Forget fires and floods; the slowing economy looms as the largest threat to margin-challenged group insurance and reinsurance companies. The era of super fund supremacy in striking group insurance deals might just be coming to an end, as CATHERINE JAMES reports.
Like most financial markets participants, insurers have been watching with nail-biting anticipation for some normality to return to the markets. But the group insurance market is almost down to chewing on its fingers.
One senior reinsurer, who has worked in group insurance for 11 years, says the changing economic conditions have made the current group insurance situation a serious risk, the likes of which he has never seen. The reinsurer, who declined to be named, says competition has squeezed group insurance premiums to remarkably low levels that – while sustainable in a healthy economy – are potentially large liabilities in a recession.
While some may dismiss his fears as exaggeration, he pinpoints a number of concerning factors colliding. It’s a documented phenomenon that claims for total and permanent disability (TPD) and income protection rise as the economy falls. Coupled with the fact that group insurance is now insuring more people for greater amounts of cover at lower premiums, it is not hard to see why he thinks some insurers and reinsurers should be counting their pennies carefully.
Competition in the group insurance market has markedly grown in the last five years. More new players, such as MetLife, have entered the scene and they’re all vying for fewer, but much bigger, super fund clients. MetLife head of institutional business, Michael Burke, says there’s more at stake for one group insurance contract than in the past because the consolidation of the super sector has led to fewer players with understandably larger contracts. “They’ve got strength because their insurance premiums are very significant. No insurance company wants to lose a large super client, or even a small super fund client,” Burke says.
Margin squeeze is inevitable as insurers compete to retain these much sought-after super fund clients. Premiums are heading south and default cover is increasing as super funds are renegotiating their group insurance contracts as often as three times a year, up from every three years, according to deputy chief executive of the Australian Reward Investment Alliance, Paul Watson.
The group insurance market has grown at a rate of around 15 per cent a year in terms of total premiums being paid, at the same time as the premiums themselves have only decreased. In the 2007 fiscal year alone, group insurance saw rate reductions of 15 to 20 per cent while the market grew overall by 40 per cent, as funds increased their default level of cover and added a salary continuance option, according to a study by actuarial firm Rice Warner. Figures for 2008 are currently being finalised. Margin squeeze or not, group insurance is a profitable business.