KPMG’s Life Insurance Insights 2020 dashboard provides analysis and insights based on financial results up to 30 June 2020 for the Australian life insurance market.
In aggregate life insurance premium income (excluding reinsurance) declined in the 12 months to June 2020, reflecting additional challenges to the operating environment for insurers over the period.
The direct (as opposed to inwards reinsurance) premium revenue decreased by 6.1 percent to $17.3 billion, compared to relatively stable levels of approximately $18.4 billion per annum for the 2017 to 2019 period.
Group lump sum premium revenue decreased by 12 percent likely reflecting the impact of regulatory changes on the insurance in super - Putting Members’ Interests First (PMIF) and Protecting Your Super Package (PYSP) - which came into effect during the year.
Inwards reinsurance increased by 7.7 percent to $7.2 billion, reflecting the increase in the use of reinsurance, including reinsurance of current in-force portfolios within the industry.
Risk products recorded losses (after tax of) $1.41 billion across the year, a reduction in profit of $1 billion from the prior year.
Overall, profits reduced across all risk products, with only the retail lump sum line of business recording a profit for the year.
Retail lump sum profits decreased by $324 million to $422 million.
Group lump sum profits decreased by $415 million, resulting in a loss of ($353) million.
Retail disability income losses increased by $122 million to a loss of ($1,128) million.
Group disability income losses increased by $156 million to a loss of ($249) million.
The cost of claims continued to increase across all risk products as claims as a proportion of premium increased by 4.3 percent in FY20 to $15.3 billion. This extends a worsening trend of experience with increases of 1 percent and 4.1 percent observed across 2018 and 2019. Trending experience may be further impacted by the uncertainty generated by the COVID-19 pandemic.
The profitability for lump sum insurance has trended down over recent years, but the decrease in profitability in FY2020 was larger than prior years.
For group lump sum insurance this was likely due to a wide range of factors including the impact of the decrease in premium volumes due to PMIF and PYSP without a corresponding change in operating expenses, the impact of COVID-19 on claim reserves for companies with March 2020 or June 2020 year ends and adverse claims experience.
The decrease for retail lump sum insurance was less significant than for group lump sum insurance, but likely arose due to adverse lapse experience combined with the impact of COVID-19 on claim reserves for companies with March 2020 or June 2020 year ends.
The large losses on retail disability income products have continued, reflecting worsening claims experience and the strengthening of claims assumptions including the allowance for the impact of COVID-19 on claim reserves for companies with March 2020 or June 2020 year ends. This highlights the ongoing challenges over the sustainability of this product in its current form. Faced with increasing losses and regulatory pressure, insurers are expected to consider the future design of this product alongside industry guidance from the Institute of Actuaries.
An updated KPMG-FSC industry table reflecting disability income experience from 2016 to 2018 was recently released together with an industry experience investigation, identifying accident and mental illness claims as key drivers of adverse claims experience. In an effort to push the industry to address product design and profitability issues, APRA has also implemented entity-specific supervisory capital adjustments that will take effect on 1 October 2020 - deferred from 31 March 2020 due to the onset of the COVID-19 pandemic.
Net profit after tax from non-risk products decreased over the year by $1.1 billion to $64 million. This is partly reflective of the challenging economic environment caused by the COVID-19 pandemic and the impact this has had on insurers’ investment and associated revenues, along with the impact of low yields on the valuation of guaranteed liabilities.
Those product groupings with the most significant reduction in profits, as per the APRA product classifications, were:
Participating business: $237 million reduction in profit
Investment linked: $104 million reduction in profit
Other product: $656 million reduction in profit
Notwithstanding the challenging operating environment and poor performance, the life insurance industry in Australia continues to be well capitalised. For the year ending 30 June 2020, the capital coverage ratio for the industry had remained consistent with the prior year at 1.8.
We note the headwinds for capital emerging in 2020 through APRA supervisory adjustments which will come into effect from 1 October 2020 - which form part of APRA’s measures to mitigate the risks associated with the retail disability product, reduced profitability, declining yields and general strengthening of assumptions across the industry as insurers brace for the impacts of the COVID-19 pandemic (both direct and indirect) on capital.
The life insurance industry faces significant challenges in responding to the impacts of COVID-19 while attempting to make genuine progress in addressing profitability issues that are acknowledged by all participants as not being sustainable. Progress towards a more sustainable position requires action on multiple fronts. Work in addressing the future product design is critical - however this needs to be accompanied by a coherent strategy that takes into account the pricing of in-force books, effective and efficient claims management, overall expense management and targeted distribution strategies.
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