The Australian life market has been undergoing a period of profound structural change within the past five years driven by regulatory reform, competitive pressure, historically low interest rates and a changing consumer.
These circumstances have combined to depress new business, increase costs and cut profitability, with the industry reporting an aggregate loss in 2019. Life insurance premium has contracted year on year for five years with policy revenue more than halving to AUD 30.24bn (USD 20.35bn) in 2019 from its 2014 peak.
The COVID-19 pandemic has added to the market's challenges and is likely to define performance in 2020 with the economic dislocation and financial market volatility it precipitated further suppressing new business activity, increasing policy lapses, stoking death and disability claims and triggering investment losses. The abrupt reminder of human mortality, however, has boosted interest with MetLife research reporting increased activity on life and disability covers.
Substantial segment losses have been reported in recent years, mostly in disability income product lines, with the individual segment reporting a further AUD 1.47bn (USD 989.37mn) loss in 2019, bringing total losses to over AUD 3bn (USD 2.02bn) in the past five years. The progressive deterioration in the scale of results from this class prompted the Australian Prudential Regulation Authority (APRA) to intervene in the market, with insurers informed in December 2019 of the introduction of immediate measures to stabilise the market. These included the implementation of a specific capital charge linked to a life insurer's exposure to the individual DI market.
Highly publicised revelations of malpractice unveiled by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry further eroded public trust in its financial institutions, principally its leading banks, life insurance companies and financial advisers. The government is seeking to address it with a commitment to implement all the report's 76 recommendations mostly through amending legislation. Australia's dual regulators, prudential supervisor APRA and market conduct regulator ASIC have also seen revisions to the roles and organisation and have secured increased funding to support more assertive enforcement.
On the demand side, the consumer has been under increasing pressure as Australia's long economic expansion faltered from 2017 with falling house prices exposing record-high household debt levels. This strain is expected to increase in 2020 as the COVID-19 pandemic induces Australia's first recession since 1991. Generally included within life and disability cover terms, an increase in disability income claims is anticipated following a sharp rise in unemployment and heightened work stress. The Reserve Bank of Australia has responded to support the economy with further monetary easing from May 2019, taking the bank rate (Official Cash Rate) down to 0.25% from March 2020 from 1.5%.
With regard to life insurance supply, the former bank-led financial services group cross-selling model is now dead. Since 2015 all but one of the leading banks have divested their life insurance subsidiaries mostly to specialist foreign multinational insurance groups, with the last, Westpac, placing its life insurance unit under strategic review in May 2020; AIG has been reported as a possible buyer. A more concentrated supply base is emerging, which is now majority foreign-owned. Life insurers are increasingly specialist in certain market segments plus newer disrupters such as NobleOak and Integrity Life are gaining traction with more customer-centric business models.
Life insurers have also faced upheaval in distribution. Higher professional standards, including a minimum degree standard education, were introduced for intermediaries from January 2019, overseen by the Financial Adviser Standards and Ethics Authority (FASEA) as industry training body. Adviser remuneration has also changed with commission bans on some investment-linked products and progressive reductions in indemnity commission on individual protection sales, down from 80% in 2018 to 60% from January 2020. Furthermore, ASIC banned telesales activity for life insurance and consumer credit insurance products from 13 January 2020 leading to the winding up of the publicly quoted direct distribution specialist, Freedom Insurance Group Ltd in January 2020.
A significant feature of the Australian life market is the predominance of yearly renewable term (YRT) contracts, estimated to account for around 80% of in-force life insurance policies. Such "stepped premiums" provide the cheapest possible cover at inception and so are easier to sell in intermediary dominated distribution. They become increasingly expensive over time, however, as premiums increase at renewal to reflect revised age and benefit indexation, and so regularly test buyer commitment. It is suggested such policies can detract from provider pricing discipline at inception, as underwriters know a YRT contract permits annual pricing adjustment to reflect experience.
Such YRT contracts mitigate against very long-term ownership of life insurance with policyholder lapse rates observed to start rising from around age 43 according to one insurer. In force business, however, naturally increases year-on-year, so blurring the distinction between new business and increments to existing policies.
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