The Australian Life Insurance Industry Is at a Crossroads
The Australian life insurance industry appears to perennially face structural challenges. In 2013, two of the largest reinsurers experienced material financial losses driven by worse-than-expected claims experiences. Around the same time, industry lapse rates were trending up, and insurers consequently started recognizing losses and write-downs on their present value of future profits. The industry experienced a wave of regulatory reform, for example, with the Life Insurance Framework, Code of Practice, claims reviews and the Financial Adviser Standards and Ethics Authority, to name a few. These reforms occupied management attention and, with the Royal Commission recommendations, will continue to do so in the foreseeable future.
Recently released results show that the claims experience and, ultimately, profitability challenges continue to plague the industry. New business volumes are significantly down compared to last year, with no signs of a near-term turnaround.
Currently, this is the status of the industry:
- Underlying profitability is low, and a turnaround is uncertain
- Traditional distribution models are challenged, and revenue growth is largely being driven by price increases
- Costs continue to increase on regulatory and remediation projects
- Customer trust in the industry remains low
These points may be discouraging, but it is important to keep in perspective that the life insurance industry has an important economic and social role to play.
Various studies have shown that the “protection gap” in Australia is large and that there is an intrinsic need to provide customers with security. The challenge for insurers is how to do so in a sustainable way that better meets customer, community, regulatory and shareholder expectations. While there are no easy answers, here are three levers that industry participants should explore:
Face the Big Problems
For good reason, including the challenges outlined at the start of this article, insurers haven’t had the capacity or appetite to make fundamental changes to their business. Industry responses have been polarizing: At one end, changes have been short-term and tactical in nature, often using pricing as a lever; at the other end, we have seen large-scale transactions that have distracted management attention for years.
In the interim, the fundamental issues in the industry have not been addressed. Now is a good a time as any to face the big problems. These include but are not limited to:
Product redesign. Driven by competitive pressures, we have largely seen insurers give away more coverage and often misprice risk. There has been minimal innovation in trying to identify and create products that are sustainable for the industry and that better meet customer needs. This is one of the hardest problems facing the life insurance industry globally, but one the Australian players need to face sooner rather than later
Underwriting. We have seen insurers and reinsurers focus some activity to enhance underwriting, and incremental improvements have been made, particularly on the customer and adviser experience end. However, there remains a large opportunity for insurers to transform their approach to underwriting by better collection and use of data that enables more informed decision-making and pricing. For an industry that was built on information pooling and asymmetry, there is a long way to go.
Insurers need to make fundamental changes to their business models. Doing so will require patience and may mean sacrificing short-term profits for longer-term returns.
Increase Your Customers’ Awareness—and Your Own
A lot has been published recently about rebuilding customer trust, and much of this material is applicable to the life insurance industry. Here are some specific actions life insurers should consider:
Increase customer awareness on the importance of life insurance. Some life insurers have, over time, engaged with individual company-specific initiatives on this matter, but the industry needs to collaborate and step up its collective efforts. Industry bodies such as the Financial Services Council and others could play a role.
Better understand your customers. Yes, life insurers have limited data on their customers and fewer touchpoints than other product providers, but what is not excusable is how ineffectively insurers have collected and processed this information. Insurers should re-assess all their customer touchpoints and ask themselves:
- Are they collecting, storing and sharing this data in an effective manner to build better customer profiles?
- How are they acting on the information they receive? For example, is root cause analysis being done on customer complaints?
- What initiatives are in place to expand the customer touchpoints and collect more data over time?
Foster a Culture of Innovation
Many an insurer has set up innovation teams, accelerators, incubators and even venture capital funds to scan interesting startups from across the globe. However, few insurers have been able to make meaningful traction with these initiatives. The core activity of innovating has been delegated to decentralized teams that struggle to inject their learnings into an organizational culture that has not fundamentally changed for years. Driving true and lasting innovation requires senior leadership to make it a priority for the entire organization, to individually demonstrate how they are leading on this front and then build and integrate organizational processes that support such activities and behaviors. These characteristics are common in many technology companies and successful insurtech companies, and large insurers could do well to learn from them.
The Road Ahead
The costs of inaction for the industry and its customers are too high, and this warrants prompt action. However, executing any one of the highlighted initiatives will not be easy, let alone all of them. Doing so will require patience—from shareholders in particular—as it may mean sacrificing short-term profits for longer-term investments and returns.
The life insurance industry is well-placed to make that trade-off as it is built on the promise of providing long-term security for its customers. And it is a trade-off that will result in a more sustainable industry that is potentially more profitable, provides customers with greater security and meets stakeholder expectations in fulfilling its socioeconomic role.
A version of this piece first appeared on Actuaries Digital.