Richard Weatherhead says life insurance is currently front of mind for many stakeholders in the financial services industry.
Many traditional financial advisers have focused on superannuation and investment and have written relatively small amounts of risk insurance. However, since the GFC, many have now turned to this product line as a genuine source of revenue growth for their practices.
Many dealer groups and wealth managers are actively seeking to acquire practices with risk insurance specialists. Consequently, there is a takeover premium for such practices in contrast to the relatively depressed valuations for advisers with superannuation and investment practices.
The Government, Treasury and regulators have a focus on risk insurance as a result of:
• The Future of Financial Advice (FoFA) changes – in particular, whether these should apply to risk insurance;
• The Cooper Review – strengthening the position of default insurance within superannuation and recommending a ban on commissions; and
• Various ASIC reviews that have an impact on risk insurance, including consumer credit insurance.
Insurers and reinsurers are seeking new avenues for distribution of their products, with new distribution alliances being formed (for example, Tower and Virgin Money) and regular product launches being targeted at new market niches. For example, over the past year new direct life products have been launched at the rate of almost one per week.
The industry is getting across the message regarding underinsurance, with in-force premiums up 11 per cent over the 12 months to March this year (albeit less than the16 per cent increase achieved over the previous 12 months) and with increasing usage of insurance needs calculators provided by superannuation funds and wealth managers.
The success of campaigns such as the Financial Services Council’s (FSC’s) Lifewise campaign contribute to raising public awareness regarding the need for insurance, and this will drive further growth.
Despite the growing market, competition for a share of it continues to intensify.
The adviser market constituted 62 per cent of the market by premium income but only 42 per cent by amount of cover. This reflects the relatively higher premium rates for risk insurance in the adviser market (which has an older demographic and wealthier client base than superannuation funds).
The fastest growing segments are employer master trusts and industry funds, which we expect will capture an additional 10 per cent market share between them over the next 10 years. This reflects a number of factors acting in favour of these segments:
• An increased share of new employees entering the work force in combination with high levels of default cover;
• Price competitiveness, in part driven by the scale of many funds, giving them increased buying power; and
• A significant increase in the provision of intra-fund, single issue or modular advice to superannuation fund members, which we anticipate will increase five-fold over the next 10 years.
The direct life insurance market will maintain its market share but, in a growing market, this will constitute significant growth.
Two of the key factors that appear to be driving the growth of direct life insurance are:
• Technology; and
• Multi-touchpoint distribution strategies.
The Web is becoming a focus for many direct life insurance distribution strategies, not only for customers to research products and buy online but also as a starting point for customers who may ultimately request telephone-based advice (either general or personal) or as a destination for those responding to TV advertisements or due to promotion of the site in letters or branches.
The Web has become an essential tool for many prospective customers to carry out tasks such as a self-assessment of insurance needs and basic product research prior to obtaining cover either online, over the telephone, in a branch outlet, or even through an adviser.
Multi-touchpoint distribution strategies are becoming more important for access to potential clients in different demographic groups. For example, Gen Ys (and the emerging Gen Zs) may have a greater preference for self-directed research online, but with the back-up of telephone advice if they need it. Older people may be more comfortable discussing insurance needs either face to face, in a branch or over the phone initially but still carry out personal research and even apply online.
Having said this, stereotypes are dangerous and multi-touchpoint distribution strategies have the benefit of providing all the access options clients may wish to choose.
PRICE COMPETITION
Perhaps the most intense price competition recently has been in the group insurance market with many major funds having reviewed their insurance arrangements over the past 12 months (including AustralianSuper, Statewide Super, First State Super and Health Super).
Price has remained a key selection criterion for superannuation fund trustees, despite the significant focus on both accessibility (for example, online application and automated underwriting) and service standards.
Premium reductions of anywhere from 5 per cent to 40 per cent have been achieved during insurance reviews with insurers’ profit margins being squeezed as a result. Margins have become increasingly vulnerable to increased claim rates in the future. Indeed, some funds have experienced deterioration in claims rates, particularly for income protection cover, and have been challenged in maintaining cover levels and prices going forward.
Price changes in the adviser market have been less pronounced and competition continues to focus on enhanced features and insurance processes rather then prices.
Income protection prices continue to edge upwards, particularly for agreed value (as opposed to indemnity) cover. Some insurers have expressed concerns regarding pricing in areas such as partial trauma benefits for early stage cancer and the impact of increasing mental disorder claims. However, there has been no direct pricing action in response to these trends to date.
Price competition has been almost absent from the direct life insurance market to date. Allianz is the only major direct life insurance writer that promotes cost as a differentiator for its products in the market. However, we expect price competition to be an increasing factor in the direct life insurance market in the future.
High distribution costs mean that direct life insurance products are amongst the most expensive in the market. Ultimately, consumers will compare prices and make purchasing decisions accordingly. So price competition will drive down prices, even though this has not happened to date.
The risk insurance aggregator market is not expected to develop in Australia to the same extent that it has, for example, in the UK. However, consumers will increasingly carry out their own price comparisons before purchasing, which means that comparison sites will be more heavily used.
The Graph 1 shows, across the age spectrum, the annual premium payable by a female non-smoker for $600,000 of death and total and permanent disability cover. The premiums quoted are the median prices for products in key market segments:
• The adviser market;
• The direct life products market; and
• Industry superannuation funds (voluntary cover).
The graph shows separate results for those in white collar and light manual occupations.
The graph demonstrates the significant buying power of superannuation funds and their low distribution costs, given the high proportion of cover provided on a default basis and the fact that many superannuation fund costs are funded from administration fees rather then risk insurance premiums.
On the other hand, direct life product prices include significant distribution costs associated with that channel, including advertising, web development and marketing.
Graph 2 shows a similar comparison for income protection cover of $5000 per month with a two-year benefit period on an indemnity basis.
WHAT WILL BE A TREND IN FUTURE RISK INSURANCE PRICES?
Many insurers will face upward pressure on capital requirements following implementation of APRA’s review of capital standards.
The claims experience improvements of recent years will clearly not continue indefinitely, which suggests price stabilisation, particularly in the group insurance market.
Increased competition in the advice market will put downward pressure on adviser-sold risk insurance prices and those of direct life insurance writers.
Overall, insurers will need to grapple with increased capital expenditure to drive technology and process improvements at the same time as they absorb these pricing pressures. Competition in the advice market may also lead to a disaggregation of the cost of advice from premium rates, irrespective of the outcome of Treasury’s review under the Future of Financial Advice (FoFA) reforms. After all, separating the advice element from current prices would reduce them by around 25 per cent, making a significant difference to price comparisons such as those in the graphs above.
All of this is great news for consumers who will enjoy better products at lower prices with improved, streamlined insurance processes.
