Insights Report Life Risk Australia 2010 NMG Financial Services Consulting

Insights Report
Life Risk Australia
NMG Financial Services Consulting
2009 has been a watershed year for the life risk (protection)
From 2004 – 2007 retail and group new business growth
segment in many of the geographies we cover. Declining equity
accelerated, and profitability steadily improved (with an average
markets in 2008 and into 2009 reduced consumer appetite for
return on equity of over 15% for the period). In 2008 and through
risk even as institutions and distributors were forced to look to
2009 new retail sales continued to grow (albeit less rapidly than
alternative products to offset lower investment sales; life risk new
in prior years, and supported by one-off external stimulants) but
business and revenue growth accelerated even as investment
product margins deteriorated particularly in trauma and income
revenues declined. As a result we have seen a marked and
protection. Aggregate industry profits were dragged down by
positive shift in sentiment towards life risk from insurers as well
investment losses (Figure 2) and insurers quickly moved to report
as distributors, and are hopeful that this will stick as investment
on a normalised basis despite having previously been happy to
markets and sales bounce back.
take the credit for investment income. Still, relatively stable headline
This general observation applies as much to Australia as to
other markets. Australian life insurers were already focused on
standalone risk or protection products (unlike insurers in the UK,
results were in stark contrast to wealth management, where the
impact of the global financial crisis (GFC) on volumes and on
profitability was far more pronounced.
South Africa or Asia where investment-linked or bundled products
As this disparity between life risk and wealth results became
are the norm) but life insurance was still widely seen as a poor
apparent, we witnessed a rapid change in sentiment: media and
cousin to wealth management. 2009 marked a turning point, with
analyst coverage of the life risk sector became progressively more
a noticeable shift in mainstream institutional and media attitudes
upbeat while domestic financial institutions reversed years of under-
to life insurance and to life insurers.
investment in their own insurance businesses to kick off the wave
of life insurance consolidation we predicted in our last Insights report.
Figure 1: Historical Life Risk Sales and Profit Growth
Retail Life Risk New Sales, 2007 - 2009
- A$m Growth
Total Retail Sales
Life Risk Industry Profitability, 2007-2009
- A$b -
1.0 - 1.1
Source: NMG Risk Distribution Monitor
Source: NMG analysis of company accounts, management interviews and estimates
Insights Report – Life Risk Australia 2010 3
We would note that this newfound enthusiasm was not shared by
We have noted already that insurers benefited from external
all industry participants. A number of multinationals voted with their
stimulants in recent years, while increased enthusiasm for life risk
feet, with Aviva and ING exiting in 2009 and AXA SA apparently set
is due at least in part to the perceived scope for demand expansion
to follow suit in 2010. These multinationals will have been driven
driving future premium growth. Many insurers are therefore
by capital and currency considerations as well as the availability
(understandably) focused on external and demand-side issues as
of growth options outside Australia, but contrasting perspectives
a basis for strategy development, planning and prioritisation. We
on industry outlook and valuation must also have played a part.
acknowledge the prominent demand themes facing the industry;
We know that some of the remaining second-tier and specialist
on the other hand we could point to supply-side issues that are
insurers are re-considering whether and how they compete, and
equally important, and that individual insurers might be better able
in the short-term it seems likely there will be more transactions
to analyse and manage, but that attract far less attention. Given
and at prices that reflect the limited supply of quality franchises.
uncertain external dynamics over the next 12 - 24 months our
But looking beyond the immediate future we are more interested
feeling is that insurers would be well advised to focus more on the
in how consolidation will impact industry growth and competitive
supply-side and on strategies providing a basis for competitive
dynamics, and the implications for insurers (whether consolidation
advantage in all future scenarios:
participants or non-participants), distributors and customers.
