Life insurance sector growth and profits were badly hit by disruption to distribution channels in 2018, and this decline continued through the first half of 2019, KPMG’s Life Insurance Insights – an analysis of financial results over the 18 month period to 30 June 2019 – finds.
The industry has also continued to experience declining profitability, with the life risk insurance sector now loss-making in aggregate. In the first half of 2019 the industry made a loss of $86 million from risk products, worsening from the essentially breakeven position in 2018, when the industry generated a total profit of just $33 million. These results compare to an aggregate industry profit of approximately $1.5 billion in 2017.
Ordinary risk products continued to be loss making, with the product line reporting a loss of $130m across the industry during the first half of 2019, following a loss of $341 million in 2018. In the first half of 2019 losses in ordinary retail disability income (-$499 million) more than offset profits in ordinary retail lump sum ($399 million).
Superannuation risk products reported a significant decline in profits, with the product line reporting just $44 million across the industry during the first half of 2019 compared to $372 million profits in 2018. A number of life insurers have also observed a deterioration in their mortality experience.
Pauline Blight-Johnston, KPMG Partner and Head of Life Insurance, said: “The last 2 years have been a period of considerable challenge for the Australian life insurance industry. Customers and the public are increasingly asking questions about the value the industry provides. At the same time, the profitability challenges driven by higher than expected claims payments across the industry are perhaps the greatest we have seen in a generation. There is clearly a large disconnect between the perceived and actual value being delivered by these products”.
“Unsurprisingly, the disruption to life insurance distribution models has noticeably affected revenue growth across the industry. Subdued growth rates reflect the impact of lower initial commissions due to the Life Insurance Framework that came into full effect in 2018, as well as a retreat from direct distribution models following the exposure of problems with these models during the Banking Royal Commission.”
“A well-functioning, sustainable, accessible and trusted life insurance industry is important for all Australians, particularly for the more vulnerable members of our society. Leaders in this industry must continue their efforts to reshape its customer proposition to simultaneously rebuild public trust and put the industry on a more sustainable financial footing.”
Retail disability income continues to be the main contributor to poor performance ($568 million losses in the first half of 2019) and is impacted by a range of challenges, including increasing mental health claims, longer claim durations and the impacts of the Banking Royal Commission and changing community expectations.
- Retail lump sum continues to be profitable, with $532 million profits in the first half of 2019.
- Group business reported a small loss of $50 million in the first half of 2019.
- Consistent with the declining profitability, benefit payments to policyholders continue to increase both in amount and as a percentage of premium. In the 2018 calendar year benefit payments (gross policy expenses) increased by $1.2 billion to $13.8 billion or from 57.1 percent to 59.3 percent of premium (gross policy revenue). This trend has continued in 2019, with 62.9 percent of premiums paid as benefits in the first half of the 2019 calendar year.
- Life insurance companies remain well capitalised as a whole. For the financial years ended in the 12 months to December 2018, the capital coverage ratio for the industry decreased slightly from 2.1 to 1.8, but is still well above regulatory minimums. We note the emerging headwinds for capital in 2019 due to declining profitability and falling yields.
The analysis does not yet reflect the impact of the Protecting Your Super changes in group insurance which is expected to put further downward pressure on sales over the coming financial years.
David Kells, KPMG Partner and Head of Insurance added: “Life insurers are operating in a difficult environment. There is no simple solution to the very poor experience of income protection business. The extensive regulatory changes for life companies are impacting the expense line and investment budgets and, understandably, require a lot of management and board focus. The macro overlay of an uncertain economic environment – with implications on both sides of the balance sheet – adds to the difficulties.”
“The key really is about prioritising and managing these complex challenges – insurers need to ensure a tactical response to regulation does not result in more remediation issues. But we must not forget that the underlying premise of life insurance still very much alive and well, and the product definitely has value to customers – Australia still has a significant under-insurance issue. There are significant opportunities for life insurers who can leverage new technology and ways of working to provide a better experience and simpler products to their customers.”
KPMG’s analysis also flags two specific challenges for the life insurance industry.
First, the upcoming extension of Unfair Contracts legislation to insurers. These laws were designed to protect consumers and small businesses from unfairly one-sided standard-form contracts. Until now they have not applied to the insurance industry. Life insurance companies will need to review their contracts in light of this legislation and determine if any terms may be deemed to be unfair in certain circumstances or at some time in the future – a difficult judgement to make, given that fairness is a relative concept and perceptions can change over time. More significantly, insurers may not be able to rely on terms, definitions and conditions in existing insurance policies which they are unable to change and upon which they have relied in determining product prices.
Second, the increasing prevalence of mental health issues in our community. $750 million of all claims paid in the 2018 calendar year relate to mental health. It was the number one cause for TPD claims, and it was the number two cause for disability income. The report, The impact of psychosocial factors on mental health and their implications for Life insurance, recently published by KPMG and the Financial Services Council explores the issue of mental health in the community and in insurance. The report notes an increasing potential for a range of social factors and individual psychological stresses to be diagnosed and treated as mental illness – often with detrimental impacts to recovery and a return to optimal wellbeing. The insurance industry and health practitioners need to coordinate mental health care for an individual that tailors recovery plans, empowers people to recognise coping skills for positive mental health and improves their chance of returning to full health and a fulfilling life.