Advice / APAC / Insights

Why the life industry is ripe for disruption

Image: Shutterstock, via: Denphumi
Image: Shutterstock, via: Denphumi

The life insurance sector continues to be plagued by substantial losses on individual disability income insurance (DII), with APRA warning the scale of losses could increase further given the vulnerability of the product to the ongoing impact of COVID-19.

The Australian Prudential Regulation Authority (APRA) published its 2020 Year in Review last week, and it’s sombre reading for life insurance companies. While the industry boasts a long-term average net profit margin of 3 per cent, this fell to -10 per cent in 2019/20 largely due to continued losses in DII and further declines in both individual lump sum and group business. 

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The decline in profitability comes despite premium rate hikes in DII in recent years, due to a combination of adverse claims experience and the need to strengthen reserves.

In most industries in Australia, over a 10 year period you’d expect to see a raft of start-ups hit the scene and make a splash – or even cause a tsunami.

We’ve seen it in banking, with the rise of the neo banks, many of which have now been snapped up by the Big Four as they seek to protect their patch and leverage the digital capabilities and agility these new players boast.

Yet according to APRA, there have been just three new entrants in the last decade, and a number of exits. As of June 2020, there were 28 APRA-authorised life insurers (St George had its licence revoked in September 2019).

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Granted, the barriers to entry are high. Capital requirements are substantial and key players dominate (the top five life insurers account for 62 per cent of total industry assets), but similar barriers exist in banking.

A look at the broader fundamentals goes some way to explaining why we aren’t seeing the same level of disruption in the life insurance sector.

According to APRA, return on net assets began to decline in 2016, fell off a cliff in 2018 and has continued a downwards trend through to 2020. The return on net assets fell to -6 per cent in the 12 months to June 2020, from 3.5 per cent the previous year and compared to a 10-year average of 11 per cent.

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“The main driver of this accelerating trend, dating from 2016, has been significant declines in total profits across both investment-linked and non-investment-linked products, and a prolonged period of low interest rates,” APRA noted.

This, coupled with profitability challenges, makes it a difficult environment for new entrants. But while many of the latest insurtechs focus on general or private health insurance, the life sector is not completely lacking innovation.

In recent years, we’ve seen a small number of start-ups emerge promising to fix key pain points in the life insurance customer journey, or offering products suited to particular market niches.

Coverhero, an Australian insurtech founded in 2017, offers income protection to gig economy workers via its flagship product Hustlecover. Beyond identifying a gap in the market – freelancers and contractors are underserviced by traditional life insurance and are only increasing in number – the product also offers a 14-day claims waiting period. This is a clear differentiator in an industry where three months is the standard.

We’ve also seen the likes of Ethos, a US start-up founded in 2016 that uses predictive technology, to quote term life insurance rates in minutes via an app. Ethos bypasses the need for a medical exam, which inevitably slows down the application process, by verifying applicants’ self-reported data with their actual medical records.

As regulatory pressures force a rethink on product design and put upwards pressure on premiums, life companies have no choice but to migrate away from paper-based, lengthy applications and claims processes and provide a customer-centric experience to customers and advisers alike.

The need for certainty of income for individuals and their families in the event of worst-case scenarios isn’t going away, nor is the watchful eye of APRA.

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One Comment

  1. jeremy@businessfp.com.au' Jeremy Wright says:

    In order to understand a problem in an Industry, it is important to understand the Industry first.
    Unfortunately, the Government and none of the Regulators understand the intricacies of the Life Insurance Sector, which makes any attempt of remedy, a recipe for more issues and unintended consequences from their actions.
    ASIC and APRA have exacerbated the issues facing the Life Insurance Industry and to date, have not put forward any suggestions that will help turn the current decline, into a Business sector that will provide what they have purported for years, which is for all Australians to have affordable access to quality advice and products.

    The solution is so simple, yet no-one in these seats of power, seems to have any idea of how to quickly fix, what is becoming a road to perdition for the advised retail Life Insurance sector.

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