Life insurers take two-year pounding

Australian life insurers will
be hoping for better times as they emerge from a two-year period of
sharply falling premium income. Holding out hope, particularly over
the medium to long term, are significant shortfalls in savings and
risk insurance, both subjects of major industry consumer education
initiatives.

Australia’s life insurance industry was
riding the crest of a boom in 2007 as it reveled in premium income
which had surged 37.2% compared with 2006. But in 2008, the global
financial crisis began taking its toll on the life market, sending
premium income slipping almost 4% with far worse to come in
2009.

For almost all the country’s 32 life insurers
2009 was a gloomy year, reveals data from Plan For Life (PFL), an
Australian actuarial and research firm. The data shows premium
income in the 12 months to 30 September 2009 slumping 24.1%
compared with the same period in 2007-2008 to A$33.86bn
($31.6bn) 

The slump impacted virtually all insurers,
including market leader AMP Group which recorded an above average
26% fall in premium income to A$9.59bn. Nearest rival, bancassurer
National Australia Group’s MLC unit, experienced a more damaging
35.3% decline to A$7.08bn. 

Hardest hit was Macquarie Life, which saw
premium income slump 45.1% to A$458m. This extended Macquarie
Life’s dismal showing in 2008 when it recorded a 41% fall in
premium income, from A$1.42bn to A$835m. The insurer’s market share
fell from 3.1% in 2007 to 1.4% in 2009 and market ranking from
seventh to 12th.

Underlying Macquarie Life’s poor showing was
uncertainty surrounding its banking parent Macquarie Group during
the financial crisis. On the back of this uncertainty, Macquarie
Group’s share price fell from a peak of A$92 per share in November
2007 to a low of A$19 per share in February 2009.

However, some insurers bucked the
downtrend.  Particularly impressive was the performance of AIA
Australia, a unit of American International Group’s Asian
subsidiary AIA Group, now the subject of an acquisition by UK
insurer Prudential. During the 12 months to 30 September 2009, AIA
Australia recorded premium income of A$739.4m, a 70% increase which
boosted its ranking from 13th in 2008 to ninth in 2009 and market
share from 1% to 2.2%.

In growth terms, Allianz Australia Life (AAL)
also put in a strong showing, increasing premium income 20% to
A$27.9m. Despite this, AAL remained a minor player with a market
share of only 0.08% in 2009.  

Retirement savings slump

Across the sub-sectors of Australia’s
life market, the biggest hit was taken by retirement income
products, PFL reporting a 53.8% fall in premium income to A$4.56bn.
The sub-sector includes short- and long-term annuities, allocated
annuities and pensions.

All insurers, noted PFL, reported double-digit
percentage falls in business with the biggest suffered by Axa (down
83.4%), MLC (down 74.5%), bancassurer Suncorp-Metway (down 73.1%)
and banking group Westpac’s BT Financial unit (down 69.7%).

From an overall industry premium income
perspective most damage in 2009 was caused in the superannuation
(super) sub-sectors. Individual super premium income dived 27.5% to
A$10.94bn while group super premium income was down19.6% to
A$9.77bn.

As with retirement income products, no insurer
reported growth in the individual super sub-sector. Best performers
in this unfortunate situation were Tower Group (down 4.4%), Axa
(down 8.1%) and Aviva (down 12.4%).

Biggest fall was recorded by MBF Life, which
saw individual super premiums fall 44.9% to A$202m. MBF Life is a
unit of Australian health insurer MBF which in turn is a subsidiary
of UK health insurer Bupa. MBF Life and Clearview Retirement
Solutions, another MBF unit, are to be acquired by Australian
financial services company MMC Contrarian for A$195m, a 22.6%
discount to the two units’ A$252m embedded value.

Across both individual and group super
sub-sectors, the biggest decline in value terms was recorded by MLC
which saw total premium income fall 25%, from A$7.1bn to A$5.33bn.
AMP Group also took a heavy knock, with premium income down 22%,
from A$9.25bn to A$7.21bn.

Ordinary non-super investment inflows were also
under pressure in the 12 months to September 2009, falling 15% to
A$538m. This followed a 26% fall in the  12 months to
September 2008.

Retirement savings
disaster

The slump in super and non-super
investment inflows comes at a time when the Investment and
Financial Services Association (IFSA) is warning that Australians
face a “retirement savings disaster”.

