Australian life insurance industry at the cross-roads

The Australian life insurance industry appears to perennially face structural challenges. In 2013, two of the largest reinsurers experienced material financial losses driven by worse than expected claims experience. Around the same time, industry lapse rates were trending up and insurers consequently started recognising losses and write downs on their present value of future profits. The industry experienced a wave of regulatory reform (Life Insurance Framework, Code of Practice, Claims reviews, FASEA etc.) that occupied management attention and with the Royal Commission recommendations, will continue to do so over the foreseeable future.

Recently released results from some of the players show that the claims experience and ultimately profitability challenges continue to plague the industry. New business volumes are significantly down compared to last year with no sign of a near-term turnaround.

To summarise where things are at for the industry:

• Underlying profitability is low and a turnaround is uncertain
• Traditional distribution models are challenged, and revenue growth is largely being driven by price increases
• Costs continue to increase on regulatory and remediation projects
• Customer trust in the industry remains low

At one level, that sounds existential.

However, it is important to keep in perspective that the life insurance industry has an important economic and social role to play.

Various studies have historically shown that the ‘protection gap’ in Australia is large and there is an intrinsic need for providing customers with security. The challenge for insurers is how to do so in a sustainable way that better meets customer, community, regulatory and shareholder expectations.

Whilst there are no easy answers, here are three levers that industry participants should explore:

1. Face into ‘Big problems’: For good reason and the challenges outlined at the start of this article, insurers haven’t had the capacity or appetite to make fundamental changes to their business. Industry responses have been polarising: at one end, short-term and tactical in nature, often using pricing as a lever; at the other end, we have seen large scale transactions that have distracted management attention for years.
   In the interim, the fundamental issues in the industry have not been addressed. Now is a good a time as any to face into these ‘big problems’. For me, these include but are not limited to:
   1. Product re-design: Driven by competitive pressures, we have largely seen insurers giveaway more coverage and often mis-price risk. There has been minimal innovation in trying to identify and create products that are sustainable for the industry and better meet customer needs. This is one of the hardest problems facing the life insurance industry globally but one, the Australian players need to face into sooner rather than later
   2. Underwriting: We have seen insurers and reinsurers focus some activity to enhance underwriting and incremental improvements have been made, particularly on the customer and adviser experience end. However, there remains a large opportunity for insurers to transform their approach to underwriting by better collection and usage of data that enables more informed decisioning and pricing. For an industry that was historically built on information pooling and asymmetry, the industry has a long way to go.

2. Increase your customers’ awareness and your own: A lot has been published recently about rebuilding customer trust and much of this material is applicable to the life insurance industry. Here are some specific actions life insurers should consider:
    
   1. Increase customer awareness of the importance of life insurance: Some life insurers have over time engaged with individual company-specific initiatives on this matter but I think the industry needs to collaborate and step-up their collective efforts. Industry bodies such as the Financial Services Council (FSC) and others could play a role.
   2. Better understand your customers: Yes, life insurers have limited data on their customers and fewer touchpoints than other product providers but what is not excusable is how effectively insurers have collected and processed this information. Insurers should re-assess all their customer touchpoints and ask themselves:
      1. Are they collecting, storing and sharing this data in an effective manner to build better customer profiles?
      2. How are they acting on the information that is being received? As an example, is root cause analysis being done on customer complaints?
      3. What initiatives are in place to expand the customer touch points and collect more data over time?

3. Foster an innovation culture: Many an insurer has set-up ‘Innovation’ teams, ‘Accelerators’, ‘Incubators’ and even VC funds to scan interesting start-ups from across the globe. However, few insurers have been able to make meaningful traction with these initiatives. One of the reasons for the above is that core activity of ‘innovating’ has been delegated to de-centralised teams that struggle to inject their learnings into an organisational culture that has not fundamentally changed for years. Driving true and lasting innovation will require senior leadership of an organisation to make this a priority for the entire organisation, to individually demonstrate how they are leading on this front and then build in organisational processes that support such activities and behaviours. These characteristics are common in many technology companies and successful Insurtechs, and large insurers could do well to learn from them.

The costs of inaction for the industry and its customers are too high. However, executing on any single one of these initiatives will not be easy, let alone all of them. It will require patience, from shareholders in particular, as it may mean sacrificing short-term profits for longer-term investments. The life insurance industry is well placed to make that trade-off as it is built on the promise of providing long-term security for its customers.

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