Australia’s market for life insurance is at what appears to be an interesting crossroads. Ms Pauline Blight-Johnston from RGA Reinsurance Co of Australia Ltd provides some insight.
From where do you now see most of Australia’s insurance market’s growth coming?
A: Right now, we’re seeing significant growth in the group market – specifically, the insurance policies purchased through Australia’s superannuation (retirement) fund system. In Australia, employers are required by law to contribute 9% of each employee’s annual salary to a superannuation fund that contains dedicated portfolios for each employee. Employees are free to place their portfolios with the investment house of their choice, so this is a lively, competitive market.
Insurance is also sold through these funds: insurance companies contract with the funds to sell life, total permanent disability (TPD) and income protection coverage to their members. Premiums for the coverage are deducted automatically from the members’ accounts. Most funds provide members with a basic level of default cover which can be increased at their request.
Is this also a competitive market?
A: Absolutely. Australia currently has more than A$1.25 trillion (US$1.32 billion) in total superannuation assets, making it one of the largest such pools of these assets worldwide. In addition, there is quite a bit of consolidation currently occurring among investment manager companies in the superannuation space. The annual aggregate insurance premiums for some of these funds exceed $100 million, so insurers compete very aggressively to win the business.
How much insurance is purchased through these employee-driven superannuation funds?
A: Right now, about half of all life insurance sales in Australia is driven by these funds. The segment is growing fast, primarily because of the ease: coverage, for the most part, is underwritten automatically, without the need for medical items such as fluids. In addition, over the last two years, many superannuation funds have incorporated income protection into their default options.
What makes up the rest of Australia’s life insurance market?
A: Mostly individual yearly renewable term insurance, which is distributed through independent financial planners, via the Internet, TV advertisements, and banks. The market for individual critical illness coverage is growing as well. Reinsurers have been assisting insurers in entering this market by enabling product and benefit design.
Where do you see the most room for growth?
A: Group superannuation and non-intermediated, direct to the public sales. At this point, many Australians are still underinsured, as most in the superannuation system don’t opt for amounts higher than the defaults. We’re also seeing rapid growth in funeral policy sales, and believe there is great potential to sell insurance to younger generations via new, potentially technologically driven, channels.
What is the main challenge for life insurers in Australia right now?
A: Claims experience has been challenging. Australia’s economy held up comparatively well during the global financial crisis, but is still experiencing some weaknesses. Insurer profitability has been impacted primarily by increased disability claims, which frequently happens during down markets. This has been compounded by the rapid growth the industry has experienced in recent years resulting in increased numbers of claims and increased pressure on claims assessment resources.
Is Australia’s population experiencing demographic issues similar to those impacting other populous countries around the world, such as the US and Japan?
A: Yes – Australians are living longer, so our population’s average age is rising.
Do Australians need more education about their options to maximise their retirement savings?
A: One of the big challenges in the Australian market right now is that there is not yet a deep understanding among retirees and pre-retirees of the risk that they may outlive their money. Several years ago, the preservation age (the age at which individuals can receive their superannuation) rose from 55 to 60, which means people have more time to save. But unfortunately, too often when workers reach preservation age, they tend not to think about using their lump sum superannuation to buy a lifetime annuity. Instead, they either spend it fast, and then live out their days on social security payments or try to invest it and manage their own longevity risk. The investment and insurance communities see the need as a growing one, and are trying to bring about change in this regard.
The global financial crisis has spurred some regulatory changes in the personal finance space. Has this affected the insurance space as well?
A: Yes. Two key sets of reforms are being implemented in the superannuation market. The Stronger Super reforms are designed to strengthen the superannuation system by reducing consumer costs and better safeguarding the value of the investment portfolios. These reforms may affect insurance product design within superannuation. In addition, the Future of Financial Advice (FOFA) reforms will most likely prohibit the payment of commissions to the intermediaries arranging group insurance. These two sets of reforms are expected to have profound effects on the industry.
How do you see Australia’s insurance market developing over the coming year?
A: On the cautionary side, Australian insurers still need to seek ways to manage their portfolios effectively through the current curve of the financial cycle. The claims experience over the last 12 months is really showing that insurers need to take a closer, more analytic look at how their products are priced, underwritten and structured. A few changes in policy terms, as well as more automation in claims processing, could mitigate future loss risk.
We also believe Australian insurers will need to find ways to use techology to make both underwriting and claims decisions more efficient. On the underwriting side, this will mean looking at developing simplified products needing less medical underwriting that can be sold automatically, and investigating predictive underwriting models. On the claims side, automating more of that process could also be very beneficial. Fortunately, Australian insurers are very open to technological developments.
Overall, Australia’s insurance industry right now is at an interesting pivot point. The conversations are beginning to turn away from focussing on price to focussing on value. We think this is the right direction, and would like to see it continue.
Ms Pauline Blight-Johnston is the Managing Director at RGA Reinsurance Company of Australia Ltd.
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