InFocus: The future of a concentrated life insurance market

The life insurance industry has shrunk further with TAL’s acquisition of Westpac Life Insurance and this will reduce competitive pressure and innovation, according to DEXX&R.

DEXX&R managing director, Mark Kachor, said the industry had slimmed down to the big players and that incumbents would each get a larger share of the market and new business.

However, Kachor said the shrinking market was less favourable as a more concentrated market would lead to a reduction in competitive pressure and cause innovation to wither.

“Everything has shrunk down to similar underwriting engines and the underwriting process and there is no competitive pressure in the margins,” he said.

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“While there used to be opportunities for advisers to arrange more favourable terms for clients with say special needs or special circumstances, a lot of that is not going to happen now because insurers know their competitors are not going to move on pricing so nor will they. That’s what happens when competition evaporates.”

Kachor also said there would not be the same amount of pressure for insurers to innovate as well.

However, TAL chief executive, Brett Clark, disagreed as he believed the retail market had a “very competitive landscape”.

“The sales outcomes for retail life are really dispersed across a wide range of life insurers – TAL, AIA, Zurich, OnePath, MetLife, Neos Life, PPS, and Clearview. You know, that’s a very wide selection of life insurers that advisers and customers can choose from, and I think the market will still be very competitive,” he said.

“While some traditional names are no longer there, you’ve got a whole bunch of new players entering the retail market, which I still think is giving advisers an customers a lot of choice. So, I don’t see any issues around the future competitive landscape of the retail life insurance market.

“We’ve got the changes in disability income insurance products coming up as well which is going to create more options for advisers, not less options.”
Clark said the next two months would see Westpac and TAL agree on pre-completion plans and that ownership of the business was not anticipated until the middle of 2022.

Kachor said it was likely TAL would adopt the same approach as they did with its acquisition of Asteron in 2018 which was to close new business and put it in run-off to shrink the administration and cost structure of the company.

With this latest acquisition, ClearView and NobleOak would be left as the only Australian-owned life insurers but both Kachor and Clark viewed this in a positive light.

“Life insurers at times have been owned by larger wealth management, superannuation, and banking organisations. Now, all the key life insurers are life insurance specialists and that goes to the level of expertise and capability you need to manage a life insurance business well,” Clark said.

“Alongside that, we’ve also seen foreign capital come into the Australian market and ultimately that’s a good thing as well because there’s a real commitment to the value of life insurance for the community, and that’s well understood by specialist global life insurers. 

“So, yes, they may be less Australian but there’s more specialisation expertise and depth of understanding of life insurance and I think that’s a good thing.”

Kachor agreed and said in the past when insurers were owned by banks, the businesses were always starved of capital to modernise IT and back-office operations. 

“The reason being that the banks were getting a return on equity on their core retail banking activities of 15%. Now, a life company has never ever lived up to those sort of returns on equity – it might have been churning out 8%,” he said.

“So, when the life company says ‘we need to modernise our back office systems, they’re old, they’re clunky, we want to achieve the savings that a modern system can provide’, the board’s looking at it and saying ‘why are we investing $300 million over here for a potential return of 10% when we can smarten up our banking app, and get a return in a business that’s returning 15%’.”

Kachor noted that with TAL’s Westpac acquisition, the industry would likely see fewer many mergers or acquisitions in the near future.

“I think this about cleans it up. The other side of it is, of course, we do have some very small new entrants, like Integrity Life. I would expect they would have expectations of rapidly growing through the market share from advisers who may not be enamoured with the level of service that they’re getting out of the incumbents,” he said.

“It’s an ideal time almost as all the big competitors evaporate for small new entrants to get a foothold. But at the end of the day, the adviser has a best interest to take into account so your product has to be equal to what they could have written somewhere else.”