Feature: Challenges ahead for insurance sector

20-Jan-2014

By Zoe Fielding

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For many in the life insurance sector, 2013 was a year to forget. Large numbers of customers allowed their policies to lapse and claim rates jumped, hitting life companies’ financial results.

Now, at the start of a new year, the sector is hopeful the worst has passed, but it is realistic about the challenges ahead.

The “glass half full story”, MLC general manager of product and underwriting for retail insurance Sean McCormack says, is that few Australians have sufficient life cover, which presents opportunities for the sector.

“We’ve still got a massive underinsurance issue, [but with] new distribution networks through advisers, banks, group and direct insurance, we’ve got new channels opening and the ability to address underinsurance,” McCormack says.

Industry research conducted in 2008 and collated by the Financial Services Council’s Lifewise campaign found low levels of awareness and a lack of understanding about life insurance were key barriers to consumers taking out policies. Many thought life cover was too complicated and didn’t know where to start in selecting a product.

More than 80 per cent of people thought insurance cost too much (although 61 per cent overestimated the cost), and more than two-thirds of industry super fund members gave life insurance a low priority in their lives.

Since then, the industry has taken steps to raise awareness and dispel myths about insurance.

The campaigns have been successful, according to TAL managing director Jim Minto.

“Consumer awareness of life insurance is getting stronger all the time. People who say insurance is sold not bought are so wrong, particularly for younger people ... people are getting it: that they need cover,” Minto says.

TAL’s research shows consumers are doing more to investigate insurance policies and are happy to switch providers for a better deal. They’re also prepared to move between adviser-recommended policies, direct insurance and policies held through superannuation.

“They will move wherever they think it will be the right place to move. That will create more activity and headline lapse rates,” Minto says.

The costs for insurance companies of acquiring new business are high compared with servicing existing policies, so high lapse rates are a problem for the sector.

Suncorp Group’s life insurance business – which includes Asteron Life, Suncorp Life & Superannuation, and Suncorp Group Services NZ – reported a $26 million drop in underlying profit after tax compared with the year before due to higher than expected lapse rates and reduced superannuation profit.

AMP reported operating earnings in its insurance business fell 52 per cent in the six months to June 2013 to $64 million from $134 million in the prior corresponding period. It issued a statement in October saying it expected further increases in lapse rates in the fourth quarter of 2013.

Insurers have been studying the reasons why customers have been allowing their policies to lapse. McCormack says MLC has found there’s no “one-size-fits-all reason”.

“Some segments of the economy are doing it tough and when the choice comes between putting food on the table and getting insurance, people will cancel their insurance. Some categories of customers have had insurance in place for a while and have forgotten about the value,” he says.

To arrest increasing lapse rates, MLC trebled the number of people working on policy retention over the past 12 months and those staffing levels will continue through 2014.

McCormack says insurers can improve customer retention by working with advisers to identify clients who are at risk of letting their policies lapse.

“Some advisers are not aware that there’s a lapse issue in their business. Arming our business development managers with really good information helps inform an adviser ... that’s where we can step in with strategies to help the adviser arrest lapse rates,” he says.

“Some practices have grown at such a rate that they can’t keep on top of their clients. We provide support services where we will take on some of the responsibilities of servicing the clients on behalf of the adviser.”

Rather than focusing on clawing back customers who have already moved on, AMP insurance and superannuation group executive Pauline Blight-Johnston says the industry should work to meet the changing needs of existing customers.

“Many lapsed clients either put in place alternative insurance arrangements, often via another company or distribution channel, or made the decision to cease their insurance cover because it was no longer something they required. In these cases it is not appropriate or realistic to assume we could coax those clients back,” Blight-Johnston says.

Designing products that suit customers across various stages of their lives could prevent them from shifting elsewhere. “For example, we should design products that expect customers to begin reducing their insurance cover during their 50s and are financially viable under that assumption,” Blight-Johnston says.

Distribution costs must be managed, and the costs of back-end operations and claims management should be minimised, she says, adding that investment in these areas is likely to pay off for insurers.

One area of cost that is harder for insurers to control is claims.

The number and value of claims across the industry have been high for the past few years, particularly on income protection and trauma insurance policies. Insurers attribute this to a slowdown in the broader economy, which creates stress and makes people more likely to consider calling on their policies.

Higher claims, like higher lapse rates, are hitting insurers’ finances.

National Australia Bank’s net life insurance income for 2013 fell by $180 million or 24.3 per cent compared with 2012, due to higher claims, changes to its assumptions and holding higher insurance reserves.

Higher claims cut underlying profit in TAL’s Australian operation to $46 million for the six months ended September 2013, from $70 million in the previous corresponding period, its Japanese parent, Dia-ichi Life Insurance Company, reported.

Minto expects claim rates to remain high in 2014, which will put upward pressure on premiums. He predicts some insurers will lift prices more than once this year.

Blight-Johnston also expects premiums to rise. “But it’s difficult to predict by how much and the time period over which these increases will emerge,” she adds.

“The reinsurance market has hardened over recent months and this may be expected to flow through into rates charged to customers. It is important to recognise, however, that not all segments of the industry warrant rate increases, nor would I expect the increases required in the various segments to be uniform.”

McCormack says setting premiums is a delicate job. “You need to balance the needs of claims, the shareholders, advisers and retentions. To say that all premium rates are going to rise is simplistic ... we operate in a competitive market and we know as insurers that if you push too hard there are other options for advisers reviewing their clients.”

Group insurance policies sold through superannuation are most likely to see price rises as the terms on these products have expanded quickly without accompanying increases in premiums, he says.

The retail insurance market is more competitive, but premiums on these policies are still likely to increase moderately over the next 12 months.

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