Richard Weatherhead assesses the outlook for Australia’s risk insurance market.
The global financial crisis has focused the public attention on financial security with many retirement plans being thrown into chaos, or at least put on hold, as retirement savings have seemingly evaporated over the past year. In economic downturns, people turn their attention to the need for risk insurance cover – life, disability and trauma benefits. For many financial advisers, with clients unwilling to commit substantial additional funds to superannuation, risk insurance has been a key focus for maintaining and developing client relationships. Insurance needs often increase as overall wealth reduces.
SIZE OF MARKET
The chart below compares the annual premium income in the risk insurance market in 1993 and 2008. All the figures are expressed in 2008 dollars to remove the impact of inflation. The overall risk insurance market in Australia has grown by 9.6 per cent per annum in real terms over the past 15 years and is expected to grow by 6.2 per cent per annum in real terms, or 9.4 per cent per annum in nominal terms over the next 15 years. The chart below shows the breakdown of the current market by segment.
Wholesale business – which includes risk insurance sold within industry funds, employer master trusts, stand-alone corporate superannuation funds and public sector superannuation funds – has grown dramatically, in line with the growth of superannuation itself. The introduction of default insurance and its gradual increase over the years has extended cover to virtually all members of superannuation funds, at least while they are actively making contributions.
Conversely, trauma cover is not available within superannuation and only a few funds have default income protection (or salary continuance) cover. Growth in the retail sector has also been driven by the growth of superannuation, particularly for the self-employed and those working for small businesses. However, it has also been driven by the shift from packaged investment and risk products, common in the 1970s and 1980s, to unbundled products – with risk sold in its own right, supported by comprehensive financial needs analysis by advisers and product designs that have the flexibility to be tailored to meet specific client needs.
In the past few years, we have seen a growth in direct sales using a variety of media including print, web and call centres. These sales are usually generated from existing customers and are often linked to other products. For example, selling life insurance together with home mortgages.
There is now a wide range of different definitions of total and permanent disablement; guaranteed insurability for future increases on cover; automatic indexation of cover; and cover for an ever-increasing range of trauma events, with a trend towards severity-based cover levels. Continuation options – enabling clients to maintain cover as they move from one provider to another or one superannuation fund to another – are now almost universal in the retail sector and are becoming more common in industry superannuation funds.
In the income protection market, although overall growth has been lower than for other products, some growth has also resulted from price increases, reflecting under-pricing of risk in the late 1980s and early 1990s and subsequent price corrections. Competition has intensified significantly over the years, particularly in the wholesale market where the buying power of the large superannuation funds has enabled them to secure significant price reductions combined with benefit improvements.
The benefits of risk pooling within superannuation funds that have large numbers of members have enabled significant levels of cover to be provided without underwriting. In the retail sector, competition has driven price reductions for death and total and permanent disability business. However, even allowing for improvements in benefits and features, the cost of trauma cover has increased, primarily as a result of higher claim costs.
Insurers have invested heavily in streamlining the underwriting process, and innovations such as initial periods of accident-only cover and pre-existing conditions exclusions have been used to enable products to be offered without any underwriting. These products have often been designed for direct distribution but have also become common, either with or without advice, in the mortgage and loan markets where risk insurance is sold to pay off the loan if the borrower dies.
The management of risk insurance business within adviser practices has been transformed over recent years. The FSR requirement for formal financial needs analysis and a Statement of Advice have added great complexity, even when the need is relatively simple to establish. However, back office processes have been streamlined significantly through the introduction of electronic quotation systems, product comparators such as ProPlanner and COIN, electronic application forms and, more recently, automatic underwriting, with clients in full health being accepted on the spot.
Client relationship management has become more efficient with the widespread use of customer relationship management (CRM) tools, both in- house and via on-line access to insurer records and CRM systems. Advisers have been able to reduce their paperwork significantly with many transactions becoming virtually paperless.
The drive towards automation will continue and intense price competition will continue. How- ever, the key points of differentiation are likely to be in distribution and service. Advisers will increasingly develop tiered services for their clients, including limited advice to those with relatively simple and homogeneous needs, supported by simple, relatively low-featured products. For the more complex circumstances, tailoring of products to individual needs will increasingly become a value adding service provided by advisers and a point of differentiation between insurers.