,” Browne says.

Higher capital requirements

If all this is not enough, life insurers are also facing the imposition of higher capital requirements by regulators rattled by global financial crisis (GFC)-induced disasters.

“The new capital regime will have different impacts for different insurance companies. This is also why group is being scrutinised by the regulator very closely,” Morgan says.

Although the industry is generally supportive of APRA’s moves to improve insurers’ capital provisioning, Browne believes there are concerns about the final outcome.

“The GFC proved Australian capital provisioning is good, but the regulators are looking at ways to make it even stronger. We are concerned, however, that this may translate into increased costs to consumers.”

According to McCormack, the APRA consultative process has worked well. “The worst outcome is that there is a requirement to increase capital substantially. We are pleased that APRA has heard our feedback and is willing to test and adjust its requirements.”

The higher capital requirements are also linked to improved risk management. “The other aspect of the new capital regime will be to put a better risk culture into insurance – although it is good now – bringing risk management to the fore in decision-making,” Swinhoe explains.

“This is going to change how management operates and will help head off something worse happening. It will make people put their decisions into the right risk framework.”

Impact of international changes

Although the local regulator may be willing to talk, international regulatory reforms may prove more problematic.

Last year the International Accounting Standards Board published a proposed set of changes to insurance contract accounting designed to impose a single accounting standard on all insurers in all jurisdictions, which will apply to all types of insurance contracts on a consistent basis.

The new accounting standard should make it easier for insurers to raise capital around the world, because their businesses will be better understood, Swinhoe says.

However, although implementation has been deferred, the new standards will have a substantial impact on Australian insurers – especially bank-owned companies.

“In the early years, life insurance will be less profitable and a less attractive place for companies to put their capital,” he explains.

“If insurers want more capital to grow and the returns are not so good in the short term, they could have problems accessing capital – particularly from their banking parents. Accounting standards don’t change the value of a business, but they can change the perception of it and that can make it hard to get capital.”

Morgan agrees the impact could be huge.

“It if takes place it will potentially have a big effect on Australian insurers, as deferred acquisition costing is used here a lot. That means contracts need to stay on the books for a number of years to allow smoothing of the profit streams.”

Another less well-known problem for insurers is the March decision by the European Court of Justice to ban gender pricing in insurance contracts from December 2012.

“This is massive for the industry, both for general and life insurance. The real danger is will it extend to other countries. This throws everything up into the air. It only takes a few people to drive it into another jurisdiction and that will have massive implications,” Morgan notes.