The life insurance industry is facing its worst conditions in decades, and bank shareholders may lose patience waiting for returns to improve, Ernst & Young (EY) has warned.
According to EY, the banks have become among the largest providers of wealth and life insurance solutions in Australia. But the research firm said its analysis of the 2013 full year results announcements from Australia’s major banks shows they face continued challenges in the wealth management sector.
…the banks’ patience in relation to wealth and insurance may well be tested over the next few years
“Financial returns to shareholders in the wealth and insurance sectors have been challenged in recent years,” said EY’s Oceania Banking and Capital Markets Leader, Paul Siviour.
“Wealth manager margins have been impacted by the cost of regulatory reforms, weaker economic conditions and increasing competition. At the same time, the life insurance industry is facing its worst conditions in decades – as a result of increasing claim volumes and high customer attrition rates – with shareholder returns falling significantly.
“Some commentators are beginning to question whether the banks can make returns in these sectors at the same levels as traditional banking, and indeed the banks’ patience in relation to wealth and insurance may well be tested over the next few years if ROE returns remain subdued,” Mr Siviour said.
ANZ, Westpac and NAB all presented updates to shareholders this week, highlighting the challenges posed by the insurance market…
ANZ
ANZ reported an increase in operating income for its Global Wealth business of 5%, which it said was driven by gains in the investment market, improved insurance related claims, stable lapse experience, higher in-force premiums and solid growth in volumes.
Retail life insurance in-force premiums grew by 10%, attributed to productivity improvements from ANZ Financial Planning (with in-force up 16% on 2012) and the aligned planner channels (up 7% year on year).
The bank also highlighted how its life insurance retention initiatives had led to a lapse rate lower than the industry average for retail insurance (13.7%, down slightly from 2012’s rate of 13.9%).
Despite the challenges, ANZ CEO, Mike Smith, said the bank would continue to invest in delivering wealth solutions to its customer base. “In Wealth we are providing more financial solutions to more ANZ customers while using innovation to create new growth opportunities,” Mr Smith said.
In 2013, the bank reported an 11% increase in wealth solutions products held by ANZ bank customers, and a 13% increase in direct insurance sales.
Westpac/BT
A good result across BT Financial Group’s life and general insurance businesses contributed to an increase in cash earnings of 13% year on year. Net earned premiums for life insurance grew by 21%, and revenue increased by $3 million.
BT said sales have been stronger following the expansion of distribution to the independent financial adviser and aligned financial planner networks, partially offset by margin compression, a modest deterioration in lapse rates and an increase in claims consistent with the larger portfolio.
Westpac said it had not experienced the same level of deterioration in insurance loss ratios and lapse rates as the rest of the industry over recent months. The bank said this was due to its decision not to write group insurance policies, and because policies are typically originated as part of a broader financial services relationship which means lapse rates have been lower than the industry average.
NAB
NAB Wealth cash earnings decreased by 5% to $493 million in 2013, which NAB said was due to the challenging conditions in the insurance industry.
According to NAB, its insurance business reported deteriorating claims experience during the year, leading to a change in actuarial assumptions which has affected the group’s result by $57 million (pre-tax). In-force premiums as at September 2013 grew by 5.8% over the year.
The Banks patience may well be tested? What on earth does that observation mean? The banks have bought up insurance companies in their race to offer a full suite of wealth management tools – the reason they had to buy OnePath, BT and MLC/Aviva was because banks had found risk a very difficult market to be taken seriously in, the products were generally poor and their distribution model struggled to gain traction with the public. Insurance businesses need to be run by insurance people who understand risk and distribution and can manage the books and the relationships in a compassionate understanding manner, this has always appeared difficult for banks to get their collective heads around. The banks have bought themselves into a position of trust and I’m sure they recognise their duty, It’s time for all participants in the risk insurance space to talk about sustainable solutions, confirm their commitments to the market and work towards positive outcomes for all parties.
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