As the industry has consolidated and insurers retain more risk to offset falling revenue, funds accessing reinsurers’ pricing and capacity is the simplest solution to rebalance competition for members.
Shareholders suffering ongoing poor business performance has been among a number of factors contributing to a reduction in the number of life insurers in Australia, with approximately one third of the life insurance sector consolidating in recent years. In parallel, demand is falling as legislative changes such as Protecting Your Super (PYS) and the proposed Putting Members Interests First (PMIF) Bill have exerted downward pressure on insurers’ revenue.
In response to falling income, insurers have been decreasing the amount of risk ceded to the reinsurance market – we estimate as much as half of the previously reinsured risk of the top 10 industry funds is now being retained by the direct insurers. For insurers, this is ignoring the principle that by increasing their exposure, there is also a corresponding increase in the risk of greater losses. And this is in an environment where the new business capacity of the reinsurers has increased to nearly $4 billion in the last year, up from $3 billion in 2018.
With only three active insurers in the large industry fund space as compared to ten global reinsurers available to offer capacity, there is a clear oligopoly at play as access to competition is indirectly being limited by the gatekeepers (insurers) to the reinsurance market. Recently exacerbating this was the timing of PYS which left funds no choice but to be price takers when implementing member changes. Limited supply, falling demand and no time to test members receive best outcomes (insurance tenders can take eight to twelve months) have all contributed to the cost of insurance for remaining members increasing as a window of significantly reduced competition has opened.
The regulators’ core purpose is to balance, amongst other objectives, competition and competitive neutrality but in a bid to nudge the industry into action around its profitability, indirectly they could be stifling competition further. Examples include continuing to approve insurance company consolidation, encouraging a one-off industry reset of retail advised disability income products (this is likely to lead to a price correction) and limiting access to overseas risk carriers through a review of the LPS 117 practice standards (while simultaneously increasing ability of local insurer subsidiaries to repatriate more risk to their overseas parents).
Trustees have to consider what is best for members (not just ‘reasonable’), and while additional life companies can’t be manufactured overnight, seeking models that increase competition will undoubtedly lead to better member outcomes. With the impending SPS515 standards due to commence on 1 January 2020, and a requirement to demonstrate these member outcomes as being met within insurance, the wholesale market (reinsurance) could provide a simple mechanism to introduce more bidders for the risk and therefore create a more efficient market.
In a recent discussion paper on this topic, we noted: “when competition dries up, a small number of parties can impose outcomes on an industry. While that is commercially legitimate, competition is a key requirement for a sustainable industry and ensuring consumers get the best possible deal.”
The life insurance industry over-corrected in 2013-2014 and did so again with the introduction of PYS – a key driver on both occasions being a lack of competition. With PMIF imminent, trustees should be considering how to capitalise on the lessons of the past and ensure that members are accessing competition to deliver on the best interest’s test.
Ilan Leas is managing director at Retender, the risk specialist.