We have been advocates of the attractiveness of the life risk
Build a broader portfolio of incremental investments
segment since the publication of our first Life Risk Insights
report in 2005. We have pointed to relatively stable growth
and profitability, as well as to the role for capital and scope for
institutional profit participation. We were not alone in that regard,
Re-think insurer value chain participation
and it was frankly not difficult to forecast improvements in growth
and profitability even without predicting the impact of external
demand stimulants (a rising tide that lifted all ships). But we are
Consider alternative organisational and ownership
Improve cost transparency and management
increasingly cautious about the near-term outlook, and concerned
that expectations of future growth and profitability are now out of
line with long-term industry fundamentals. At best we think that
insurers face a period of considerable uncertainty based on the
interplay between three key dynamics:
First, the implications of whether consolidation (particularly
integration of successful specialists into non-specialist insurers)
is effectively executed and benefits realised and rationally
distributed between customers, distributors and insurers.
Second, the extent to which non-specialist new entrants
into IFA, group and (particularly) direct marketing channels
compromise segment profitability and reputation.
Third and most critically, the impact of supply-side regulatory
change (including APRA’s attitude to new life licenses, offshoring
and outsourcing, prospective accounting changes and legal
developments impacting claims management) on profitability,
competitive dynamics and the pace and pattern of new
entrant activity.
Investigate a broader range of risk pooling
Build a broader portfolio
of incremental investments
We have considered a number of feasible future scenarios based
on identified change dynamics, each presenting radically different
outcomes in terms of growth and profitability, channel and product
dynamics and competition. We are confident only that insurers face
an extended period of uncertainty, and we are accordingly advising
our clients to avoid big bets (large-scale, fixed investments with
limited optionality) over the next 12 – 24 months. That is not to say
that we think insurers should scale back investment activity. The
minimum cost of maintaining competitive position is higher than
ever with so many insurers positioned on the boundary between
‘competitive’ and ‘differentiated’ (Figure 2) and if anything we feel
that uncertainty creates opportunity for those willing and able to
invest. However we question whether the kind of large-scale
technology or product investments (or major acquisitions for that
matter) that may have found favour in recent years are prudent in the
current environment. We suggest insurers build broader portfolios
of smaller, incremental investments around those themes (cost
efficiency, multi-channel participation and lead relationships/shareof-wallet) that are most likely to play well in all future scenarios.
Shifting focus from big bets may be easier said than done. We have
identified in past reports that insurers seem to prefer large-scale
technology and operations initiatives over incremental investments in
marketing and relationship management, and we suspect the current
trend toward fewer, bigger insurers owned by diversified institutions
will only exacerbate this tendency. Looking forward insurers may
need to re-think how they develop and manage smaller-scale
initiatives aligned to those factors that are known to drive share-ofwallet (Figure 3). They may also need to reconsider initiatives that
offer little value in the insurer’s preferred or central future scenario,
but provide significant upside or risk mitigation in alternative
scenarios. Finally it may be necessary to consider alternative (lower
cost, lower risk) approaches to pursuing big opportunities where
there is little scope for incremental improvement: for example,
partnering with international specialists to deliver genuine product
innovation at lower risk and cost.
Figure 3: Factors Driving Share-of-Wallet Improvements
1. Gathering u/w information
2. Underwriter relationships
3. Staff empowerment
4. Processing non-standard cases
5. Usability of application forms
6. Underwriting non-standard cases
7. Knowledge of adviser’s business
8. Tailoring product & service
9. New business idea flow
Source: NMG Life Risk Adviser Programme 2008/2009
Figure 2: Life Risk Adviser Programme, 2009 Business Capability Index
Market penetration
Business Capability Index
Source: NMG Life Risk Adviser Programme 2009
Insights Report – Life Risk Australia 2010 5
Consider alternative
organisational and
ownership models
While alternative organisational and ownership structures have
We believe there are a range of options for insurers willing to
proliferated in asset management, and even in the general insurance
challenge the status quo (Figure 5). Of course different models will
industry, life insurers have in general preferred to stick with a more
suit different segments, and all imply execution risks as well as
traditional, internally homogenous model: a single licence and
trade-offs. For example our analysis of multi-boutique businesses in
brand, wholly institutional ownership and with very limited scope
asset management suggests that complexity and dilution of scale
for divisional autonomy, identity or broader economic participation.
economies may in some cases outweigh the benefits associated
Looking forward we think that insurers have good reason to
consider alternatives:
First, in a consolidating market, measures helping large, multi-
with greater expense transparency and participation, resulting
in higher expense ratios. These models may not be immediately
suitable for established channels or operations; on the other hand
they may help incumbents or new entrants to support inorganic
channel insurers to maintain divisional specialisation and channel/
growth prospects, to facilitate entry into new distribution channels
segment alignment driving competitive advantage (particularly in
or segments, or simply to combat the entry of specialists and new
the IFA channel as illustrated in Figure 4, and more generally for
entrants once the current round of consolidation has played out.
those multi-channel insurers that acquire channel specialists) will
be increasingly important.
