KPMG’s Life Insurance Insights provides analysis and insights based on financial results up to 30 June 2021 for the Australian life insurance market.
The past year has seen a period of continued disruption, with the impact and uncertainty of COVID-19 magnifying the challenges of a dynamic and evolving regulatory environment. Despite this, financial results show signs of recovery compared to recent years.
The size of the market as measured by annual premium has remained stable, with life insurance premium income (excluding reinsurance) increasing by 2.4% to $17.7 billion per annum. Both lapse and new business rates (as at December 2020) on advised policies decreased from prior years, reflecting both the uncertainty relating to COVID-19 and the challenges faced by the advice distribution channel for life insurance.
The number of lives insured by the market decreased by 10%, highlighting that the stable premium income at an industry level was generated by price increases across the market, some age related or in response to PYS and PMIF, but some in response to rising claims costs and losses over recent years.
Industry profits of $1bn were recorded in the year to June 2021. Of this, $0.6bn of profits were generated in the Insurers’ Statutory Funds, a significant improvement on the -$1.4bn losses generate in the prior year. This was underpinned by increased profitability across both risk and non-risk products. Notably, the losses recorded on Individual Disability Income business decreased substantially to $0.3bn from $1.3bn the prior year.
These improved profits are supported by relatively stable claims levels, with Gross Claims as a Proportion of Gross Premiums decreasing by 1.7% for Risk Products. This highlights the limited impact that COVID-19 has had on life insurance claims performance up to June 2021.
The improved financial performance of the market has been achieved while managing large programs dealing with a range of upcoming regulatory changes, including: Design and Distribution Obligations (DDO), claims as a financial service, breach reporting and complaints as well as changes to accounting standards. At the same time, a large part of the industry has continued to work through the transition arrangements arising from the recent wave of M&A activity and an industry re-design of the Individual Disability Income Insurance (IDII) product.
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An infographic snapshot of life insurance market data to June 2021.
Industry Size and Capital Strength
Direct Premium as at 30 June 2021, an increase of +2% from $17.3bn in prior year.
Inwards reinsurance premiums as a proportion of Direct Insurers Premiums as at 30 June 2021, a decrease of 1.6% in the prior year^.
The industry capital coverage ratio has increased from 1.8 in the prior year.
Reduction in the sum of lives insured across cover types in the Group Super channel in the 3 years to 31 December 2020^^.
The sum of lives insured across cover and channel types as at 31 December 2020, a decrease of 10% from 35.9m in the prior year^^.
Profit across the Life Insurance industry in the 12 months to June 2021. In the prior year $1.4bn of losses were reported^^^.
Increase in profit on Risk Products from the prior year. Losses totalled $20m as at 30 June 2021.
Increase in profit on Non-Risk Products from the prior year. The profit totalled $0.6bn as at 30 June 2021.
Losses on Retail Disability Income as at 30 June 2021. The losses totalled $1.3bn in the prior year.
Profits on Retail Lump Sum, which remains the only profitable risk product.
Product Revenue and Distribution
Proportion of Risk Product Net premium relating to Lump Sum (Retail & Group) as at 30 June 2021.
Annual premium sold through Individual channels (as opposed to Group) at 31 December 2020. 52% of the market is sold through the individual advised channel.
Proportion of Risk Product Gross Annual Premium relating to Superannuation business.
Proportion of Risk Product Gross Annual Premium Written by top 5 companies (as at 31 December 2020).
Reduction in the new business volumes at 31 December 2020 compared to the prior year^^^^.
Increase in the average premium per policy for Risk Products in the 12 months to 31 December 2021.
Increase in the Individual Disability Insurance average premium per policy in the two years to 31 December 2020.
Reduction in the lapse rate at 31 December 2020 compared to the prior page ^^^^.
Decline rates for TPD (Group and Retail). These have been broadly stable over the last 12 months.
Acceptance rates for death cover.
Life insurance market outlook
Despite the improved financial results observed, the recent period of change and disruption in the market is expected to continue over the coming year. We expect the following to be key areas of focus for life insurers during the next 12 months and beyond.
|Unprecedented times – COVID-19|
In March/April 2020, actuaries across the life insurance industry began predicting the impact that COVID–19 would have on the life insurance industry and whilst the long-term impacts are still uncertain the short-term impacts were not as expected.
The most significant impact was a sharp decline in retail lapses, with lapses falling by 3.0% for lump sum benefits and 1.6% for IDII benefits.
Initially there was an expectation that death claims would increase and then as the pandemic extended and restrictions continued that death claims would decrease due to reduced levels of accidents and respiratory related deaths. However lump sum claims experience appears to have been relatively stable in 2020 compared to 2019.
There was also an expectation that claim terminations for IDII and Group Salary Continuance (GSC) products would decrease. Whilst the data does not provide granularity with respect to termination experience, there is no indication of a sharp increase in claim costs. The unprecedented actions by government to maintain jobs and support companies potentially mitigated the cost to the insurance industry.
