Reviving the sickly life insurance industry

A race to the bottom on pricing is strangling the life insurance sector, with insurers unwilling to increase premiums and lose customers. Fiddling at the margins won't be enough.

The very mixed results coming out of this month’s company reporting confirms that 2014 is panning out to be an interesting year in the insurance industry. 2013 saw plummeting profitability for most life insurers, with Australian Prudential Regulation Authority data released in February showing that profit across the industry as a whole last year was down by 31 per cent. 

Life insurers have pointed out the underlying issues affecting their profitability: increasing claims and fewer customers holding their policies for the longer term, particularly baby boomers. These twin pressures, combined with a failure to meet new business targets, are continuing to erode the profitability of most insurers.

The industry is concerned about its viability, which is under threat in the current conditions. Yet most of the individual life insurance companies are not making great strides in terms of innovating their way out of trouble, which is conspicuous at a time when the broader business community is focused on innovating its way through the challenging economic climate.

Despite some fiddling at the margins -- some companies are restructuring departments and pinning the blame on brokers -- these problems are worsening.

The biggest problem is that the life insurance industry is being strangled by competition, which is ordinarily a good thing in business. The insurers know they need to simplify their products and increase the cost of premiums, but fear of moving first (and in doing so, losing more customers) is preventing any of the players from taking action.

The industry is at a stalemate. The insurers can either continue in the race to the bottom on pricing and damage their profitability further, or bite the bullet and increase premiums.

There is an obvious danger in grappling with an industry-wide problem using an industry-wide solution: the threatening accusation of anti-competitive behaviour. But a fine line has to be walked in this instance as the viability of the industry is at stake.

It’s indisputable that Australia needs a strong life insurance industry. It’s not just about profit; it provides a public good with individuals taking out private life and income protection insurance to secure their own wellbeing. This, in turn, prevents further demands on the publicly funded welfare system.

Maybe the individual insurers will be able to unwind their way out of trouble through internal changes, like updating their cumbersome and expensive claims processing systems and technology or outsourcing more skilled staff to better manage claims.

Each of the 14 large life insurers in the Australian market are this year embarking on grandiose sounding ‘claims transformation programs’, but these are yet to come to fruition. So they remain more a hope than a definitive solution.

It will be interesting to see how the banks that have bought the life insurance businesses over the past 10 years will react. They will be watching like hawks to see if these ‘transformations’ can revive profitability in their insurance businesses. We have no precedent for what happens otherwise, and so 2014 will be a crucial year for the industry.

Dr Brandon Carp is managing director of UHG.

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