The premium income of Australia’s life insurance
industry has been on the decline for three years, with only risk
business in a grossly underinsured market providing some glimmer of
hope. Now, even risk business faces the threat of a setback thanks
to a sharp fall in the housing market and regulatory
reform.
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There was little respite for Australia’ life insurance
industry as a whole in 2010 with total premium income sliding 5.5%
compared with 2009 to A$36.03bn ($39.5bn), according to data from
Australian actuarial and research firm Plan For Life (PLF). Last
year was the third in which the industry was on the back foot since
the boom-year of 2007 when premium income surged by almost 40%.
In 2010, the life industry
experienced declining premium income in four of its five business
segments with the most damage done in the individual superannuation
(super) segment where premium income of A$8.555bn was 17.8%
(A$1.85bn) lower that in 2009 when a 20.3% fall was recorded.
In the segment, bancassurer
National Australia Group’s MLC Group unit experienced the most
severe decline with its premium income almost halve to
A$1.23bn.
The group super segment also gave
little reason for cheer with total premium income of A$11.96bn down
7.9% (A$1.03bn) compared with 2009 when an increase of 3.5% was
recorded.
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By GlobalDataThe most significant decline in
this segment was experienced by Australia and New Zealand Banking
Group’s unit OnePath Australia Group (formerly ING Australia),
which saw premium income slump 46.5% to A$1.048 and its share of
the segment fall from 15.1% to 8.8%.
In the retirement income and
ordinary investment segments there were some signs of improvement,
if only that the rate of decline slowed. Total premium income in
the retirement income segment of A$5.62bn was 3.9% lower in 2010
than in 2009 when a 25.7% fall was recorded.
In the ordinary investment segment,
premium income of A$517.3m reflected an 4.4% decline, down from an
11.5% decline in 2009. This segment is in “long-term decline”,
notes PFL.
Risk business
shines
Within this gloomy picture, the one
positive has been a strong rise in risk premium income which
increased by 12.5% in 2010 to A$10.29bn, bringing the total
increase since 2007 to 51%, or A$3.17bn.
PLF reported that all companies
participating in the risk sector experienced increases in business
in 2010, with Tower Group leading the field with a 31.5% increase
to A$1.194bn.
This gave Tower Group a market
share in the risk sector of 12.7%, second only to the country’s
second-largest life insurer, National Australia Group’s MLC Group
unit, which held a market share of 15.2%.
In the risk sector, another insurer
which made good progress in 2010 was Australia’s largest life
insurer AMP Group, which increased its risk premium income by 26.4%
to A$814.6m and its market share from 7.7% in 2009 to 8.7%.
Also performing well was AIA
Australia, a unit of American International Group’s Asian
subsidiary AIA Group, which grew premium income by 19.1% to
A$714.3m to give it a market share of 8.9%.
However, solid total risk premium
income growth in 2010 appears to reflect the momentum generated by
strong new sales in 2009. This is reflected in new risk premium
income sales which were muted in 2010, lifting by a marginal 0.4%
compared with 2009 when new sales were up 14.8% compared with
2008.
Tower Group was the top performer
in 2010, lifting new sales 30.5% compared with 2009 to give it an
18.7% market share – taking the number-one position from MLC Group.
In terms of sales growth in 2010, Tower Group was followed by AMP
(13.8%) and Axa Australia (7.7%.)
Growth in risk premium income over
the past three years has been driven by solid performance in the
three subsectors – individual risk lump sum, individual risk income
and group risk – with individual risk lump sum providing the main
thrust.
The individual risk lump sum
business is the largest of the three subsectors and in 2010
accounted for just less than half of total risk premium income and
51% of new business. The subsector has also recorded the fastest
growth pace over the past three years with premium income in 2010
25% above the level recorded in 2008. PFL noted that the subsector
has benefited significantly from growth in the housing market.
However, Australia’s housing market
has entered a period of contraction following interest rate
increases in 2010. The Housing Industry Association noted recently
that the country’s housing market is “struggling”. Adding to the
gloom, mortgage broker Aussie Home Loans reported that there had
been a 20% fall in new mortgage applications in the first four
months of 2011.