Second, as insurers become more cost-focused they must
Figure 4: Characteristics of IFA Focused
vs Aligned/Multi-Channel Insurers
seek to increase divisional visibility of, accountability for and
IFA Focused
BCI (capability index)
RMCI (Relationship Index)
% Lead Relationships
20 – 35%
15 – 30%
Forecast Increase in New Business
15 – 25%
10 – 20%
participation in cost outcomes (provided measures to achieve
these goals do not dilute cost efficiency).
Third, as insurers begin to emphasise key-person differentiators
(for example in relationship management and marketing)
or grow in expertise-intensive channels (for example direct
marketing) they will need to think differently about how they
recruit, incentivise and retain staff, moving away from traditionally
hierarchical ‘command and control’ structures to more
progressive organisational models.
Source: NMG Life Risk Adviser Programme 2009
Figure 5: Alternative Business Models
Distinct branding and
target markets
Distinct branding and target markets
Common branding across markets
Single brand and target market
Multiple business units
(one licence)
Multiple divisions
(one business)
Single division
Limited/no common infrastructure
Shared infrastructure
(arm’s length pricing)
Shared infrastructure
(non-arm’s length pricing)
Channel/segment alignment
Channel/segment alignment
Consumer brand awareness
Segment focus
Direct staff economic alignment and
Balance alignment and scale
Economies of scale
Economies of scope
Support acquisition or lift-out
Support lift-out strategies
Cost impact of complexity and
dilution of scale
Balance staff alignment and scale
Limited specialisation or alignment
Royal London (UK), Aegon (AsiaPac), Hollard (South Africa)
Promina, Budget/AIH
Australian life insurers
Multiple specialist
Single infrastructure
(internal or sourced)
Institutional partnerships (eg with
banks or retailers)
Segment exposures
Key staff participation & retention
St Andrews Life (UK bancassurance),
Cigna (direct)
Insights Report – Life Risk Australia 2010 7
Re-think insurer value
chain participation
While the Australian wealth management value chain has become
As alternative distribution channels expand, the demand from
increasingly fragmented, life insurers have for the most part
powerful distributors (retailers, industry superannuation schemes)
resisted disaggregating functions or pricing. This makes sense
for increased participation and control will ultimately favour
given recent industry context (a supportive demand environment,
insurers and reinsurers willing and able to cede distribution and
limited focus on costs, and historically narrow industry scope
servicing functions and focus on risk pooling.
in terms of product and channel) but going forward we expect
insurers to look harder at where and how they participate along
the value chain:
It is worth pointing out that this is one area where Australia still lags
peer markets. In the UK, mainstream insurers have exited policy
administration and servicing to specialist local administrators and
Consolidation (and the potential fall-out from large-scale
through offshoring, while in South Africa insurers have moved
integrations) may create opportunities for new entrants; we are
to variabilise sales and marketing cost by franchising business
already aware of several multinationals variously progressed in
development activities. Even in Asia distribution, product and risk
entering the Australian market, and all would prefer to ‘rent’ a
pooling activities are segregated in certain segments, including
licence and operations from a local partner while focusing on
private banking and direct marketing. In Australia we have seen
product development, risk management and/or distribution
incipient moves toward fragmentation in emerging channels
(with Hannover Re acting as issuer/underwriter for Hollard’s Real
Australia is a high-cost location with respect to generic
processing, and capacity constrained with respect to technical
functions. As cost pressures build the case for insurers to
outsource functions (including technical functions, to markets
such as South Africa or New Zealand) or even to establish
utilities, will become more compelling.