The long-term impact of COVID-19 on IDII, GSC and TPD claims experience is still highly uncertain both for retail and group insurance. Historically impacts on employment can take up to 18 months to translate into increased claims. The impact on mental health in the community continues to be high, but it is unclear whether it also high on the insured population.
|Impacts from regulatory change|
Regulation, prudential oversight, enforcement action and voluntary industry codes have been steadily building since the Royal Commission. These all have a significant impact across the front, middle and back offices and increase further the risks and costs of non-compliance and reputational damage.
Group Insurance – Protect Your Super (PYS) and Putting Member’s Interest First (PMIF): The financial results during the first half of 2021 generated a more positive outlook for the coming year, with losses reducing from the prior year.
This reflects repricing activities across the market as well as the step change in claims costs that occurred in 2020 resulting from PYS and PMIF regulatory changes. The long-term claims outlook remains uncertain with respect to the extent of anti-selective outcomes arising from the opt-in changes for members under 25.
IDII – APRA Sustainability Measures: A key component of the measures is the release of new IDII benefits with several features needing to be discontinued from 1 October 2021.
This change is expected to have resulted in a potential surge of sales of IDII ahead of the 1 October deadline followed by a decline for a short period thereafter and in the short term a decrease in lapses of IDII.
The market is expected to be subject to ongoing changes for a period of time, as insurers adjust their products with consideration to the premiums charged and nature of benefits offered by competitors.
A number of the key changes relating to DDO, breach reporting, complaints and claims as a financial service have all taken effect in recent weeks as life insurers pay close attention to any post implementation issues.
Increased regulatory focus on cyber risks, will continue to drive increased risk management activities for insurers in this space, including compliance with CPS 234 Information Security.
IFRS 17: With IFRS 17 becoming effective in January 2023 we expect insurers to spend the next 12 months working through the practical and financial implications of transitioning to IFRS 17 reporting. The new accounting standards will highlight pockets of portfolios which are unprofitable; this may result in repricing activity over the next 2 years. The choices insurers make with respect to transition may also impact the future accounting profits experienced by portfolios.
Many of these regulatory changes will require increased levels of insurer engagement with the Board, Shareholders, Regulators as well as other stakeholders.
The number of lives insured, summed across cover and channel types, has decreased by 10% over the last year and by 23% over the last two years. A significant proportion of this is expected to be due to the PYS and PMIF legislation.
The average premium per policy has increased by 12% over the past year and by 24% over the last two years.
Decline rates have been broadly stable across the industry over the last 12 months. TPD traditionally has the highest decline rate at 10.8% for Group Super (increased from 9.1% last year) and 18.5% for Individual Advised (stable from last year).
|Systems and data|
Data is expected to be high on the agenda for all insurers, whether this relates to data strategy, data quality improvements or the upgrading of data infrastructure.
This continued push for improved use of data has been driven by several external factors, such as the regulatory changes noted above, along with a drive to better understand changes to customer expectations and pressure on distribution channels.
The statistics show a significant increase in the capital strength of the insurance industry with a Prescribed Capital Amount (PCA) ratio of 1.94.
This likely overstates the capital strength of the industry as many insurers will be subject to Supervisory Adjustments as part of APRA’s IDII sustainability measures and these are not included in the official statistics.
With acquisition, integration and separation activity getting closer to completion for a number of insurers, shareholder focus on the ability to generate robust, sustainable returns on capital is likely to increase further.
|Environmental, Social & Governance (ESG)|
Shareholders, regulators and community expectations continue to drive a focus on ESG throughout the Financial Services industry – and the lead up to COP26 in Glasgow is intensifying this. Expectations of financial service providers are increasing (e.g. APRA has recently released guidance CPG 229) – and this trend will continue.
Life insurers are currently embedding a range of governance and process changes associated with IDII sustainability. There is an opportunity to broaden these efforts to include an ESG framework which is constructed around their core purpose of providing long term cover to policyholders.
In terms of life insurance specific considerations, the risks associated with the liability side of the balance sheet needs to be considered, including the implications of large potential environmental or social exposures that may arise through concentrations of risk either on a geographic or industry basis.
We expect this to continue to be a source of disruption as further consolidation opportunities within the market are pursued, although the number of targets is reducing as a result of the consolidation over recent years.
There will no doubt be a continued focus on the completion and transition activities for those insurers involved in recent transaction activity, including continued competition for resources to support these activities as well regulatory change programmes.
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^ The statistic represents the proportions of direct premiums reinsured within the Australian Market.
^^ Calculated as the sum of lives insured across each cover and channel types. This doesn’t represent the number of individuals insured (as an individual may have multiple covers).
^^^ Reflects profits of Life Insurance Statutory Funds, as opposed to the Entity in the APRA Performance Statistics.
^^^^ Calculated as a weighted average rate across different cover and channel types using the APRA Claims and Dispute statistics which contains only Risk Products.