The big four banks are well positioned to capitalise on financial advice, but it is questionable whether they can achieve the same returns as in their core operations, according to a report by Ernst & Young.

The banks are “moving away from relying on external intermediaries to sell insurance products to using in-house advisers and direct-to-customer and self-service offers, based on a greater understanding of individual customer needs”. 

The shift to selling insurance through in-house advisers is significant because three of the big banks are also among the top five Australian life insurers, Ernst & Young says.

Commonwealth Bank has about $3.5 billion in annual insurance premium, while Westpac has about $2 billion and NAB is slightly behind with a similar figure.

However, despite the size of their insurance books, the banks face the same problems as the rest of the life industry.

Ernst & Young Oceania Banking and Capital Markets Leader Paul Siviour says life industry conditions are the worst in decades, with growing claim volumes and high customer attrition rates.

“Disability claims are well beyond those expected by the industry, due to increased stress and depression claims,” he said.

“This may be due to the weaker economy, greater awareness of cover by policyholders and, in some cases, lawyers promoting claims.”

Mr Siviour says lapse rates are growing as cost-conscious customers drop cover in the tough economic climate.

“There are growing structural problems within the industry that cannot be fixed in the short to medium term, putting pressure on returns for a number of years.

“Some commentators are beginning to question whether the banks can make returns in these sectors at the same levels as traditional banking.

“Indeed, the banks’ patience in relation to insurance may well be tested during the next few years if return on equity… remains subdued.”