2017 a year of change in life/risk

Mike Taylor writes that with the sale of CommInsure, the pending sale of the ANZ life insurance business and the looming full implementation of the Life Insurance Framework, 2017 has been a pivotal year for the Australian life/risk industry.

2017 will likely be remembered as one of the most pivotal years for the Australian life/risk industry – a year during which the number of bank-owned life insurance companies reduced from three to just one.

Since January this year the industry has been witness to the sale of the Commonwealth Bank’s (CBA’s) CommInsure to AIA Australia and by the end of this year, if industry speculation proves correct, it may also be witness to the sale of ANZ’s life insurance business to either MetLife or Zurich.

In 2015/16 the industry was witness to the sale by National Australia Bank (NAB) of 80 per cent of its MLC Life insurance business to Nippon Life.

That leaves just one of the major banks still in the life insurance business – the only bank without substantial life insurance platform legacy issues – Westpac.

This has all occurred at the same time as life/risk advisers have been obliged to come to terms with the implications of the Life Insurance Framework (LIF), particularly the impact on their remuneration structures – something driven home during the recent Money Management Risk Breakfast, held in Sydney.

It was during that breakfast that Australian Securities and Investments Commission (ASIC) senior executive leader of financial advisers, Joanna Bird sought to switch the discussion from the issue of “churn” to the question of whether appropriate advice was being provided.

Referring to questions around ASIC Report 413, regarded by many life/risk advisers as the precursor to the LIF, Bird said the regulator did not use the word “churn” and that it was nowhere in 413.

“We talk about lapse because it is a risk indicator, along with other things, of poor advice,” Bird said.

“There are different definitions of lapse, but for the purposes now I would use the definition that is in the regulations associated with the legislation, which basically doesn’t use lapse but basically says when clawback will apply and sets out when that will be, and that’s when the policy ends or [is] reduced,” she said.

Bird’s comments aligned with those of ASIC deputy chairman, Peter Kell who in September told a Parliamentary committee that the regulator continued to have issues with the overall quality of life/risk advice.

The full implementation of the LIF regime will take effect from 1 January next year, when upfront commission will be capped at 80 per cent, reducing to 70 per cent from 1 January, 2019 and then 60 per cent from 1 January, 2020.

New retention clawback provisions will also apply from 1 January, next year starting with 100 per cent clawback in year one, and 60 per cent in year two.

When combined with higher education requirements, the LIF changes are expected to see the exit of a large number of life/risk advisers, but the extent of the trend is not expected to become fully known until at least October next year.

Few people regard the LIF as being the end of the regulatory change story for the life insurance sector, but the changes going forward are expected to be fewer and less radical, with groups such as ClearView pressing for more action to open up approved product lists (APLs) while others are continuing to press for more work around the codes of conduct.

While shareholders in the major banks may not understand or care about the intricacies of the LIF, they should well understand the reasons for the banks exiting the life insurance sector – it is something that has been spelled out in the red ink which has blotted the results of banks’ insurance divisions. Any examination of the full-year results of the CBA and ANZ confirmed that their insurance businesses were problematic.

It was equally confirmed by the regulator, the Australian Prudential Regulation Authority (APRA) which directly referenced insurance company profitability in its annual report tabled in the Parliament in late October.

APRA pointed to the fact that the industry’s return on net assets had been well below the 10-year average in 2016/17.

But ClearView Wealth managing director, Simon Swanson believes the banks might have done better in the life insurance space if they had focused purely on the distribution of life insurance through their bank channels, and noted the manner in which Westpac and the CBA distributed their general insurance through their channels.

“What banks have proved incapable of doing is providing both objective advice and genuinely supporting ‘independent’ financial advisers,” Swanson said. “This is because they see advisers as simply distribution agents for their products.”

Reflecting the tenor of ClearView’s submissions to the Senate Economics Committee inquiry into Life Insurance, Swanson pointed to how tightly the institutions, and their lobby group, the Financial Services Council (FSC), were clinging to limited life insurance approved product lists (APLs). 

“They are resisting reforms that would open up APLs, empowering aligned advisers to act as fiduciaries and choose the most appropriate solution for their clients from the 11 or so APRA-regulated life insurers in Australia,” he said.

Reflecting on the consolidation which had occurred in the life/risk industry and the state of profitability, APRA’s annual report said the industry’s return on net assets in 2016/17 of 10 per cent had declined notably in the most recent year, and was now well below the 10-year average of 13 per cent.

“Returns for 2016/17 declined markedly from the preceding year, driven largely by a deterioration in insurance risk profitability,” the annual report said. “This was driven by poor results across several product categories, but was most significant for individual disability income insurance where the industry experienced a substantial loss.”

It said that while premium rates had increased since the heavy losses reported during 2014/15, the effect had been outweighed by continuing poor experience and the need for further reserve strengthening as insurers adopted revised morbidity assumptions.

But financial performance aside, the most important outcome of events over the past two years is that insurance companies, particularly Japanese-owned insurers, are now the dominant players in the life/risk industry.

Thanks to its acquisition of CommInsure, AIA Australia has supplanted TAL as holding the greatest market share, but with the exception of AIA 60 per cent of the remaining insurers either boast Japanese ownership or majority Japanese shareholding.

TAL is owned by Dai Ichi Life, having delisted from the Australian Securities Exchange nearly five years ago, MLC Life is 80 per cent owned by Nippon Life and Sony Life is now a significant shareholder in ClearView.

This trend is something which was also noted by APRA which stated that the life insurance industry remains highly concentrated, with the top five life insurers accounting for 81 per cent of gross industry assets, fractionally up during 2016/17.

However the regulator also noted that “ownership of the industry has become more diverse” with recent years having seen an increase in foreign ownership, particularly by Japanese insurers.

ClearView’s Swanson sees the likelihood of further consolidation in the industry, albeit that he sees it as a regrettable phenomenon.

Asked about the outlook for consolidation, he said it was not good for the industry or consumers because it served to stifle competition.

“Already there are only 11 or so APRA-regulated life insurers in Australia, compared to around 60 when I first started in the industry,” Swanson said while pointing to the number of life insurers which were in acquisition mode.

“… there is a strong case for existing players to buy another insurer and integrate two businesses because there are obvious synergies and cost-outs. For starters a whole layer of management can be cut out,” he said. “On the other hand, an international insurer without an existing presence here would need to retain the local management team.”