Home / Life Insurance / Sector’s struggles serve as warning: Guy Carpenter
5 November 2018
Increasing regulatory costs, high earnings volatility and intensive capital costs are rapidly changing local life insurers’ business models and encouraging a wave of divestment to foreign owners, Guy Carpenter says.
The reinsurance broker’s Life and Capital Asia MD Matthew Rose warns regulatory requirements are creating a lag on capital returns.
Lower returns and high earnings volatility are encouraging shareholders to invest their capital in more profitable areas of the financial services industry.
This encourages foreign groups to buy local insurance operations, because they have a stronger tolerance for perceived short-term pressure and will accept lower return targets and greater volatility in results. Foreign companies have lower capital costs and see long-term growth opportunities in Australia.
Mr Rose says Australia’s experience is a lesson to insurers in other jurisdictions, which are starting to appreciate the importance of managing capital more efficiently.
AMP has echoed these concerns in a note to shareholders defending the sale of its life insurance business. See other story.
The industry faces a challenging outlook, with significant earnings volatility and claims risks, and increased competition from global insurers with lower capital costs, greater scale and diversification, it says.
Elsewhere, Commonwealth Bank has sold its stake in an Indonesian life insurance operation to focus on its core business.
Mr Rose suggests insurers should renegotiate reinsurance treaties to free up capital.
Many long-term treaties are “set and forget”, and can become less reflective of the company’s current capital needs.
S&P Global Ratings’ recent sector review says the underperformance of the income protection line hampers the industry’s profitability, while possible legislative changes affecting group life may further erode margins.
“All these challenges reinforce the negative trend we see for the sector,” S&P says.
A recent push by the Financial Services Council to let insurers cover the costs of workers’ rehabilitation services – to reduce income protection costs and make the industry more sustainable – was rejected by parliamentarians.
Industry defends genetic testing regime
The Financial Services Council (FSC) has defended limits included in proposals to change the way the industry handles genetic testing, following criticism from campaigners.
The FSC says consultation will begin on a moratorium to stop life insurers asking all applicants whether or not they have had a genetic test.
In Australia insurers cannot require a test, but there is a carveout in anti-discrimination law allowing them to ask about testing and refuse cover or increase premiums on the basis of adverse results.
This has led to fears some people will decide against potentially life-saving genetic tests because of the impact it could have on their insurance cover, and earlier this year a parliamentary inquiry called on the FSC to take action.
Under the proposed moratorium, all Australians can obtain up to $500,000 of life or total and permanent disability cover without having to disclose an adverse test result. There are also limits of $200,000 for trauma and $4000 a month for income protection.
But Jane Tiller, Ethical, Legal and Social Adviser in Public Health Genomics at Monash University, says the limits are too restrictive.
Ms Tiller, a founding member of the Australian Genetic Non-Discrimination Working Group, is also disappointed not to have been consulted about the proposed moratorium.
“In the UK the only limit is for Huntington’s disease,” she told insuranceNEWS.com.au.
“Here the limits are too low and they are not specific to any particular diseases. They cover absolutely everything.
“The limits are lower than they should be and we are disappointed we have not been consulted before now.”
An FSC spokesman told insuranceNEWS.com.au the limits are in line with other jurisdictions.
“The moratorium limits are in line with Germany and Switzerland, and significantly more than Holland and Sweden,” the spokesman said. “In all those countries, the limits apply to all tests. The UK is an outlier in this respect.
“The industry has looked carefully at international comparisons. The cost of the moratorium will need to be carefully managed by life insurers to ensure a balance between those who have genetic conditions and those who don’t.”
Under the moratorium, people seeking cover below the limits will not be asked about genetic testing, but those asking for higher cover may be.
If they are declined cover as a result, they can reapply for the lower cover with that insurer or another. The moratorium will start on July 1 next year and continue for five years, with a review planned for 2022.