Life insurance industry feels the pinch of straitened times

Australia’s life insurance industry has had more than $1 billion wiped off its value as it battles the impact of a slowing economy and difficulties in getting big policy holders off claims.

In the past year, six of the biggest players in the industry have reported that profits have not met expectations by a combined $220 million.

They blame higher than expected loss of customers as economic conditions deteriorate and higher than expected claims costs, particularly around so-called income-protection products. These products guarantee a portion of a policy holder’s salary for a period of time if they are unable to work.

Depression and stress-related claims by middle-aged white-collar workers have proved to be a particular source of higher-income-protection claims.

According to the prudential regulator APRA, income-protection products were only marginally profitable for all providers in the year to March 31 and were loss-making in the year before.

In February, the biggest Australian life insurer by in-force premium, AMP, cut more than $500 million from the estimated value of its operations as a result of changed assumptions about the loss of customers and the cost of claims. This followed a $54 million reduction in expected profits from its life insurance operations in the six months to the end of 2012.

”The Australian insurance industry is suffering poor lapse rates and claims experience across the board, with industry lapse rates at a 10-year high,” AMP CEO Craig Dunn told the company’s annual meeting last month. ”In challenging economic times, more people are deciding to reduce their insurance cover or cancel their policies altogether.”

Also in February, the country’s biggest bank and third-biggest life insurer by in-force premium, Commonwealth Bank, said expected profits from its life insurance operations over the past year had come in $70 million lower than expected.

The industry has estimated that policy lapse rates have risen from 12.5 per cent five years ago to about 15 per cent today.

The expectation of permanently higher lapse rates is the biggest driver of the combined $1.2 billion reduction in future profit margins across the life insurance industry recorded over the past year, according to leading actuaries.

The big insurers are also blaming increased policy churn by financial planners for the shortening of time a policy stays on their books.

Earlier this year an industry push to introduce self-regulated anti-churn measures is believed to have been derailed by opposition from one major bank. The industry is mustering forces for a renewed push in the next 12 months.

Premium rises are being implemented across the industry. Industry funds have announced to members big rises in premiums as a result of higher than expected claims. For example, from June 29, the 2 million members of the biggest industry fund, AustralianSuper, will face an almost 40 per cent increase in premiums for death and total and permanent disability cover and about a 25 per cent increase for income protection. AMP has also flagged price rises for some of its customers.

But raising prices presents challenges in life insurance. Those in good health can respond by switching to a cheaper product provider, leaving only those in poorer health and more likely to make a claim within a fund, undermining the objective of the price rise.

The insurers have been ramping up efforts to manage claims more effectively, with the ultimate aim of getting claimants off claim as quickly as possible. The insurers acknowledge difficulties – ”How do you get someone who is stressed ‘off-claim’. Experience is terrible for everybody.”

The biggest fear is that a dramatic increase in unemployment rates will lead to further deterioration in industry profitability.

Despite the deterioration in lapse rates and claims costs, the Australian life insurance industry as a whole, which includes the sale of lump sum and disability products, remains profitable. It recorded a net profit of $3 billion for the year ending March 2013, according to APRA. The industry is dominated by the major banks and AMP, which have 59 per cent market share.

Stewart Oldfield is a research analyst at Wilson HTM.

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The original release of this article first appeared on the website of Hangzhou Night Net.

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