Insurance in Superannuation

The Challenges of the Current Market

Stephen Huppert

Partner, Deloitte

July 2014

AFR front page, Sat 26 Oct 2013

AFR back page, Tues 23 July 2013

1 The Situation

2 The Contributors

3 The Responses

4 The Future

1 The Situation

2 The Contributors

3 The Responses

4 The Future

Degrees of separation

members = insured

employer

administrator

trustee insurer

Economic downturn Insurance payout in lieu

of retrenchment

Significant premium increases

Late reporting of TPD limits opportunities to rehabilitate or reduce

benefit

Reinsurance market tightening

Increases in default cover, especially TPD

leading to incentives to claim

Definitions becoming complex leading to

unanticipated claims

SLAs take precedence over rigorous

assessment of claims

AALs becoming more and more generous

Return to work definitions not able to be

readily enforced

Poor data quality Pricing on incomplete

data

Increased involvement of lawyers

Aggressive competition for business

Worsening DI claims experience

Greater incidence and longer duration

Observations from the market

Experience now very different to when priced

Incidence of mental health now up to 30-40%

of disability claims

“As a result of the poor group claims experience, there have been some very

significant increases in premium rates for large superannuation funds in recent times

— of the order of 25 per cent to 40 per cent in a number of cases".

"This is a direct reflection of poor past pricing and governance practices, and

recognition that the premium rates were just not sustainable.

“[While the insurance industry is] starting to address its shortcomings, unfortunately,

superannuation members bear the brunt of the mispricing that occurred in the past“.

Perspective from APRA

Ian Laughlin

Deputy Chairman,

June 2013

Source: APRA Statistics

$0

$500

$1,000

$1,500

$2,000

$0

$1,000

$2,000

$3,000

$4,000

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

$ B

illio

ns

$ m

illio

ns

Growth in Group Risk Premiums (LH axis) vs Growth Superannuation Assets (RH axis)

Superannuation Funds Premiums

Perspective from the superannuation funds

Source: APRA

0

1,000

2,000

3,000

2004 2007 2010 2013

Pre

miu

ms P

aid

to

In

su

rer

($m

)

Premiums Paid

0

200

400

600

800

1,000

1,200

1,400

2004 2007 2010 2013

Pro

ce

ed

s o

n I

nsu

ran

ce

Po

licie

s

($m

)

Proceeds on Insurance Policies

0%

50%

100%

2004 2007 2010 2013

Loss R

atio

Loss Ratio

Perspective from the superannuation funds

Source: APRA

Perspective from insurance companies

“While claims experience improved overall, Wholesale Life

net revenue declined significantly due to unfavourable claims

experience and claims reserve increases”

Comminsure Full Year Profit Announcement, 14 August 2013

“Australian wealth protection operating earnings down 52%

on 1H 12, reflecting poor claims experience and increased

lapse rates.

The result was impacted by experience losses of A$33m and

lower profit margins reflecting lapse assumptions

strengthened in FY 12.”

AMP Half Year Profit Announcement, 15 August 2013

-$500

-$400

-$300

-$200

-$100

$0

$100

$200

$300

$400

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

$m

Profit by Product (12 mth rolling average)

Group disability income insurance

Group lump sum risk

Source: APRA

0

400

800

1,200

1,600

2,000

Jun 2008 Dec 2009 Jun 2011 Dec 2012

Lump Sum Risk Net Policy Revenue ($m)

-400

0

400

800

Jun 2008 Dec 2009 Jun 2011 Dec 2012

Lump Sum Risk Profit before Tax ($m)

0

100

200

300

400

500

600

Jun 2008 Dec 2009 Jun 2011 Dec 2012

Disability Income Net Policy Revenue ($m)

-150

-100

-50

0

50

100

150

Jun 2008 Dec 2009 Jun 2011 Dec 2012

Disability Income Profit before Tax ($m)

Perspective from insurance companies

Source: APRA

1 The Situation

2 The Contributors

3 The Responses

4 The Future

Relaxing of product definitions and policy terms

Legal involvement driving increased awareness of benefits available to customers

Improvements and increases in benefits

1 The Situation

2 The Contributors

3 The Responses

4 The Future

Review product features

• Review Terms & Conditions including AALs

• Tighten definitions including eligibility, default cover, return

to work rules

• Consider a time limit by which past claims will not be

allowed to be admitted

• Are all the insurance benefits relevant to fund members?

Reduce or remove benefits of limited value to members.

Improve claims management

• Review claims philosophy

• Process mapping

• Roles and responsibilities

• Decision making process

• Check adequacy of quality assurance procedures

and controls.

Better data/better use of data

• More effective use of data to understand

behaviours and processes

• Maintain better quality data for pricing. Undertake

regular reviews and cleansing of data

• Need more than three years’ data to price TPD

• Understand the performance of insurance portfolio.

Work with employers

• Wellness initiatives

• Early intervention

• Return to work policies.

1 The Situation

2 The Contributors

3 The Responses

4 The Future

Additional contributions above SG

rate for comfortable retirement

Australians need to contribute more to super. The Superannuation Guarantee

contribution will still be insufficient when it increases to 12% of salary

5.4%

7.5%

Should superannuation be

used for life insurance?

How will the cycle stabilise?

Reported

Losses

Increases

to

premiums

Increase in

tender activity

Lack of

reliable data

What pricing

Basis?

Increase in

claims

Question arises for the sustainability of insurance in super

If premiums keep going up…

Do members (and Trustees) opt out at some point?

This may increase the proportion of ‘sub standard’ lives

The cycle continues…

Insurers seeking

profit

Funds questioning

value

Previously thought low margin but profitable

LAGIC increasing capital requirements

Profitability falling with claim deterioration

ROC not sustainable at current levels

Funds must justify cost to member balances

Significant increases in price

Insurers choosing not to respond to tenders

Balance between cost and benefits delicate

Need a mutually sustainable understanding of cost & benefit

Supportive roles of each in ensuring fair claim payment systems

Insurers need to make a margin to continue to offer services

“Never let a good

crisis go to waste”

Winston Churchill

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