Dynamic forces continue to shift Australian life/risk

5 October 2018

The sale of direct insurance via outbound call centres has represented good business for four of Australia’s major life/risk insurers but there exist real question marks about its future viability following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

ClearView has exited its direct insurance business and has left no one in any doubt about why it chose to do so some 14 months’ before the Royal Commission, while Freedom Insurance confirmed the gravity of the issues which had been exposed during the Royal Commission when, in early October, it confirmed an immediate suspension of new business sales of all direct insurance products and the immediate departure of its managing director and chief executive officer, Keith Cohen and the impending departure of its chief operating officer, Jenny Andrrews.

Freedom’s new chief executive was named as its chief operating officer, Craig Orton.

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Other players such as TAL must also now be weighing up the viability of their direct businesses in light of the closing submissions of counsel assisting the Royal Commission and even before the Commissioner, Kenneth Hayne, delivers preliminary findings on insurance.

However Freedom’s announcement to the Australian Securities Exchange (ASX) gave some real insight to the issues facing those pursuing the “direct” model when it said that Freedom’s upfront commission revenue largely derived form the sale of final expneses insurance and “the existing distribution model will not meet ASIC’s proposed new regulatory regime”.

Equally revealing was ClearView’s use of a submission to the Royal Commission to declare that it had no intention of re-entering the direct market.

The major life/risk companies must also consider their commercial modelling in the group insurance space in circumstances where the Royal Commission has raised questions about the appropriateness of vertically-integrated institutions such as AMP Limited deciding that its in-house insurance entity is the most appropriate body to provide group insurance to AMP superannuation funds.

The Royal Commission has directly posed the question of whether superannuation funds “who engage an associated entity as the fund’s group life insurer be subject to additional requirements to demonstrate that the engagement of the group life insurer is in the best interests of beneficiaries and otherwise satisfies legal and regulatory requirements, including the requirements set out in paragraphs 22 to 24 of Prudential Standard SPS 250, Insurance in Superannuation?”

Such questions, when combined with concerns around the independence of superannuation funds held within vertically-integrated structures, present serious commercial challenges for AMP and Westpac but tend to validate the decision by the Commonwealth Bank to sell its CommInsure business to AIA and ANZ’s decision to sell its OnePath business to Zurich.

These commercial/governance realities are being imposed on the big insurers at the same time as the latest research from DEXX&R has served to reinforce the continuing highly competitive nature of Australian life/risk market, notwithstanding the continuing exit of the major banks.

According to the DEXX&R data released in late September, 68.3 per cent of the Australian life/risk market is shared by just five companies – TAL (18.3 per cent), AIA (15.9 per cent) MLC Life (12.2 per cent) AMP (11.7 per cent) and OnePath (10.2 per cent).

However, a number of transactions are about to complete with AIA acquiring CommInsure and with Zurich taking ANZ’s OnePath business and with TAL acquiring Suncorp’s life business.

According to the DEXX&R data, compiled ahead of the TAL/Suncorp transaction announcement, Australia’s top five life companies following the acquisitions would be:

  • AIA – 24.1 per cent
  • TAL – 18.3 per cent
  • Zurich – 14.5 per cent
  • MLC Life - 12.2 per cent
  • AMP – 11.7 per cent

Allowing for TAL’s completion of its acquisition of the Suncorp life insurance business, it is likely that it and AIA would be neck and neck in terms of market dominance.

Important, as well, is the influence of the major Japanese insurers in shaping the commercial dynamic of the Australian market with TAL owned by Dai-ichi Life and MLC Life around 80 per cent owned by Nippon Life.

Sony Life continues to have a strategic interest in ClearView, albeit that the Australian insurer announced to the Australian Securities Exchange in May that it had terminated a cooperation with the Japanese insurer because it had not received an offer from Sony.

According to the DEXX&R data, June quarter individual lump sum new business fell by 12.8 per cent with recorded new business of $298 million $44 million less than the $342 million recorded in June 2017 quarter.  

It noted that with several major retail banks suspending or closing down direct sales of life insurance products, life companies were becoming increasingly reliant on sales made by aligned and non-aligned advisers providing personal advice for future lump sum new business growth.   

“In the disability income market, where virtually all new business flows from planners providing personal advice, sales were up in the June quarter and discontinuances continued to fall, indicating that as direct ‘without advice’ lump sum made an increasingly smaller contribution to lump sum new business, lump sales will return to a growth phase, albeit from a lower base,” the DEXX&R analysis said.


While life/risk advisers continue to grapple with the implementation of the Life Insurance Framework (LIF), the Royal Commission has placed commission structures back in play.

In his preliminary findings, the Commissioner, Kenneth Hayne, directly referred to the capacity for “misaligned incentives” to lead to inappropriate advice.

Hayne suggested that while sales staff might, appropriately, be rewarded by way of commission, advisers should not be.

He said this called “attention to two other issues: one concerning the separate treatment of benefits given in relation to life risk products (other than a group life policy for members of a superannuation entity, or a life policy for a member of a default superannuation fund) and the second concerning the payment of sales-related bonuses (or ‘variable remuneration’) to advisers”.

“As noted earlier, changes have been made, with effect from 1 January 2018, to the rules that govern the payment of commissions in connection with life risk products,” Hayne said. “But, subject to those changes, selling life insurance products is still rewarded by upfront and trail commissions.”

“Why do not these arrangements lead to misalignment of incentives? Why should these provisions remain? Put shortly, if crudely, sales staff can be rewarded by commission; advisers should not be.”

“If, as seems inevitable, appeals are made to both history and the need to maintain the availability of advice by preserving existing advice business models, what evidence is there that shows that the costs of doing away with payment by commission will outweigh the benefits of improving the overall quality of advice that is given?” the Commissioner asked.

In the issues which he said arose from the Commission so far, Hayne’s preliminary findings asked whether the life risk exceptions to the conflicted remuneration provisions [of the Future of Financial Advice] should now be changed.

“How far should they be changed?” he asked.

“If they should be changed, when should the change or changes take effect?” 

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