creation Australians have made impressive strides thanks to the
success of superannuation funds. The same cannot be said for using
life insurance to protect their wealth, a shortcoming that presents
life insurers with a significant opportunity to expand their
reach.
Introduced in 1992 as the key element of a sweeping reform of
Australia’s retirement system, superannuation (super) funds have
become the dominant feature of the country’s savings market.
Spurred on by compulsory contributions by employers – which have
risen from 3 percent of employees’ income in 1992 to 9 percent
since 2002 – and tax incentives to encourage voluntary
contributions by employees, assets in super funds soared from A$321
billion ($308 billion) in June1997 to A$1.177 trillion at the end
of 2007.
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For Australia’s life insurers supers are big business, and
in 2007 new premium income from this source totalled A$43.44
billion, according to the Australian Prudential Regulation
Authority (APRA). This represented 95.8 percent of life insurers’
total new business of A$45.35 billion.
Assets of super funds have also grown to dominate insurers balance
sheets. As at 31 December 2007 statutory life office assets backing
supers stood at A$225.5 billion, 90.2 percent of total statutory
assets.
Of concern is that life insurers’ share of new super business is
declining steadily. From a peak of 44.3 percent in 1992, insurers’
market share has fallen in every subsequent year to a low of 19.2
percent in the fourth quarter of 2007.
Growth of super assets also disguises a decline in non-super assets
in both percentage and absolute size. For example, data from APRA
reveals that at the end of 2007 statutory life office
non-superannuation assets were A$24.5 billion compared with A$27
billion in 2004 and A$35 billion a decade earlier. Notably, on
non-super business the life insurance industry paid more in claims
than it received in premiums in four out of the seven years between
2001 and 2007.
Quite simply, Australians are doing extremely well at accumulating
retirement assets but are neglecting the protection provided by
life insurance. It is a situation of which the life insurance
industry is acutely aware.
“Protecting wealth is as important as building wealth and we’re
pointing the finger at ourselves first as an industry for not
consistently communicating this message effectively enough, said
Richard Gilbert, CEO of industry body the Investment and Financial
Services Association (IFSA).
Gilbert was unveiling the IFSA’s “Securing Australians’ Financial
Wellbeing”, a policy review of the life insurance industry that
will take until 2009 or 2010 to complete. Among objectives of the
review is to examine new ways of encouraging demand for life
insurance and income protection products and to reduce impediments
to take-up.
Stressing the importance of the review, Gilbert said: “The main
game for the past few years has been superannuation and the bedding
down of financial services reform, but consumer awareness and
education as to the benefits and affordability of life insurance
products will now be elevated as an industry priority.”
Gilbert continued that the role life insurance plays is not well
recognised by most Australians, many of whom are confused, wary,
unaware or complacent about protecting their greatest asset – their
ability to earn income. The industry has also suffered from a
tarnished public reputation, based on some common
misconceptions.
“While much reform has taken place over the past decade, the life
insurance industry has not done enough to overcome various
perceptions about its products and services,” said Gilbert.
His observations were based on four studies undertaken for the IFSA
between 2005 and 2007 by research firm TNS Australia. TNS found
that while most Australians have a basic understanding of life
insurance, there is significant confusion and lack of awareness
about the role the life insurance industry serves in protecting the
livelihoods of Australia’s families.
Indeed Australians are more likely to have vehicle insurance than
life insurance. According to the IFSA 84 percent of Australian’s
have vehicle insurance while only 55 percent have life insurance.
In addition, only between a quarter and a third of Australian’s
have cover such as mortgage or permanent disability insurance that
would protect them against income loss.
Not surprisingly most Australians face a huge protection
shortfall. This was highlighted by the first ever protection gap
study commissioned by the IFSA in August 2005.
