Over the past few years several direct insurers and reinsurers have exited the superannuation market in Australia over high claims and concerns over poor data, which has done little to help the reduced but still persistent life underinsurance gap.
This exit has caused a lack of capacity, particularly reinsurance capacity, and is the biggest problem in the whole group insurance market, according to Rice Warner.
“Sometimes an insurer wants to quote to a fund, but can’t because they can’t find a reinsurer to back them,” says Jenni Baxter, senior consultant at Rice Warner. “The reinsurers will say we’ve got capacity, but only for the right terms.”
Because of growing claims, brought on by super fund members increasing awareness of their eligibility, those left holding the can are pushing hard for a change to definitions. Reinsurers have been clear that if funds want to keep them changes need to happen, including different underwriting control.
Reinsurers have already played a critical role around changes to product structures, definitions and eligibility, but this has largely been addressed through premium increases – not a viable method for super funds going forward.
Another impact is it takes longer to get pricing done, both for insurers and reinsurers, because there are much stricter governance program within each company. There are more sign offs and much more attention to the data and what insight can be gleaned.
“We call the terms more stringent, but you could also call them more sensible. Some of the existing definitions that are out there, and the lack of underwriting controls, have led to great anti-selection which isn’t in the interests of the security of members,” says Baxter.
She added tightening will continue for two reasons. Firstly, because while some funds have acted others have waited to watch the group of first movers and are still to take necessary action. Secondly, tightening of eligibility and products is inevitable because funds don’t want to be pushing through more large premium increases.
Rather they want to make sure the premiums their members are paying are appropriate to both their needs and account balance.
For example, there is talk from insurers, actuaries and funds around the appropriateness of TPD lump sum payments, with many thinking an income payment may be more suitable. Some funds have reduced TPD and increased income protection but “we haven’t seen anyone ditch it so far,” Baxter says.
“We may see a stage where the reinsurers push that significantly and redesign that completely, so it may be an income payment for two years, five years, and if you are still considered to meet the disability definition at the end of that period you might get the lump sum, as opposed to a lump sum at the beginning,” says Baxter.
Disruptors and collaboration
One of the good things that has come out of this disruption is that funds have become much more aware of reinsurers and the significant part that they play.
Reinsurers are now wanting to have more engagement with the funds, for the funds to understand who they are and the risks they are prepared to take on, and so far there has been a reasonable response.
Damien Mu, chief executive at AIA, says that group insurance in Australia is now so large it requires a combination of both direct and reinsurers to effectively deliver the benefits to members. He too cautioned about premium increases saying it would be counter intuitive to what group insurance is meant to be about – affordable cover.
However, collaboration between insurers has been sparse as they are in direct competition with each other. If they can get past that we may see more co-insurers as well as the schemes get bigger. There is also a possibility that local insurers will act in a reinsurance role. METLife have already done this being effectively becoming the reinsurer for AMP for a particular fund.
Ian Fryer, head of research at Chant West, says there’s talk of more international reinsurers entering the market. These have seen the problems and think it could be a good time for new entrants that have an appetite to take on risk at a time when the industry is getting its act together.
“People didn’t really understand the risk and turned a blind eye, but now the industry is pretty much on top of what is going on and some international reinsurers are saying ‘OK, now might be a good time to get in because there’s disruption for the current players and there could be a bit of a chance for us to take a bit of the market,’” says Fryer.
So far this interest has been tentative, but Pacific Life RE is requesting an Australian life license, a promising sign as it shows commitment to be here in the longer term. Other interest is coming from PartnerRe, SCOR, and Arch Re.
Fryer added as issues are sorted out players who have exited will be much more comfortable and maybe go back into the market.
“Reinsurers are all about risk and asking where they could lose a truck load of money. They want to see certain changes happen with the fund to make sure the previous doesn’t happen again because they end up holding the can.
“Funds are doing the right thing at the moment, so they are making reinsurers feel more comfortable going forward,” says Fryer.
Damien Mu will both be presenting at the Leaders panel – the road ahead for group insurance at the 4th annual Group Insurance Summit in Sydney on August 19, 2015.
To register for the conference visit https://www.eiseverywhere.com/ereg/index.php?eventid=125466&