Life insurance market stabilises despite Covid: KPMG annual sector review

KPMG

Australia’s life insurance sector stabilised in the 12 months to 30 June 2021, with overall premium income rising by 2.4 percent to $17.7bn, KPMG’s annual market survey reveals.

Industry profits totalled $1bn in 2021. Of this, $0.6bn was generated by underlying insurance products, a significant improvement on the $1.4bn losses for these products in the prior year.

The improved figures were underpinned by increased profitability across risk and non-risk products. Notably, the losses recorded on Individual Disability Income business fell sharply from $1.3bn in 2020 to $0.3bn. There were also relatively stable claims levels, with Gross Claims as a Proportion of Gross Premiums falling by 1.7 percent for Risk Products.

The impact of COVID-19 was fairly muted. The feared rise in death claims in the initial stages of the pandemic did not happen, with lump sum claims relatively stable in 2020 compared to 2019. Steady premium income at an industry level reflected price increases amongst remaining policies.

David Kells, KPMG Insurance Sector Lead, said: “The 2020/21 year was the first full year of the pandemic for the life sector, and while the long-term impacts are still uncertain, the immediate results were not as bad as some had feared. The overall number of policyholders declined, as we would have expected given financially hard-pressed consumers looking to tighten their belts, but much of this can be attributed to the Protecting Your Super (PYS) and Putting Members Interests’ First (PMIF) regulations.

“There was an expectation that death claims would initially increase and then begin to fall as the pandemic extended and restrictions continued, due to reduced levels of accidents and respiratory related deaths. However lump sum claims experience appears to have been relatively stable in 2020 compared to 2019.

“The same can be said for Disability Income and Group Salary Continuance (GSC) claims, with no indication of a sharp increase in claim costs. The unprecedented actions by government to maintain jobs and support companies potentially mitigated the cost to the insurance industry.”

The resilience of the sector was demonstrated, as it was able to make up previous shortfalls by increasing prices. Some of this was age-related and some was in response to rising claims costs and losses over recent years. But KPMG believes there is still a degree of uncertainty facing the industry.

Briallen Cummings, KPMG Actuarial Partner, said: “While the results were reasonably encouraging for the industry, we should be careful of being too definitive. The long-term impact of COVID-19 on Individual Disability Income Insurance (IDII), and Total & Permanent Disability (TPD) claims experience is still highly uncertain both for retail and group insurance. Historically impacts on employment can take up to 18 months to translate into increased claims. The impact on mental health in the community also continues to be high.”

The KPMG study points out that improved financial performance of the market has been achieved while managing large programs dealing with a range of upcoming regulatory changes, including: Design and Distribution Obligations (DDO), claims as a financial service, breach reporting and complaints as well as changes to accounting standards.

At the same time, a large part of the industry has continued to work through the transition arrangements arising from the recent wave of M&A activity and an industry re-design of the IDII product.

David Kells added: “While the Hayne Commission may seem a long time ago, regulation, prudential oversight, enforcement action and voluntary industry codes have been steadily building since the Commission, and some of the requirements kicked in at the start of this month. These all have a significant impact across the front, middle and back offices and increase further the risks and costs of non-compliance and reputational damage.”

Full results from KPMG survey

Profits:

  • $1bn profit across the Life Insurance industry in the 12 months to June 2021. Of this $0.6bn was generated in the Statutory Funds, compared to the reported losses of $1.4bn in the prior year.
  • $1.4bn decline in losses on Risk Products from the prior year. Losses totalled $20m as at 30 June 2021.
  • $0.6bn increase in profit on Non-Risk Product profits from 2020. Profit was $0.6bn at 30 June 2021.
  • $0.3bn Losses on Retail Disability Income as at 30 June 2021. The losses totalled $1.3bn in the prior year.

Capital position:

  • The statistics show an increase in the capital strength of the insurance industry with a Prescribed Capital Amount (PCA) ratio of 1.94. However, this likely overstates the capital strength of the industry as many insurers will be subject to Supervisory Adjustments as part of APRA’s IDII sustainability measures and these are not included in the official statistics.

KPMG Observations:

  • In March/April 2020, actuaries across the life sector began predicting the impact that COVID-19 would have on the life insurance industry and whilst the long-term impacts are still uncertain, the short-term impacts were not as expected.
  • The most significant impact was a sharp decline in retail lapses, with lapses falling by 3.0 per cent for lump sum benefits and 1.6 per cent for IDII benefits.
  • The financial results for Group Insurance during the first half of 2021 generated a more positive outlook for the coming year, with losses reducing from the prior year. This reflects repricing activities across the market as well as the step change in claims costs that occurred in 2020 resulting from PYS and PMIF regulatory changes.
  • Increased regulatory focus on cyber risks, will continue to drive increased risk management activities for insurers in this space.
  • IFRS 17: With the new accounting standard becoming effective in January 2023 we expect insurers to spend the next 12 months working through the practical and financial implications of transitioning to IFRS 17 reporting. The standard will highlight pockets of portfolios which are unprofitable; this may result in repricing activity over the next 2 years.

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