Among the study’s findings was that Australian parents with
dependant children were underinsured by $1,370 billion in life
cover and that 2.47 million families were open to the risk of
financial hardship if either parent died. Further research
conducted in August 2006 revealed that nearly 70 percent of small
business owners had no insurance against loss of income.
Underinsurance comes at a time when Australian household debt is
setting new records, having increased from 65 percent of disposable
income in 1997 to 158 percent in March 2007, according to the
Reserve Bank of Australia (RBA).
This places Australians amongst the most highly indebted in the
world – ranking fourth behind Denmark, the Netherlands and New
Zealand according to international body the Organisation for
Economic Co-operation and Development.
According to the IFSA the average Australian family borrows
A$235,000 for a new mortgage which requires 35 percent of income to
meet the repayments. In addition, a report published by the RBA in
August 2006 revealed that the average Australian family has
A$16,000 in personal loans and A$4,600 in credit card debt. The RBA
noted that many families rely on two incomes to service this
debt.
Many working Australians are provided with death insurance via
super funds. However, cover is limited. Actuarial consulting firm
RiceWalker estimated in a study published in 2006 that the average
level of cover provided via super funds – A$70,000 – represents
only 20 percent of the needs of the average Australian.
The IFSA’s strategy to improve interest in life insurance and
income protection products is based on three principles: awareness,
support and simplicity.
Awareness revolves around a focused communications campaign aimed
at educating people on the need for insurance, particularly against
the background of high debt levels. The awareness aspect of the
initiative will also aim to dispel misconceptions about the
industry that TNS Australia revealed, and example of which includes
that life insurance is expensive and only for the well off.
In terms of support the IFSA’s initiative revolves around the role
of life insurance in decreasing Australians dependency on
government social welfare as is the case with super funds and
private health insurance. The IFSA believes increased incentives
will be required to achieve this, an approach that has worked
admirably in the super and private health sectors.
Simplification revolves around two aspects: simplifying language
used to enhance awareness and understanding of life insurance
products and working with government and regulators to simplify the
regulatory regime by reducing unnecessary regulation and
harmonising regulation.
The IFSA’s initiative already appears to be reaping results in the
form of product innovation by life insurers. Among the first to
respond was European insurer Allianz’s Australian unit which in
late-2007 set about what it termed “shaking up the Australian life
insurance market’s status quo.” Spearheading the initiative is
Allianz Life Plan, a product that can be bought via the internet or
a call centre.
Allianz Australia’s CEO Jonathan Poole explained that the product
would enable people to obtain life cover at a cost of between 20
percent and 30 percent less than similar products available.
He added that it takes 12 minutes to buy the product online or over
the phone compared to a typical purchase through an insurance
adviser which takes up to eight weeks, while policy documents are
seven pages long compared with an industry average of 80
pages.
Another indication that insurers are responding to the IFSA’s
initiative came in June this year when MLC, a unit of National
Australia Bank and Australia’s second largest life insurer,
announced significant premium reductions on certain products. This
includes level life cover products where premiums have been reduced
by up to 14 percent for clients up to age 55 and decreases in total
and permanent disability level premium products of up to 10 percent
for clients across all ages. All new and existing clients
automatically receive the rate reductions. MLC has also improved
discounts provided for critical illness policies by up to 10
percent for sums insured greater than A$500,000 and by up to 15
percent for sums insured greater than A$1 million.
A particularly optimistic forecast of prospects for the life
insurance industry came recently from Tower Life, Australia’s
fourth largest life insurer based on non-super business only.
According to Tower Life, the life insurance industry’s premium
income has the potential to treble by 2017. Tower’s MD, Jim Minto,
believes the primary drivers of growth will be illness-related
insurance and an increased realisation by Australians that they are
significantly under-insured.
In the six months to 31 March 2008 Tower reported retail life
insurance in force to A$434.4 million up 13.7 percent compared with
the first half of 2008. Group life in force increased 8.2 percent
to A$259.4 million. “The overall life market environment remains
positive,” commented Minto.
