LIF helps erode insurers’ bottom line

life insurers LIF life insurance life insurance framework Josh Frydenberg KPMG Pauline Light-Johnston protecting your super unfair contracts distribution models

25 November 2019
| By Mike |
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Reduced life insurance commissions resulting from the Life Insurance Framework have played a part in reduced bottom lines for the major life insurers.

That is one of the bottom lines of new KPMG analysis, Life Insurance Insights 2019, which has portrayed a life insurance industry already struggling in the facing of difficult conditions and a tighter regulatory environment and with even more challenges on the horizon.

The analysis reveals that while life insurers are still struggling to deal with a difficult disability insurance market and the impact of the Government’s Protecting Your Super legislative package, it must now deal with the upcoming extension of the Unfair Contracts legislation to insurers.

The KPMG analysis paints a grim picture of the Australian life insurance industry marked by a continuation of declining profitability and coupled with increasing regulation.

It said that in the first half of 2019 the industry made a loss of $86 million from risk products, worsening from the essentially break-even position in 2018, when the industry generated a total profit of just $33m.

The analysis said these results compared to an aggregate industry profit of approximately $1.5 billion 2017.

“Ordinary risk products continued to be loss making, with the product line reporting a loss of $130 million across the industry during the first half of 2019, following a loss of $341 million in 2018. In the first half of 2019 losses in ordinary retail disability income (-$499 million) more than offset profits in ordinary retail lump sum ($399 million). 

It said superannuation risk products reported a significant decline in profits, with the product line reporting just $44 million across the industry during the first half of 2019 compared to $372 million profits in 2018.

Commenting on the research, KPMG partner and head of life insurance, Pauline Light-Johnston, said the last two years had been a period of considerable challenge for the Australian life insurance industry.

“Customers and the public are increasingly asking questions about the value the industry provides.  At the same time, the profitability challenges driven by higher than expected claims payments across the industry are perhaps the greatest we have seen in a generation.  There is clearly a large disconnect between the perceived and actual value being delivered by these products,” she said.

“Unsurprisingly, the disruption to life insurance distribution models has noticeably affected revenue growth across the industry. Subdued growth rates reflect the impact of lower initial commissions due to the Life Insurance Framework that came into full effect in 2018, as well as a retreat from direct distribution models following the exposure of problems with these models during the Banking Royal Commission.”

“A well-functioning, sustainable, accessible and trusted life insurance industry is important for all Australians, particularly for the more vulnerable members of our society. Leaders in this industry must continue their efforts to reshape its customer proposition to simultaneously rebuild public trust and put the industry on a more sustainable financial footing.” 

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