The impact of a slowing housing
market was already reflected in new individual lump sum risk
business in 2010, with growth slowing from 14.9% in 2009 to
3.2%.
Australia can’t afford any slowdown
in growth in its life risk insurance sector. Despite the strong
showing from risk premium income between 2008 and 2010,
Australian’s remain underinsured in the extreme.
In a study published in 2010,
actuarial firm Rice Warner Actuaries estimated that more than 95%
of Australian families do not have adequate long-term life
insurance cover while the total level of underinsurance is a
mammoth A$1.37trn.
Income protection insurance is also
widely neglected by Australians. This was emphasised in a study
published by the Investment and Financial Services Association –
now the Financial Services Council (FSC) – in February 2010, which
revealed that, based on current average insurance levels, the
typical Australian family’s weekly income will be cut by half when
a main breadwinner becomes temporarily ill or injured and can’t
work.
“Australia’s ‘she’ll be right’
attitude stops most people confronting the very real possibility
they will suffer an insurable event during their working life that
has the potential to leave them financially ruined,” commented FSC
CEO John Brogden.
According to the FSC, over the next
10 years, one million working-age parents with dependents (one in
five) will be impacted by death, serious accident or illness.
For Australian life insurers it
represents a big opportunity for growth. But first they have to
educate consumers, according to Australian internet-based insurance
broker Lifebroker, which in a 2010 survey found that 67% of
consumers believe insurers will use loopholes to avoid payouts.
Also of concern is ignorance of the
need for insurance.
Lifebroker’s survey found 71% of
consumers mistakenly believe the federal government is required by
law to provide financial support to families in the event of the
premature death of a family member. Also, 70% mistakenly believe
the federal government is required by law to pay a replacement
income to workers if they stop work due to illness or injury not
caused at work.
Some 85% of consumers believe life
insurance pays a lump sum if they live past retirement age.
Changing
landscape
After a period of little activity
on the corporate action front, Australia’s life industry has
recently seen a number of significant deals, including the entry of
Japan’s second-largest life insurer Dai-Ichi Life into the market
through the acquisition of Tower Group.
Significant success achieved by
Tower Group over the past several years caught the attention of
Dai-Ichi Life, which made its first move in September 2008 when it
acquired a 29.7% stake in Tower Group from UK investment company
Guinness Peat Group for A$376m.
Dai-Ichi followed this up in
December 2010 when it made an offer to acquire the outstanding
70.3% of Tower Group which it did not own for A$1.19bn. The bid
succeeded with the Australian insurer becoming a wholly-owned
subsidiary of Dai-Ichi Life on 27 April 2011.
With Tower Group having steadily
increased its market share from 1.9% in 2007 to 3.6% in 2010 its
competitors will no doubt be watching with keen interest the
positive impact having Dai-Ichi Life’s capital resources behind it
potentially holds.
Australia’s life insurance market’s
landscape has also been significantly altered by the acquisition of
Axa Asia Pacific Holdings’ (AAPH) Australian and New Zealand
operations by Australia’s largest life insurer, AMP Group.
A complex deal, it involved AMP’s
acquisition of 100% of AAPH’s outstanding shares for A$13.3bn of
which A$7.2bn in cash was for French insurer’s 54% stake. Axa in
turn acquired from AMP 100% of AAPH’s Asian operations for A$9.8bn
in cash. The deal priced AAPH’s Australia and New Zealand
businesses at A$3.5bn and involved a net cash payment by Axa of
A$2.6bn
AMP has seen its premium income
slump by A$3.59bn (25%) between 2008 and 2010 and in the process
its market share decline from 34.3% to 29.6%. Based on 2010 total
premium income as reported by PFL, the deal will boost AMP’s market
share to 35%.
Inclusion of Axa’s premium will
strengthen AMP’s leading position in the individual super
investment segment where its market share will rise from 49.9% to
52.7%, based on 2010 results. In the group super investment
segment, AMP will move from second to first position with a market
share of 39.4% compared with MLC Group’s 33.9%.
The inclusion of Axa’s premium
income will also shift AMP from sixth to first position in the risk
business segment where it will have a market share of 16.3% based
on 2010 results.
