Business development manager for reinsurer RGA, Rod Berry, says insurers with group business are finding “this segment is now making a significant contribution to their overall growth and profitability, whereas previous returns may have been marginal”.
Meanwhile, rising competition in the super fund sector itself has made insurance cover a point of differentiation – hence the flurry of activity around contract renegotiation. Choice of fund legislation and funds opting to go “public offer” has not only increased competition between the not-for-profit industry funds and retail super funds sector, but even within these sectors healthy rivalry is growing.
Hannover Re’s assistant general manager of marketing, actuary Damian Thornley, says he is worried by prices “on a couple of schemes” where the incumbent insurer has been beaten by a substantial margin by another insurance provider. “Today’s prices are sustainable – if TPD risk continues to hold up,” he says, meaning if TPD claim levels remain around where they are today.
However, while claims for TPD and salary continuance – which Thornley puts in the same basket – have been on a downward trend in the last five years, decreasing the risks and hence the premiums of insuring for such claims, the times are changing. “[TPD and salary continuance] risk is a risk correlated to economic fortunes,” Thornley says.
“If the economy does go into recession and there are job losses, it will give an upward knock on TPD claims – and that will hurt group life insurers, especially some of the insurers with larger accounts.” Conversely, Thornley says that typically in a strong economy, more people are employed and salaries are increasing, and “when people are making good money they don’t think about lodging a claim”. However, withdraw their disposable income and people start looking at all their potential sources of cash. “You only need a small change in behaviour to affect your margin,” he says.
“If you have a 1 in 1000 claim rate, and that increases to 1.5 in 1000 – you’ve just had a 50 per cent increase in claim costs.” However, Thornley says a small “upward knock” won’t necessarily be disastrous – it may even be good for group insurance as it will bring “a bit more discipline into the market”.
Berry agrees that super funds are powerful negotiators but must be careful of how much they demand. “Super funds with good [claims] experience are getting very competitive rates and increased cover levels are delivering very good value for members. What funds need to realise, however, is if they push too hard to loosen the risk controls the insurer has set, the experience may deteriorate and costs may increase again,” he says.