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Life insurance losses worsen, revenues fall

Life insurance losses worsen, revenues fall

Australia’s life insurance sector recorded an aggregate loss of $1.3 billion and a significant drop in revenues in the 12 months to 30 June 2020, KPMG’s annual review of the industry finds.

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The challenging conditions of the previous 12-18 months continued, resulting in a reduction in life insurance direct premium income of 6.1 percent to $17.3 billion, while losses on risk products grew by $1 billion and non-risk products by $1.1 billion.

Across the sector, more than 40 percent of firms recorded losses while in total 81 percent had worse figures than the previous year. Insurers also saw a 4.3 percent rise in the cost of claims.

David Kells, KPMG Insurance Lead Partner, said: “This was always likely to be a tough 12 months for the life industry, starting from a low base in 2018-19, and with the full effect of regulatory changes kicking in this year. Profits have fallen, or losses worsened, on almost every metric and then two-thirds through the financial year, the COVID-19 crisis started, the full impact of which will be seen next year.”

“The life insurance industry now faces additional significant challenges in responding to the impacts of the health crisis, while addressing serious and ongoing profitability issues. Progress towards a more sustainable position requires action on multiple fronts. Critical work in addressing the future product design must be accompanied by a coherent strategy including issues such as: the pricing of in-force books; effective claims and expense management; and targeted distribution strategies.”

Mr Kells pointed to the 12 percent fall in Group Lump Sum premium revenue as reflecting the impact of regulatory changes on insurance in super – Putting Members Interest First (PMIF) – and Protecting Your Super Package (PYSP).

Full details of results

Risk Product profitability continues to fall

Risk Products recorded losses (after tax) of $1.4 1billion across the year, an increase in losses of $1 billion from the prior year.

Overall, results worsened across all Risk Products, with only the Retail Lump Sum line of business recording a profit for the year. In detail:

  • Retail Lump Sum profits decreased by $324 million to $422 million. 
  • Group Lump Sum profits fell by $415 million, turning into in a loss of $353 million.
  • Retail Disability Income losses worsened by $122 million to make a new loss total of $1.1 billion.
  • Group Disability Income losses grew by $156 million to a new loss total of $249 million.

Lump Sum Insurance profitability falls

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.

Retail Disability Income products – large losses continue

The grim figures of recent years 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.

Briallen Cummings, KPMG Actuarial Partner, said: “The retail disability income figures highlight the ongoing challenges over the sustainability of this product in its current form. Faced with increasing losses and regulatory pressure, insurers are considering the future design of this product. KPMG analysis released this year for the FSC identified accident and mental illness claims as key drivers of adverse claims experience.”

Large fall in profit for Non-Risk Products

Net profit after tax from Non-Risk Products fell by $1.1 billion to just $64 million. This is partly reflective of the slowdown in the economy during 2020 and the impact this has had on Insurers’ investments and associated revenues along with the impact of low yields on the valuation of guaranteed liabilities.

Cost of claims continued to increase

Across all risk products 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.

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.

Reinsurance role continues to increase

Inwards reinsurance increased by 7.7 percent to $7.2 billion, reflecting its greater use within the industry, including reinsurance of current in-force portfolios.

Life insurance companies remain well capitalised as a whole

One bright area is that the sector continues to be well capitalised, with this year’s capital coverage ratio remaining consistent with the prior year at 1.8. KPMG notes the headwinds for capital emerging through new supervisory adjustments which will come into effect from 1 October 2020.

David Kells added: “Separate KPMG analysis* has shown that consumers of insurance products, including life insurance are wanting better value for money and customer experiences in the COVID-19 era and are increasingly likely to switch providers if they are not satisfied. This increases the pressure on insurers still further but the results also showed those who have used life insurance do value it so there is at least a solid foundation to build on.”

For further information

Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au

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