AMP, which was formerly Australian
Mutual Provident, is, at 162-years-old, Australia’s oldest life
insurer and was also the last of the once dominant mutual insurers
to demutualise. AMP took this step in January 1998.
A wave of regulatory
reform
Australia’s A$1.32trn (March 2011)
asset super market has embarked on the biggest reform process in
its history, following the government’s acceptance in large measure
of recommendations made by a committee, chaired by former deputy
chairman of the Australian Securities and Investments Commission,
Jeremy Cooper.
“The government is acting to reduce
the unnecessary fees and charges on working Australians’ retirement
savings, and to remove barriers to a low-cost and efficient
superannuation system,” Federal assistant treasurer and minister
for financial services and superannuation Bill Shorten commented at
the time of the announcement a few months ago.
Reforms, due to come into effect in
July 2013, initially focused on the introduction of a low-cost
workplace default super product called MySuper and ‘SuperStream,’ a
package of measures intended to slash the costs of processing super
transactions.
Another feature of proposed reform
is the banning of fees charged to super fund members for compulsory
financial advice which, according to the government, a large
proportion of members never use.
However, as an extension of this,
in a last-minute move, a controversial proposal was announced by
the government at the end of April. If implemented, the proposal
would see the banning of commissions on life insurance policies
sold as part of super funds, and the introduction of a fee-only
system for advice.
The change would have significant
impli-cations given that super funds accounted for a third of total
risk premium income and 32% of new risk business in 2010.
Consultancy Rainmaker estimates that financial advisers earned
A$460m in commissions in 2010 through the sale of risk life
products.
According to reports in Australian
media, up-front commissions are as high as 128% of the premium with
trailing commissions averaging 10% per year.
Unsurprisingly, the proposal has
not been greeted with great enthusiasm by Australia’s Financial
Planning Association (FPA).
“While we are pleased this [ban]
has not extended to insurance commissions outside superannuation,
we believe insurance commissions across the sector should be
maintained,” said FPA CEO Mark Rantall.
AMP has openly opposed the banning
of commissions, despite AMP and Axa removing in-built commissions
from new super, pension and investment business in mid-2010.
Commenting, AMP Financial Services
MD Craig Meller said the proposed ban commissions on life insurance
paid for within super funds, including income protection and
disability cover, “goes too far and it is not clear what problem is
being addressed”.
In a similar vein, CommInsure’s GM,
retail advice was quoted in Australian media as saying: “We remain
concerned about the government’s decision to ban commissions on
risk insurance inside superannuation and believe this is likely to
exacerbate underinsurance in Australia.”
Also quoted was MLC Group CEO Steve
Tucker, who said: “I think the outcome is that less insurance will
be sold, and we already have an underinsurance problem.”
Meller continued: “The proposal to
ban commissions on life insurance within superannuation is
ineffective public policy because it will inevitably exacerbate
Australians’ chronic level of underinsurance. Without the
encouragement and support of a financial planner, many people do
not appreciate the necessity to arrange adequate insurance.”
He emphasised that an unintended
consequence of the proposed ban on commissions is likely to be the
transfer of a greater burden to taxpayers who will be required to
meet the social costs of underinsurance.
“An alternative would be to
consider policy initiatives that would increase Australians’
overall level of insurance cover,” he suggested.
One of the spin-offs from proposed
reform in Australia has been a closing of ranks by professional
financial planners eager to protect their turf.
Right now when it comes to
financial planning advice it is a free-for-all in Australia with no
legal restriction on individuals calling themselves financial
planners irrespective of their training, competence and
licensing.
Speaking at a function in April
FPA, chairman Matthew Rowe said: “The title of financial planner
should be restricted under law for use by members of an approved
professional association, governed by the highest ethical,
educational and professional standards.”
The FPA’s move is a positive one in a life insurance industry in
sore need of fostering consumer confidence and encouraging a more
positive attitude towards risk products in particular. How
successful the FPA, and indeed the life industry as a whole, will
be in overcoming a huge education gap among Australian consumers
remains to be seen.
See also: Health insurers
suffer Down Under