“The retirement savings gap has blown out from
A$452bn in 2004 to A$695bn, an increase of A$26,000 per person to
A$73,000 per Australian,” said IFSA CEO John Brogden in
January.

Estimates of the savings gap were made by
actuarial firm Rice Warner Actuaries (RWA) as at 30 June 2004 and
30 June 2008. RWA found the greatest portion of the gap (88%)
accounted for by people with annual incomes of between A$42,600
(70% of the average wage) and A$106,600 (175% of the average
wage).

Risk market shines

For Australian life insurers risk
insurance provided a bright spot, with risk premium income up 15.1%
in the 12 months to September 2009 to A$8.05bn, reports PFL. This
performance improved on the sub-sector’s showing in the 12 months
to September 2008 when a 12.6% increase in premium income was
recorded.

Retaining risk market leadership in 2009 was a
unit of Commonwealth Bank Group, CommInsure. Premium growth was,
however, a below average 12.9% to A$1.23bn and enabled CommInsure
to record a 15.3% market share. 

Retaining number two ranking, ING Australia
recorded a 13.6% increase to A$1.01bn giving it a market share of
12.6%. ING Australia became a wholly-owned unit of Australia and
New Zealand Banking Group in November 2009.

AIA Group put in by far the strongest showing
in the risk sub-sector, lifting premium income 84.2% to A$682.5m.
This increased AIA’s market share from 5.3% in 2008 to 8.5% and its
ranking from eighth to sixth. Also reflecting solid growth was
ninth-ranked BT Financial, which increased risk premium income
21.7% to A$408m.

But despite the risk sub-sector’s solid
performance in 2009, Australian’s remain woefully under-covered by
risk insurance. This was highlighted in a study published in
February 2010 by Lifewise, a joint IFSA and life industry
initiative launched in May 2009 aimed at promoting life insurance
awareness among Australians.

The study, undertaken by the University of
Canberra’s National Centre for Social and Economic Modelling
(Natsem), focused on life insurance, total and permanent disability
insurance and income protection insurance.

A yawning insurance gap

Putting the scale of the problem into
perspective, Natsem pointed to a study by RWA in which the
actuarial firm estimated that over 95% of Australian families do
not have adequate long-term insurance cover. The total level of
underinsurance is a mammoth $1.37trn, estimates RWA.

On life insurance specifically, the Natsem
report referred to a study undertaken in 2008 by the Industry Funds
Forum (IFF), a body comprising 25 large super funds, and the
Australian Institute of Superannuation Trustees (AIST). In the
IFF/AIST study, super fund members were found to have average death
cover of A$189,000 which compared with suggested coverage of
between A$483,000 and A$550,000. The variation takes into account
varied financial circumstances of super fund members. Based on the
IFF/AIST formula, 51% of members were found underinsured by
A$100,000 or more.

Worse still is the gap between required and
actual total and permanent disability (TPD) insurance cover. In the
IFF/AIST study 71% of super fund members were found to have TPD
cover averaging A$162,000. This was less than a third of IFF/AIST
formula-based suggested coverage of A$517,000.

Of the three protection insurance segments
covered by the IFF/AIST study, income protection (IP) insurance was
most neglected. Only 31% of super fund members were found to have
IP insurance while among members in families with dependent
children the proportion with IP insurance was only 26%.

Highlighting the seriousness of IP
underinsurance, the IFF/AIST study pointed to findings of the
University of Melbourne’s ongoing Household, Income and Labour
Dynamics survey. In the 2008 study, it was reported that 235,000
working age people, living as a member of a couple with dependent
children, had suffered a serious injury or illness in the previous
12 months.

This cause for concern was reinforced by a
study published by the IFSA in February 2010 which emphasised that
based on current average insurance levels, the typical Australian
family’s weekly income will be cut by half where a main breadwinner
becomes temporarily ill or injured and can’t work.

IFSA warned that, over the next 10 years, 1m
working-age parents with dependents (one in five) will be impacted
by death, serious accident or illness. IFSA estimates the cost of
underinsurance of parents with dependent children and a mortgage to
the Australian government will be $1.3bn in social security
payments over the next 10 years. 

Risk insurance premium income’s strong showing
in a depressed market in 2008 and 2009 suggests a growing awareness
of the need for increased life and income protection among
Australian consumers. Together with the savings shortfall, this
holds the potential of solid growth for insurers with appropriate
distribution and marketing strategies.

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