A consumer-driven report card of life insurer claim denials, as proposed by ASIC, would result in “disastrous outcomes” for the industry, says an industry consultant.
Professional Opinions director Doron Samuell says a consumer report card highlighting the claim denial rates of life insurers is “ill-conceived” and would be “a pointless and potentially dangerous exercise”.
ASIC and APRA launched the pilot phase of a project in early May to collect and publish life insurance claims data, including claims handling time frames and dispute levels, on a per insurer basis.
Mr Samuell said ASIC is changing the drivers of insurance decision from accuracy to popularity, and it is “inviting disastrous outcomes”.
“While it is perfectly appropriate for regulators to monitor the life industry, they make no mention of the potential consequences of their costly meddling,” he said.
“Executives in every insurance company will be devising strategies to focus on performing well in those tables. The most obvious way to achieve those outcomes is to pay more claims.”
Mr Samuell said insurers will understand that the lowest decline and complaint rates will be most popular with consumers.
He said the only parties who could complain about such an outcome are shareholders and their views won’t be heard.
“Insurers would be wise to replace their claims departments with an enlarged accounts payable service,” Mr Samuell said.
“Disability insurance premiums continue to rise. With ASIC’s new initiatives, it is foreseeable that it will be a giant nudge towards market unsustainability.”
ASIC last year released the findings of its industry-wide life insurance review, saying it found “a clear need for public reporting on life insurance claims outcomes at an industry and individual insurer level”.
Suncorp’s life insurance and superannuation division has been placed on ‘negative watch’ by S&P after the bank revealed it is considering “strategic alternatives” for the business, including divestment.
In a statement released yesterday, S&P Global Ratings said the strategic importance of Suncorp Life and Superannuation Limited (SLSL) has “weakened” following statements made in Suncorp’s annual result.
In last week’s annual result announcement, Suncorp revealed it is implementing an “optimisation program” for its Australian life insurance business as well as “exploring strategic alternatives”.
In response, S&P has lowered its financial strength and issuer credit ratings on SLSL to ‘A’ from ‘A+’, which it said “reflects a reduced level of uplift in the rating from group support”.
S&P said it has also placed Asteron Life’s ‘A+’ rating on watch with “negative implications, reflecting uncertainty as to the level of integration of the entity with the group”.
The research house said Asteron Life is now only “strategically important” for Suncorp – a downgrade from its previous “core status”.
“This downgrade follows Suncorp’s announcement that it has undertaken a strategic review of its Australian life insurance operations, which includes potential divestment of the operations. As such, we no longer consider SLSL as being highly unlikely to be sold,” said S&P.
“The weak operating performance of the life operations relative to group expectations has triggered the group’s strategic review. This weaker performance also contributes to our assessment of slightly lower group support for SLSL compared with that for Asteron Life,” said S&P.
“We expect the continued strength in [Asteron Life]’s inforce premiums, operating experience and emergence of planned profit margins to support the financial contribution of the group’s New Zealand life operations, in contrast to SLSL’s weaker operating performance.”
Companies offering life insurance will now disclose the outcomes of claims, under a new reporting regime in a bid to increase transparency in the industry. This information won’t only be used by individual customers but also by financial advisers and in the case of many of us, by our superannuation fund, via a group policy.
If super funds consumers and financial planners use this data, it will likely place considerable pressure on insurers who have high rejection rates to improve internal practices, terms of insurance policies and better inform consumers about the scope of the insurance coverage. A history of high rejections would suggest that there is a relatively high risk the insurer would reject future claims. Awareness that an insurer has a high rate of rejections would lead to business being diverted away from them.
Australian Securities and Investments Commission
The new disclosure regime arises from an ASIC review of life insurance claims. As part of the review ASIC looked at the histories of 15 insurers that provide life, total and permanent disability (TPD), trauma and income protection insurance.
The review found the highest rejection of claims rates were for TPD (average declined claim rate of 16%) and trauma cover (14%). The rejections were lowest for life cover (4%) and income protection cover (7%).
Disconcertingly, the rejection rates vary substantially as between insurers. For TPD, three insurers had rejection rates of 37%, 25% and 24% respectively, compared to an industry average of 16%.
ASIC provided a comparison of rejection rates among the insurers it examined, but it kept the insurer names anonymous. For example the reporting on TPD rejections ranged widely.
ASIC’s reluctance to name names in this review is understandable. It found that making comparisons was difficult, partly because the insurance policies have different terms and definitions. Sometimes these differences are subtle, and at other times substantial.