Insurance brand and TOWER for ALI) and product categories
(variable annuities and longevity products). Regulatory and
competitive dynamics may limit the extent to which mainstream
insurers are willing or able to disaggregate core functions at least
in the short term. Still we do expect a gradual evolution of thinking
around which functions are truly critical, and would encourage
insurers to think more broadly about value chain participation as
they frame their competitive strategy.
Figure 6: Value Chain Fragmentation Examples
Sales &
NB processing
Product development
Marketing and advertising
Policy administration
Product manufacturing
Claims administration
Claims management
Product issuance
Distribution sales and
Customer advice, sales
and service
Capital management
40% – 50%
10% – 20%
20% – 30%
Limited (Hollard/Real,
All IFA, DM insurers
UK (Various/Capita)
UK (PruProtect/
UK (Royal Liver
/Munich Re)
SA (Altrisk)
SA (Liberty)
All IFA, DM insurers
* Scope of reinsurer involvement is much lower than in peer markets such as the UK
Improving cost transparency
and management disciplines
In our discussions with Australian insurers we continue to be
Our analysis suggests that some major insurers could boost
surprised by how little informed debate exists around costs.
profitability by 10 - 25% by bringing operating costs in line with
Few insurers have an accurate perspective on whether they are
industry averages. Of course in the current environment and given
more or less cost efficient than peers, fewer have robust processes
the industry’s track record we are not advocating large-scale
for effective segment-based cost measurement or management,
(top-down) cost cutting but rather management and organisational
and there is little credible industry benchmark data on cost
changes supporting better incremental decision-making:
efficiency or operational metrics. In contrast to the banking or
general insurance sectors, life insurer investor presentations rarely
A culture of cost transparency both externally and internally,
reflected in communications to institutional owners and end-
call out cost ratios by line of business or product, or positioning
relative to local or international peers. In some cases life risk
results are still substantially grouped in with non-risk or trans-
A willingness to develop and utilise financial benchmarks as a
Tasman results, or with wealth management even where insurance
directional guide (along with an understanding of the limitations
generates a meaningful proportion of profits (and particularly where
of such metrics)
life insurance dynamics flatter aggregate cost metrics). Of course
even in a MoS environment, cost ratios are complicated by new
Linked to the above, a shift away from allocation-based budgeting
to driver-based budgeting and planning
business and lapse dynamics as well as cost allocations, but this
is equally true in banking or general insurance. We suspect that
Finally a move away from command-and-control cost disciplines
limited cost focus reflects a lack of informed, external scrutiny of
to line management direct accountability for and participation in
insurance businesses, as well as the relatively benign competitive
cost outcomes
environment that has prevailed in Australia.
In the absence of good internal or external data, many insurers
fall back on (apparently) logical rules of thumb: that higher
Figure 7: Cost (OpEx) Curve – Retail Insurance, 2008-09
product margins are evidence of lower unit costs, or that scale
drives cost efficiency. Unfortunately our analysis of insurer results
Expense ratio
since 1999 shows that franchise quality (supporting selection
and pricing advantage) is the only consistent driver of life insurer
+1 std deviation
-1 std deviation
returns on equity. And as illustrated in Figure 7, scale economies
do exist but only up to a threshold level; above this point larger
insurers tend to have higher costs, reflecting in part the history
of growth through acquisition and the industry’s remarkably poor
integration track record.
The Rest
Other 4
150 - 450m
Next 4
250 - 450m
Top 4
Insurers Ranked by Retail Premium (A$m)
Source: NMG analysis of company accounts, management interviews and estimates
Insights Report – Life Risk Australia 2010 9
Investigate a broader range
of risk pooling opportunities
We view life insurance as being concerned with the transfer and
On the other hand we suspect that in 10-years insurers may
pooling of mortality, morbidity, longevity and investment risks.
wonder why they did not pay more attention to these opportunities,
Australia is unique among developed markets: the insurance
and we would point to alternative (lower risk and lower cost)
industry is focused overwhelmingly on standalone life risk products,
development paths for local insurers.
