How LIF reforms have impacted insurance sales

Some time ago, after a submission to the federal government on LIF, I made the point to some former colleagues in the federal Treasury that the LIF proposals – then being driven by the media and the regulators – would cause the contraction of the life insurance industry, and the loss of government GST revenue.

They all looked sideways in surprise. True, I said, so where was the economic impact analysis of the regulatory push?

Of course there was none!

I told them that this will also reduce company tax collections, and have a significant flow-on impact on stamp duty collections by state governments, which average 10 per cent of life insurance premiums.

These stamp duty collections will now contract in absolute terms.

What follows is an analysis published recently in Strategic Insight:

“This is an overview of inflows and sales for the 12 months to the end of June 2017 for the Life Insurance Industry and the figures come from APRA.

Total Risk Premium Sales fell 9.2 per cent over the calendar year.

Market leader TAL recorded a decline of 24.6 per cent and AIA Australia recorded a decline in sales of 31.9 per cent.

In the Individual Risk Lump Sum market premium inflows grew at 2.9 per cent led by Zurich (64.2 per cent), ClearView (18.8 per cent) and AIA Australia (13 per cent), while AMP (0.8 per cent) MLC Life (2.8 per cent) and OnePath (-1.4 per cent) were flat by comparison.

Individual Risk Lump Sum sales fell by 4.0 per cent year on year.

Individual Risk Income Market inflows were up 3.8 per cent over the past year while overall Individual Risk Income Sales decreased by 2.1 per cent over the last 12 months.

Group Risk Inflows were flat, up only 1.2 per cent for the year.

Group Risk sales fell by 21.4 per cent, with Strategic Insight describing the volatile nature of sales figures tied to the success of insurers acquiring mandates in the latest round of remarketing exercises that are an ongoing feature of sector.

As a result of these activities, AIA Australia (-55.2 per cent) and TAL (-47.6 per cent) posted the highest decrease in sales.”

What will happen now?

These numbers tells us that the majors are starting to consider group risk is not going to be profitable at the present premium levels, and that as MetLife has re-entered the market in Australia it appears to have decided to take up that group risk segment, and Nippon Life (MLC) is trying to maintain volumes.

I assume that Nippon Life has a long-term, five-year strategy to re-build that business.

The group risk market, which is the principal source of life risk insurance cover for industry superannuation funds, has been a focus of substantial losses for insurers over the last three years, and these losses are forecast to increase and accelerate.

The result of these increases is that the prices of premiums have risen some 45 per cent across the group risk market, and the industry funds now have to pass this on in full.

The premiums will continue to rise in double figures.

There will be a move starting shortly to increase the exclusions on these default policies that are commenced without evidence of health – in other words, any pre-existing injury or illness will be excluded from claim.

Underwriting at claim time is a growing litigation basket, and an area where the regulator is sure to go; the consumer pain will be immense with denied claims.

The drop in risk premium sales of nearly 10 per cent is just the start, with the action of ASIC in focusing on commission as being the prime issue they are concerned with, apart from the 27-page SOA model, all contributing to the loss of confidence by advisers in this market segment.

This ASIC policy has yet to have an impact, but when it does, it will see a sustained drop in sales and thus cash flows.

It is estimated that the risk premium sales will fall again this financial year, probably by about 11 per cent, a slightly higher amount than last year, and that the pressure on the federal government will start to mount when stamp duty receipts to the state governments and company tax fall, and one or possibly two of the existing life companies start closing down offerings – especially group risk life insurance.

It is possible that AMP Life will be sold off.

This will leave us in a position in about 18 months’ time where the writing of life insurance will become an expensive proposition for consumers, because advisers will be loath to be fully exposed to 100 per cent clawbacks with rapidly rising premiums. Why take the risk?

This is the net result of the ASIC policy, and it will be quite stark.

Indeed, there will be some move by life insurers to allow (with the appropriate discounts to consumers) prepay of contracts two years ahead out of super funds, to offset this regulator imposition on the free market.

Indeed, some advisers are now looking to fully rebate life insurance commission to the client and to have the corresponding fee paid from their superannuation fund.

This obviates the legislative impact of clawback, and you cannot clawback zero commission.

Remembering here that there are already clawbacks that apply in the life insurance industry, but the regulator, who is trying to use them as some form of penalty or control device, appears to not understand the industry. Enforcement is one thing but rationality is another.

ASIC forgets that life insurance is not a packaged product and the insurer does not have to offer terms to applicants, and clearly some people will not be covered due to a range of factors (including drug use and mental health events).

So, in summary terms, there will be a lot more SOAs written moving people from high-cost insurers to lower-cost insurers, and there will be also large chunks of business moving elsewhere due to very high premium hikes and consumer complaints about claims administration.

The regulator has, in effect, created a large churn program.

In all of this, the big loser is the government – in terms of at least $1 billion in tax revenue – followed by the consumers (with price increases), and then the financial services industry, courtesy of increased compliance costs.

Ultimately, the question posed to ASIC will be why are people paying fees to you to increase costs to everyone, including consumers who will pay all of these fees, for very little result?

The industry is unlikely to absorb the fees at all.

The underlying outcome of this ASIC policy will be that less people will have life risk insurance, costs for the consumer will rise (ASIC fees will now have be included in disclosures on SOAs) and a greater impact on the future revenues of the federal government will occur.

Mervin Reed is a Chartered Financial Adviser with Tasmanian Private Wealth Advisers (licensed by Dover Financial Advisers), and a former senior federal and state public servant.