What is heartening is that ASIC proposes reporting on the conduct of individual insurers – that is, it appears ASIC intends naming names. The sooner this is done, the better.
It is in the mutual interests of consumers, superannuation funds managers, financial planners who advise clients on the purchasing of insurance, and the insurance industry itself that there is an improved capacity for purchasers to make informed choices.
Purchasing the right insurance policy is fiendishly difficult. Making anything resembling a rational and informed choice requires knowing which future events are covered by the insurance, and the likelihood of the insurer paying up if a claim is made.
Finding out which events are covered by a policy often requires wading through lengthy and complex product disclosure statements (PDS). In addition, making any reliable assessments about whether the insurer is likely to pay up on a claim is next to impossible. It is somewhat ironic these uncertainties exist as a reason for insuring is to buy peace of mind, and an assurance that if things go wrong we will receive money to compensate for some or all of the insured loss.
The difficulties consumers face in making comparisons when shopping for the right product contribute towards an inadequately competitive marketplace and a lack of consumer trust in insurers. This in turn is fuelling public disquiet that led to ASIC review of the industry.
ASIC found that overall the life insurance industry accepts 90% of claims in the first instance if a decision was made to about whether or not to make a claim. For death claims, an average 96% of claims are paid.
ASIC is concerned, however, that in some cases claims are being rejected on technical or contractual grounds that are not in accordance with the spirit or the intent of the policy. This presents a challenge for insurers to decide how to deal with that small number of claims that may not be covered under the fine print, but under any reasonable consumer or community expectation should be paid.
This sort of information is already published in the United Kingdom where the Association of British Insurers publishes data on claims payouts.
In Australia ASIC proposes working with the Australian Prudential Regulation Authority, the insurance industry and stakeholders to establish a consistent public reporting regime for claims data and claims outcomes. ASIC will report on claims handling timeframes and dispute levels across all policy types.
Enhancing the capacity for consumers to make better informed choices will help build trust in the industry and a more competitive marketplace. It will also help bring greater peace of mind for those purchasing insurance.
Author: Justin Malbon, Professor of Law, Monash University
Volatility in financial markets globally and competition from smaller “challengers” like Youi (an Australian registered company owned by South Africa’s Rand Merchant Investment Holdings) have been driving down big insurance companies’ profits, putting pressure on these companies to find ways of cutting costs.
Figures released by the Australian Prudential Regulation Authority (APRA) reveal the performance of the Australian insurance sector as a whole.
APRA figures show that revenue is declining across the sector. For the 110 insurers in the Australian market, bottom line profit after tax declined substantially from a combined $4.1 billion to $2.4 billion in 2015, a drop of 73%.
The total cost of claims made by policyholders was effectively flat for 2015, so the main driver of the slump in profit was the downturn in global financial markets. When policyholders pay their insurance premiums, insurers don’t hold these as cash. In fact, of the $119 billion of total assets of Australian insurance companies, less than 2% is held as cash. Instead, a substantial portion – $68.4 billion (57%) – is invested, with over $50 billion held as interest bearing assets such as bonds.
For the 2014 calendar year, investment returns for the sector as a whole were slightly over $4.2 billion, whereas in 2015 investment returns nearly halved to $2.2 billion. In the year ahead there may be more of a threat to insurance companies from investments in the markets.
In the first months of 2016 in Australia, the All Ordinaries Index has fallen nearly 8% and there are indicators that returns for both global bonds and shares may not improve much in the short term. Australian insurers may have to look elsewhere for returns on investments.
Increasing competition
Insurers will need to both increase revenue and decrease expenses to ensure sustainable profitability. The major insurers have embarked on cost cutting plans, which do seem to be having the desired effect.
This is important, as challenger companies the likes of Youi and Budget Direct are taking a small, but growing, portion of the $16 billion personal insurance market (which includes home, content and motor), currently dominated by IAG and Suncorp Group. This level of competition is seen in the APRA figures, which indicate that the while total premiums increased by just under 4%, the number of policyholders also increased (by over 4%), so the premium per policyholder actually declined by 1% from $612 to $605.
This increase in competition doesn’t necessarily mean a price war in the insurance sector. Gary Dransfield, personal insurance chief executive at insurer Suncorp says his company won’t look to recover its lost market share by reducing premiums.
“We don’t think that’s the way to deal with the competitive environment.”
However, if competition continues to intensify, the ability for insurers to increase premiums is somewhat limited.