on mortality risk (with morbidity risk a distant second, and unlike
the US with no specialist insurers focused on this segment) and
on yearly renewable product structures. By contrast when we
look at peer developed markets (in North America, in South Africa
and across Europe) we see a much broader range of products
including whole-of-life (UK and Singapore), modernised with-profits
and guaranteed return products (South Africa, Europe), variable
annuities and universal life (North America and increasingly in
Asia) as well as niche mortality and morbidity covers (including
broken-bones and cancer via direct channels). While investment
accumulation products may be less relevant in Australia, we see
considerable opportunity around longevity and investment risk
products that support retirement income needs (Figure 8) and
around niche mortality and morbidity products as long-term care
Unfortunately our interviews with Australian insurance executives
in 2009 suggest that few are thinking beyond the status quo in
prioritising product development investments (Figure 9). Even where
we have seen appetite to look beyond existing risk pools, this has
been driven from the broader wealth management business, and
focused on the most complex available products (the rush to develop
variable annuities being a case in point) limiting risk participation for
the local insurer. Still we are optimistic that we will see a gradual
expansion of the scope of the domestic insurance industry, and
from 2010 we intend to cover the broader range of life risk products
(including annuities) in our BQM Life Risk Adviser programme.
Figure 9: Insurer Product Development Focus
(licence and franchise). We would note that of our five highlighted
themes, this is the most speculative (at least in the short-term and
given regulatory dependencies) and could be considered at odds
Mass Market
and health policy agendas evolve and direct (affinity) channels grow.
Additional risk pools offer insurers a means of expanding revenue
participation while leveraging existing fixed costs and assets
with our general preference for small, incremental bets.
Source: NMG A&NZ Reinsurance programme 2009/10
Figure 8: Product Opportunities vs Risk Pools
Current mainstream products
Niche/new products
based trauma
Preferred Lives
Non-Tied Advisers
New product opportunities
Term Insurance
Tied Advisers
Long term care
and risk
Non-Advice Sales
Simple Term
Direct Marketing
(inc. bank direct)
Funeral Plans
Consumer Credit
Broken bones,
Risk Pools
return and
fixed rate
About NMG
NMG is a specialist multinational consultancy focused on the insurance and investments industries. NMG provides strategy, actuarial and
research consulting services to financial institutions including insurers, reinsurers and wealth managers.
NMG’s Business Quality Management (BQM) practice runs evidence-based consulting programmes, using annual cycles of interviews
with key clients and intermediaries to analyse industry trends, competitive positioning and drivers of business allocations. Established
BQM programmes exist in reinsurance, life insurance and wealth management, and across North America, the UK, Europe, Asia, Australia
and South Africa. This Insights report draws on results from the 2009 BQM Life Risk Adviser programme in Australia, 2009 BQM A&NZ
Reinsurance programme as well NMG’s Australian Risk Distribution Monitor and local and international case experience.
Janar Weerasingam
Business Quality Management
NMG Financial Services Consulting
Level 27, Grosvenor Place
225 George Street
Sydney NSW 2000 Australia
P.O.Box R1863, Royal Exchange Sydney
NSW 1225 Australia
Tel: +61 2 9251 7888
Fax: +61 2 9251 2888
NMG Financial Services Consulting
23 Charlotte Street
London W1T 1RN
Tel: +44 207 631 3087
Fax: +44 207 462 5719
Ashwin Field
Principal Consultant
Strategy Consulting
NMG Financial Services Consulting
6795 Des Coquelicots
St-Hubert Quebec J3Y 8P1
Tel: 1 450 656 4694
Fax: 1 450 462 8358
Hong Kong
NMG Financial Services Consulting
Suite 2207-9
Tower Two, Lippo Centre
Admiralty Hong Kong
Tel: +85 2 2530 8888
Fax: +85 2 2530 8100
Mark Prichard
Executive Director
NMG Group
Jane Cheng
Strategy Consulting
NMG Financial Services Consulting
Plaza Liberty 8
20121 Milano Italy
Tel: +39 2 7631 7567
Fax: +39 2 7600 1653
NMG Financial Services Consulting
141 Market Street
#11-05/08 International Factors Building
Singapore 048944
Tel: 65 6325 9855
Fax: 65 6325 4700
NMG Financial Services Consulting