Moving out

IT IS no secret that the large financial institutions – namely the big four banks, AMP and Macquarie – dominate Australia's life insurance sector, just as they do the wider financial services industry.

In December 2015, AMP, NAB, OnePath and CommInsure ranked among the top insurers for individual risk lump sum premium inflows and individual risk income premium inflows, according to researcher Plan for Life.

Recently, though, the tide has begun to turn on those large financial institutions owning risk insurance product manufacturing.
Over the past six months, two of the large institutions have pulled up stumps on their life insurance businesses and sold them off – the first of these being NAB.

In late October 2015, NAB announced via the ASX that it was to sell 80 per cent of its life business to Japanese life insurance giant Nippon Life. NAB retained a 20 per cent stake within the business and established a 20 year distribution partnership with Nippon. However, the move made NAB the first bank to move out of owning – or holding a majority share in – risk product manufacturing.

More recently, the industry saw Macquarie Group also pull out of owning life insurance product manufacturing.

Macquarie announced in March 2016 that it had entered into an agreement with Zurich for the sale of its Macquarie Life business.
With the acquisition expected to be completed in the second half of 2016 – pending regulatory and court approvals – the sale will result in all of Macquarie Life's Australian staff and policyholders transitioning over to Zurich.

As the life insurance industry has been so heavily dominated by the large financial institutions, this leaves the question of why would they now decide to exit out of owning life insurance product manufacturing?

In the statement announcing Macquarie Group's agreement with Zurich, the head of Macquarie's Banking and Financial Services Group Greg Ward said that the sale of the business "reflects the need for significant scale in the capital intensive life insurance industry in order to drive appropriate returns".

This could very well suggest, as Forte Asset Solutions' Steve Prendeville told ifa, that the narrowing of profit margins is pushing the banks to reconsider their position in life insurance.

"We've also got potentially, depending on the underlying book, a significant amount of claims coming through, so they would ask themselves is this a core [business] that it is fiscally strategic to have," Mr Prendeville said.

According to Rice Warner, the incoming regulatory changes through the Life Insurance Framework – namely where licensees will be required to cater for wider restricted approved product lists (APLs) – could be another influential factor on the banks' decision to get out of life insurance.

"Expanded APLs means that [bank] advisers will sell more products of other manufacturers and less of their own brand. [Bank] customers will get better choice if more products are offered," Rice Warner said.

Its statement continued: "The impact on the industry will be significant. It is likely that more banks will follow the lead of NAB and exit the manufacture of life insurance to release capital."

In the grand scheme of things, it may be early days to be tipping whether more banks will follow suit and exit out of the owning of life insurance manufacturing. Then again, it may not be.

There is, according to Mr Prendeville, a very real possibility that the industry could see more banks pull out from owning of life insurance business. He believes, though, that this movement won't just stop at life insurance, but will include wealth management arms as a whole.

Mr Prendeville adds that Australia's financial services sector are ripe for disruption and looking incredibly appealing to heavily cashed-up international companies. In this situation, it would be very unsurprising to see these international companies snap up bank owned business as a way to enter the Australian market.

"We do have a significant number of international players seeking entry into the Australian market, as evidenced by the recent introduction of retail risk through the South African group PPS Mutual," he said.

"Australia is an extremely good proposition at the moment, not only because of the geopolitical stability but also the size of our market."

That, accompanied by the low Australian dollar, Mr Prendeville explains, is making the idea of acquiring bank owned businesses very appealing. We may very well see banks look to cash in by offloading their life businesses, which are proving burdensome.