KPMG’s Life Insurance Insights 2019 dashboard provides analysis and insights based on financial results up to 30 June 2019 for the Australian life insurance market. We also provide KPMG’s views on the key challenges and opportunities facing Australian life insurers. We reflect on the implications of these current and emerging themes, which may require Australia’s life insurers to significantly adapt the way they do business.
Key trends: 2018 calendar year and first half of 2019
Revenue growth was subdued
Revenue grew at a slower rate in the 2018 calendar year reflecting the impact of the disruption to insurance distribution models. Direct premiums increased by 1.6 percent to $18.5 billion over the 2018 calendar year, compared to 3.0 percent in 2017 and 9.4 percent in 2016.
Direct premium growth continues to be challenged in the 2019 calendar year, with the first half of the year contracting by 1 percent compared to the first half of the 2018 calendar year.
Benefit payments to policyholders continued to increase
Benefit payments to policyholders have continued to increase over time both in amount and as a percentage of premium. In the 2018 calendar year benefit payments (gross policy expenses) increased by $1.2 billion to $13.8 billion or from 57.1 percent to 59.3 percent of premium (gross policy revenue).
This trend has continued in 2019, with 62.9 percent of premiums paid as benefits in the first half of the 2019 calendar year.
Risk product profitability has fallen
Net profit after tax from risk products in the 2018 calendar year, decreased by $1.4 billion to $33 million, largely driven by retail business. Retail lump sum and disability income business reported large decreases in profit: retail lump sum profits decreased by $669 million to $495 million and the retail disability income result decreased by $407 million to a loss of $567 million compared to 2017. The decrease in profitability for retail business was largely from increase in provisions. Group business profitability levels also reduced by $337 million to $106 million in 2018.
Lower profitability continued in the first half of 2019, with risk products reporting a loss of $86 million in the first half. In detail:
- Retail lump sum continues to be profitable with $532 million profits in the first half of 2019.
- Retail disability income continues to be unprofitable with $568 million losses in the first half of 2019. This is a result of multiple challenges, related to product design, demographic trends, regulations and changing community expectations.
- Group business reported a small loss of $50 million in the first half of 2019.
Overall superannuation business remains profitable, with $44 million profits in the first half of 2019 – although these are lower than seen in the past.
The last two years have 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.
Ordinary business reported a loss in 2018
Net profit after tax from ordinary risk products, decreased by $0.9 billion to a loss of $0.3 billion in the 2018 calendar year, largely driven by increase in provisions for retail lump sum and disability income. A number of life insurers have observed a deterioration in their mortality experience.
This trend has continued in the first half of 2019, with ordinary risk products reporting a loss of $130 million, largely driven by losses of $499 million in retail disability income, offsetting profits in retail lump sum of $399 million.
Life insurance companies remain well capitalised as a whole
The life insurance industry in Australia continues to be well capitalised. For the financial years ended in the 12 months to December 2018, capital coverage ratio for the industry decreased slightly from 2.1 to 1.8. Reinsurers have a higher capital coverage ratio than direct insurers. We note the headwinds for capital emerging in 2019 through reduced profitability and declining yields.
We must not forget that the underlying premise of life insurance is still very much alive and well. There are significant opportunities for those who can get the balance right and leverage new technology and ways of working to provide a better experience and simpler products to their customers.
Life Insurance video insights
In this series of short video clips, our experts provide commentary on the performance of the life insurance sector in Australia, along with a point of view on some of the critical factors influencing the results, and the actions the industry needs to take to address these.