Risk advisers may be calling out for greater choice in insurers, but they’re also preventing it from happening.
That’s according to research by Standard & Poor’s Ratings Services, which has assessed the industry’s risk score.
Australia’s life insurance industry performed very well, becoming one of only two countries with a “very low risk” score. But while barriers into the sector were regarded as ‘neutral’, there was one problem highlighted in the report.
“For life insurers offering individual risk products, there is also a need to distribute through a network of advisors to sell material volumes,” the report stated.
“Due to the strong competition for advisers, this channel is a relatively expensive platform for life insurers to utilise. Bank-owned life insurers have the advantage of access to their parent bank's extensive network of advisers and wide customer base. It is consequently difficult for new entrants to compete against the scale and sophistication of established players that own end-to-end value chains.”
A strong level of brand loyalty for established home-grown players is also enforced by extensive marketing in retail products, requiring sizable marketing budgets to compete.
Overall, the report contradicted the sustainability issue that many experts say the sector is facing.
“Australia is one of two countries to be assigned a ‘very low risk’ score for its life insurance sector alongside Canada,” said Standard & Poor’s credit analyst Michael Vine. “The ‘very low risk’ IICRA is the strongest on a scale of six and provides the context for our analysis of an insurer's competitive position and business risk profile.”
Wine said that S&P sees good top-line revenue growth in life risk and wealth management.
“There’s some offset, partially by income protection and claims coming out of group risk as well as some higher lapses...but a lot of that is being addressed through initiatives and we would see a turnaround in coming periods.”
Standard & Poor's credit analyst Lucy Huynh expects the sector to maintain its good profitability over the medium term.
“In our opinion, the sector’s conservative approach to product design, asset-liability management, and investment management – resulting in relatively less interest rate and longevity risks than other markets – should continue to support the sector’s profitability,” said Huynh. “While there is increasing demand from Australia’s ageing population for more sophisticated annuities or retirement solution products, we believe that the industry has largely approached this opportunity with caution. Therefore, we do not expect these risks to increase sharply over the medium term.”