Insurers facing into life challenges
The life/risk sector still offers growth potential to the major insurers but, as Mike Taylor reports, new regulatory and capital requirements have made for a more challenging environment.
What does it say about the life/risk sector in Australia that in less than a decade, two significant insurance businesses have/or are about to become Japanese-controlled and a third has been sold to the Swiss.
To put this into context, one of the life/risk market-leaders TAL was delisted from the Australian Securities Exchange (ASX) in May 2011 and came under the umbrella of Japan's Dai-ichi Life Insurance Company, while in October last year National Australia Bank announced the sale of 80 per cent of its life insurance business and the development of a partnership with Nippon Life - a transaction that is still being bedded down.
Then, only a few short weeks ago, Macquarie Bank announced that it was selling its life insurance business to Swiss-based Zurich.
At the time of the Macquarie announcement, the head of Macquarie's Bank and Financial Services group, Greg Ward referenced the need for significant scale in what he described as "the capital intensive life insurance industry".
What Ward did not say, but what he might have added, was that while the Australian life/risk sector is still regarded as having significant growth potential, it has become increasingly challenging from a regulatory, structural and investment point of view, with increasing challenges with respect to both underwriting and re-insurance.
A simple fact of life for the boards of some publicly-listed, vertically-integrated entities such as banks is that life insurance does not necessarily need to be part of their core business when it can be substantially outsourced to specialist players such as Nippon Life or Dai-ichi.
Another, not so simple fact of life, are the new capital requirements being imposed on insurers and their owners.
Indeed, the capital intensity of the life/risk sector has been a recurring theme in the explanations provided by the likes of Ward and MLC's Andrew Haggar.
Commenting on the transaction with Nippon Life, Haggar was quoted as describing it as being part of a plan to "rewrite the rules for wealth in a modern bank" in which it seeks to grow in capital-intensive products through partners while investing in capital-light businesses such as superannuation, investment and advice.
In other words, NAB/MLC made the assessment that the new capital requirements were such that it was happy to enter into an arrangement with the more insurance-focused Nippon.
And from the point of view of Japanese insurance majors such as Nippon and Dai-ichi the Australian transactions make sense in the context of companies operating in a virtual negative inflation economy with a low-growth population.
Among the other banks, and notwithstanding recent controversy, the Commonwealth Bank has thus far seen fit to stick with its CommInsure business, possibly noting that it has both the scale and distribution necessary to keep driving the business.
Indeed, the Commonwealth Bank's results announcement for the period ended 31 December, 2015 was that of an improving bottom line for CommInsure with the business increasing income by 30 per cent over the prior half, driven by lower event claims and an improved lapse experience in retail life.
It is a similar story for Westpac, with its life/risk business acknowledged as being largely unencumbered by many of the legacy product issues which have impacted other insurers. TAL chief executive, Brett Clark is quick to acknowledge the challenges which have faced the Australian life/risk industry and to note that while there remains plenty of growth potential, the commercial runs will be harder to make.
Recognising the decisions which had been made by the likes of NAB and Macquarie Bank, Clark said it reflected the fact that organisations had taken different views on their life insurance strategy.
"Arguably in the short to medium-term, growth in the Australian market looks more challenging," he said.
"I think we will continue to see companies reviewing their life insurance strategies and the landscape could look quite different in a year or two's time."
However, he said that from TAL's perspective, "we are a specialist life insurer and believe deeply in the value of the products and services we provide to Australians".
"While the future perhaps is less certain, we continue to see opportunities to grow and we will be investing behind those opportunities to ensure even better outcomes and support for Australians when they need us most," he said.
One of the other most significant insurance-specific players in the space, AIA Australia has indicated a similar attitude to the Australian market with its chief executive, Damien Mu, using the release of the company's full-year results earlier this year and a 16 per cent increase in operating profit to reinforce its focus on the Australian market.
He said AIA Australia had continued to perform well in 2015 and noted the success of some of its new product offerings, including AIA Vitality.
"We continue to focus on retention of our key partnerships while we continue to grow," he said.
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