Technology
Insurers may be able to make savings by improving the use of technology that gives these companies insight into customers’ actions. These technologies include telematics and Big Data. Telematics is the use of communications devices to send, receive and store information relating to a remote object, such as a vehicle. Big Data relates to large amounts of data creation, storage, retrieval and analysis. Both of these technologies allow insurance companies to better understand their customers.
Which is important, because the purpose of insurance companies is to collect premiums for those they insure, and to pay out to those few who do have to call upon their insurance protection (i.e. for hail damage to a car, or flood damage to a house). A major impact on profitability is the ability of an insurance company to properly assess and price the risk that the company will have to pay out. This is why the premiums for younger drivers are higher, as they judged to be a higher risk of having an at-fault claim.
More detailed information about policyholders improves the ability of insurance companies to do that, and this can occur in a variety of ways. Rather than simply base the risk of the policyholder on general category information such as age, gender, or the postcode where the vehicle is garaged, factors such as the number of kilometres driven, the time of day and location of the driving, and even speed zones provide valuable insights to insurers.
Gathered information on customers also assists insurers in other ways. In 2013 IAG purchased Wesfarmers’ insurance business for close to $2 billion, allowing it to get a better grasp of consumer choices through rewards cards purchases and permitting it to tailor insurance products accordingly.
The insurance sector is inevitably at the mercy of natural disasters – and Australia has experienced increasingly intense storms, bushfires and cyclones in recent years. But it is also facing stormy conditions on investment markets and in the competitive landscape. Those insurers that innovate – making the best use of sophisticated data science and financial tools – will weather difficult times best.
Authors: David Bon, Senior Lecturer, Accounting Discipline Group, University of Technology Sydney; Anna Wright, Senior lecturer, University of Technology Sydney.
The insurance industry—traditionally cautious, heavily regulated, and accustomed to incremental change—confronts a radical shift in the age of automation. With the rise of digitization and machine learning, insurance activities are becoming more automatable and the need to attract and retain employees with digital expertise is becoming more critical.
Our colleagues at the McKinsey Global Institute (MGI) have been exploring the implications of workplace automation across multiple industries. Although their preliminary report cautions that “activities” differ from “occupations” (the latter being an aggregate of the former), it presents some stark conclusions: for example, automation will probably change the vast majority of occupations, and up to 45 percent of all work activities in the United States, where MGI performed its analysis, can be automated right now with current technology.1 This figure does not reflect the precise automation potential for each of these specific occupations, because activities are scattered across them, and different activities will be automated at different rates. But significant changes are clearly approaching in many industries, including insurance, whose potential for automation resembles that of the economy as a whole.
We’ve been studying the impact of automation on insurers from another angle. Drawing on our proprietary insurance-cost and full-time-equivalent (FTE) benchmarking database, we focused on Western European insurers, forecast the outcomes for about 20 discrete corporate functions, and aggregated the results.2 Our work indicates that some roles will undoubtedly change markedly and that certain occupations are particularly prone to layoffs; positions in operations and administrative support are especially likely to be consolidated or replaced. The extent of the effect differs by market, product group, and capacity for automation.
Steeper declines will occur in more saturated markets, products with declining business volumes, and, of course, the more predictable and repeatable positions, including those in IT. Other roles, however, will experience a net gain in numbers, especially those concentrating on tasks with a higher value added. The broader corporate functions including these roles will lose jobs overall. But some positions will be engines of job creation—these include marketing and sales support for digital channels and newly created analytics teams tasked with detecting fraud, creating “next best” offers, and smart claims avoidance. To meet these challenges, insurers will need to source, develop, and retain workers with skills in areas such as advanced analytics and agile software development; experience in emerging and web-based technologies; and the ability to translate such capabilities into customer-minded and business-relevant conclusions and results.
The net effect of such position-by-position changes is harder to determine with certainty. Numerous variables affect each role’s outcome—whether job creation or contraction—which means that the sum of these potential outcomes could shift significantly. To analyze these outcomes, we have factored in variable growth rates across separate regions and product groups, as well as the possibility of increasing cost pressures (including those arising from a low-interest-rate environment). Our most probable outcome for insurers sees up to 25 percent of full-time positions consolidated or reduced as a net aggregate, occurring at different rates for different roles over a period of about a decade.
That’s neither a negligible amount of job loss nor an unimaginably distant time frame. On the contrary, given the magnitude of these changes and the looming future, it’s important that insurers begin to rethink their priorities right now. These should include retraining and redeploying the talent they currently have, identifying critical new skills to insource, and retuning value propositions in the war for new talent and capabilities. That competition will almost certainly increase as the digital transformation takes hold. The first waves are already hitting the beach.
