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Jul 2020

The importance of product design in life reinsurance

Source: Asia Insurance Review | Oct 2019

The number of life reinsurers in Asia is eclipsed by the number of general reinsurers, that much we know. Both the growth drivers and the pitfalls facing life reinsurers are quite unique. We spoke to Pacific Life Re’s Andrew Gill about the good, the bad and the tricky.
By Paul McNamara
Around six months ago Pacific Life Re Asia got itself a new managing director, Mr Andrew Gill, who had spent the preceding four years as head of the life reinsurer’s Australian unit. An actuary by training, Mr Gill’s career also takes in spells down under at RGA and Munich Re. 
As a newcomer to Singapore, Mr Gill is in a good position to offer a view of the performance of the regional business. “In the last 12 months we had some ambitious business targets, but we’ve been able to improve on those materially,” Mr Gill said. “So we’re doing quite well. A lot of time was invested in our differentiators - comparative advantages - with a view to growing in different markets. In the last 12 months that has come to fruition.”
People are people
In a market that is short on human resources – and in which millennials are looking for employers with a trusted and respected brand – the quality of the work environment is of growing importance. 
“Every year we run a staff engagement survey where we benchmark ourselves against others in the region,” Mr Gill said. “All across Pacific Life Re we had really good staff-engagement results. Having an engaged staff is the most important thing to driving the company forward. We’ve got the right culture and the staff feel engaged and empowered. That attracts people and keeps people here. 
“The second thing is making sure we’ve got a brand that’s seen as fresh and innovative. We would like to position our brand as saying that we will challenge the status quo and we’d love to get people who think that’s a good thing to join us.” 
Technology too
The reinsurer has also been focused on making sure that it uses technology cleverly. “Our technology offering, UnderwriteMe, has been around for a while in the UK market and it’s been extraordinarily successful there,” said Mr Gill. “So we’ve built a team here and we’ve made inroads in the market in the last 12 months: A few big deals, a regional deal with FWD and a number of other things in the pipeline.”
In a highly competitive business, it is not surprising that Mr Gill feels that there is still room for improvement. “We’ve done very well in some markets, particularly north Asia, but there’s probably more that we could be doing in the Southeast Asian markets,” he said. “There’s an imperative to drive more growth in those markets. UnderwriteMe is part of that offering in terms of leveraging our technology to drive reinsurance growth in that market.”
Headwinds in Australia
Australia is a market that has many unique characteristics for both insurers and reinsurers. “Australia is quite large in terms of the reinsurance size,” Mr Gill said. “It’s a very different market because there are different types of products. Australia has a lot of short-term group business written off the back of the local compulsory superannuation savings system. We do not see the same opportunities for group in Asia at the moment, and hence this is not part of our target market in this area. The biggest challenges in Australia relate to emerging disability income experience and a myriad of regulatory changes.”
In Australia the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry revealed its findings earlier in the year but it is only now that the real impacts are being felt. “The impact of the royal commission along with many other recent regulatory changes is materially changing the nature and size of the insurance market,” said Mr Gill. “The group market, in terms of reinsurance, is the largest in the world. We expect that market will shrink by over 20% as a result of government changes in terms of what levels of default (opt-out) insurance can be written through superannuation accounts. So there’s a lot of headwinds in the Australian market.”
The financial impact on the retail sector could be enormous. “The retail market in terms of new business in Australia was close to $500m a year,” said Mr Gill. “This could as much as halve over the coming years due to a legislated reduction in the level of up-front commission and much more stringent education and compliance requirements”. 
“A lot of these advisers have had their practices for 20 or 30 years are going to have to get re-educated. Older advisers are leaving the industry and in an environment of lower upfront commissions and ever increasing compliance costs, you’re just not getting new people taking over those jobs. In a market where there is a lot of contraction, this can drive silly competition because you’re all going for a smaller share of a smaller pie.” 
Look to the future
In such a dynamic market with so many changes, it can be difficult to forecast accurately. “The Southeast Asian markets is where we’d like to grow and further diversify our Asian footprint. Leveraging UnderwriteMe for those markets is one of the big focuses of the next 12 months. In terms of business lines, it’s probably pretty much the same with mortality and critical illness being key lines as well as capital solutions.”
Since Mr Gill has the luxury of heading both the Asian and the Australian businesses, there must be lessons that can be learned in one market and applied in the other. “The lesson we learned from Australia is that you have to make sure when you’re making decisions, that you have to first look at things through a customer lens. In Australia, some in the industry lost sight of that,” he said.
Getting the product design right
“The other thing is the importance of getting the product design right,” Mr Gill said. “If I look at what happened in the disability income market in Australia, a lot of players were over-exuberant, loosening product terms and eventually there was too much anti-selection in the market. 
“That market has lost more than A$1bn ($670m) over the last six or seven years and it was basically because the product design became too generous and allowed too much anti-selection resulting in a poor pool of risks.”
Lessons for Australia from Asia? “Product design in Australia has faltered over the last 10 years and has been focused on tweaks to product definitions to meet rating house expectations,” Mr Gill said. “In Asia you see genuine product differentiation. The challenge in Australia is that most business is sold through independent financial advisers who generally want consistency of product. That’s really been a handcuff in terms of bringing in new and innovative product designs.”
Few life reinsurers
Asia only has a small number of life reinsurers – but many general reinsurers. Why should that be? “Life insurance is generally more complicated,” said Mr Gill. “You’ve got longer-term guarantees and contracts as opposed to general insurance where you have short-term contracts and yearly renewals. The business is a lot more complicated and it makes it harder for a new player just to come in or dip their toe in the water. If you’re going to start writing life business you have to know you’re going to be here in 30, 40, 50 years’ time because the policies last that long. That brings complexity. It means more capital needs to be employed, for longer, to support the business.
“There is also more regulation. Because they are long-term products, the regulation around life reinsurance tends to be a bit more complex. Regulators want to know that if you’re selling a policy now, you’re going to be around in 30 years’ time to continue to service the policy and that you’ve got the capital behind it.” A 
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