KPMG’s Life Insurance Insights Report 2018 finds that the industry continues to grow steadily, with gross policy revenue increasing by 6.6 percent to $24.7bn – equating to 1.4 percent of Australia’s GDP.
The industry generated $14.8bn of benefit payments for policyholders and super fund members and $2.2bn in profits for shareholders in the 12 months to 31 March 2018.
Risk product profitability bounced back to its normalised level in 2018, earning $1,307m, up by $627m on last year. This was largely due to retail risk business recovering strongly from a poor 2017, with group business profitability levels remaining comparatively flat.
KPMG’s study confirmed the growing role played by reinsurers in this market, with the level of reinsurance increasing from 23 percent to 30 percent over the past 5 years. Based on premium volumes, the life insurance industry is of comparable size to health insurance and about half the size of the general insurance sector.
M&A activity continues to see a shift in ownership from local financial services conglomerates to global life insurance specialists, which are looking to diversify their global business models and are attracted to the strong growth dynamics of the risk market in a mature regulatory setting. The lower cost of capital of some of the new parents, together with a longer term investment horizon, is expected to change the manner in which the sector is invested in for improved operational efficiency and more customer-centric product offerings.
Hoa Bui, KPMG Partner, Actuarial & Financial Risk, said: “This was a solid result by the life insurers and positions them well for the tougher era to come. Sustainable growth going forward will only be achieved through customer-centric business models, given the public trust debate across the financial services sector that has been amplified through the Royal Commission.
“We can expect increased regulatory pressure for life insurers to demonstrate that their products demonstrate true customer value and a transparent customer experience through the full service life cycle. Compliance and remediation costs will increase in the shorter term, and companies will be expected to adapt their compliance operating models to manage costs effectively.
“From a channel perspective it remains to be seen whether Australia will finally see an improved performance of the bancassurance channel on the back of recent landmark third party bank-insurer strategic alliances. Critical to the success of these new strategic alliances will be seamless integration of life insurers’ protection offerings into banks’ elevated omni-channel customer experience and leveraging the banks’ knowledge of the customers’ lifestage needs”, she said.
Life insurance in Australia is unique amongst global markets because of its dominance of risk products over savings products. Risk products accounted for $22.6 billion in gross premiums, while participating conventional and investment business accounted for $206 million; investment linked accounts had net outflows of $16 million; with the balance of $1.9 billion attributable to annuities and other products.
Hoa Bui added: “With rising pressures on operating efficiency, compliance and greater customer-centricity in the product and service offerings Australian life insurers will increasingly look at global capability accelerators in structured and unstructured data management, artificial intelligence, legacy technology management, and machine learning to pursue genuine transformations in their operating models.
“The KPMG focus will be an improved claims customer experience, customer retention, smart underwriting, and regtech to manage compliance to appropriate quality and cost parameters. Global trends in traditional life insurers partnering with best of breed insurtech and mega-platform players (such as Google, Amazon and Facebook) can be expected to hit the Australian market through a new pedigree of global life insurance parents looking for disruptive global solutions to remove old world local market constraints.”
1. The changing industry structure – given the current wave of M&A activity changing ownership.
2. Insurance in super – the recent Federal Budget changes proposing moving insurance from a default framework to an opt-in arrangement for young people, inactive accounts and members with low balances could significantly reduce revenue in the sector, previous KPMG research has shown
3. Data and Disruption – improved use of data is an opportunity for life insurers to improve business performance lie in many areas. From the perspective of gaining a deeper customer understanding, significant commercial value can be derived through, for example:
Data analytics also means better fulfilment, at a lower cost, as automation reduces inefficiencies and increases the speed to serve.
4. Innovation – investment in cognitive technologies will be an area of focus for the majority of CEOs in the next three years, according to the 2018 KPMG Global CEO report – with significant opportunities in the financial sector, specifically in insurtech.
5. Public trust and life insurance – this is an ongoing issue and we can expect to see further additions to the 2017 Life Insurance Code of Practice which was introduced following media claims of poor customer service and the 2016 ASIC review of industry claims.
6. Legacy system transformation – while they fulfilled previous business needs, legacy IT systems have become a major roadblock in responding to the rapidly changing environment. As a result, many organisations are seeking to transform ageing IT platforms, especially in the core administration area.
7. EU General Data Protection Regulations (GDPR) – Australian life insurers must consider if they are bound by the GDPR. An insurer may be bound if they have a European parent, or if they collect, use or disclose data that comes from an EU resident. If it does apply, then the regulations are likely to have considerable impact, both locally and in respect of any outsourced providers. A possible non-compliance fine of up to 4 percent of turnover – in addition to the other powers given to privacy regulators – means insurers must give this the GDPR appropriate consideration.
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