The continuing consolidation of life companies, adverse claims experience, marginal efficiency gains and problems within the group risk sector are some of the areas highlighted by ASIC in its 2015 Annual Report.
Released at the beginning of November, the prudential regulator’s annual report considers the life insurance sector within a framework of the last ten years. During that time, the report documents a number of trends of interest:
A shrinking life insurance sector
APRA reports the life insurance industry currently comprises 27 authorised life insurers, representing a decline of ten insurers over the past ten years.
It says the consolidation of life insurance licences in the past decade has been a continuation of a steady trend that began around 1990, when the number of licences peaked at 61. ‘Since that time, mutually owned insurers – which were once the largest life insurers in the market – have largely disappeared, while the banking industry has developed a prominent role in the ownership of life insurance and wealth management businesses more generally,’ reports the Authority.
Without providing names, to each category, APRA documents the life insurance industry is now represented by:
- 8 large diversified insurers
- 4 insurance risk or annuity specialists
- 9 relatively small or niche market players
- 6 reinsurers
Volatility, Claims and Premiums
Although the average 15% return on equity over the past decade of the life insurance industry is not dissimilar from that of the general insurance sector, APRA notes there has been considerably more volatility in year-to-year results. Among other things, it says this volatility has been driven by the global financial crisis and, more recently, major problems in the management of risk insurance business.
The report states the decline in profitability during the global financial crisis was caused by significant falls in the value of superannuation assets under management, and the resulting declines in fee revenue and investment returns on net assets. It adds that after a couple of subsequent years of strong profitability, poor lump sum disablement claims experience for group risk insurance business generated substantial losses in 2013, with some reinsurers being particularly affected. Experience losses continued into 2014, reports APRA, although the source of the losses shifted somewhat from group to individual disability income business.
Life insurance risk business growth rates in the past were largely due to automatic contractual increases in premium rates rather than new business from new policyholders, says APRA. But it says recent premium revenue growth has been underpinned more by substantial premium rate increases, particularly in group insurance business, driven by the industry’s worsening claims experience in that sector.
Efficiency
APRA reports there has been little improvement in operating efficiency over the last decade, despite the industry’s increasing use of technology to administer, underwrite and distribute business (Figure 3e). It says this could be partially attributed to a need to maintain large books of legacy business, often on earlier generation systems, that can be expensive to administer and difficult to rationalise. The increase in the expense ratio also has reflected reduced margins caused by the poor claims experience in more recent years.
Overall, APRA concludes The industry continues to be well capitalised despite the impact of the recent increase in risk insurance claims on industry profits.
The Group Risk Market
The Authority reports there exists broad agreement among insurers and trustees as to the underlying reasons for these losses.
These include:
- Record amounts of default cover being made available without underwriting
- A weakening of underwriting controls for optional levels of cover, and automatic acceptance of incremental increases in cover without the need for medical tests
- The complexity of TPD benefit definitions, resulting in some types of claims being admitted that arguably may not have been intended to be covered by the policy wording
- Changing community attitudes to mental health, leading to a higher prevalence of claims for stress-related illness
- More claims now being subject to the involvement of lawyers on behalf of claimants
- Superannuation fund member awareness of life insurance cover available through superannuation, leading to a higher propensity to claim
- Failure to match the greater complexity of the claims environment with development of adequate pools of experienced claims staff
These increases… do not address the structural reasons that led to the underlying problems
APRA’s supervisory activities identified that life insurers have made considerable efforts to address many of these issues. For example, it notes a series of significant premium increases for many group risk schemes has had the intended effect of restoring short-term profitability. These increases, however, do not address the structural reasons that led to the underlying problems, and have produced an unexpected increase in the cost of insurance for superannuation fund members.
Other group insurance-related issues raised in the report include:
- Most insurers have undertaken claims improvement projects in order, for example, to ensure claims are paid in accordance with policy definitions; and also to speed up claims assessment (the latter in light of evidence that faster intervention in claims and a focus on a ‘return to work’ strategy leads to better outcomes for both insureds and insurers).
- More generally insurers and reinsurers have continued to review and seek to improve product design, pricing assumptions and claims management
…those insurers who comprehensively analysed and identified deteriorating market conditions earlier generally fared better than those who had been slow to act
APRA has also observed that benefit definitions remain complex in many policies. it says a number of insurers are working with trustees to review benefit definitions, but this may occur over a number of years. ‘APRA remains of the view that modernisation of benefit design and definitions is a critical aspect of developing sustainable group risk products, and great stability in pricing and should occur as soon as practicable.’
APRA notes it sought information in 2014 from life insurers and reinsurers describing how they had responded to deteriorating conditions in the group risk market over the past few years. In May 2015, the Authority provided the industry with its analysis of the information requested: ‘Unsurprisingly, the information provided indicated that those insurers who comprehensively analysed and identified deteriorating market conditions earlier generally fared better than those who had been slow to act.
Click here to access the complete 2015 APRA Annual Report.
