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May 20, 2015updated 13 Apr 2017 8:31am

Moody’s: Australian life insurers’ profits under pressure through to 2016

The profitability of Australian life insurers will be under pressure throughout 2015 and 2016, due to the policy lapses and rising claims seen for their risk products, according to Moody's Investors Service.

By Ronan Mccaughey

The profitability of Australian life insurers will be under pressure throughout 2015 and 2016, due to the policy lapses and rising claims seen for their risk products, according to Moody’s Investors Service.

Frank Mirenzi, a Moody’s vice president and senior analyst, said the higher number of policy lapses and claims for risk products largely reflects a combination of fundamental issues, including product mispricing and premium and commission structures.

Mirenzi said: "The insurers that are most at risk of profit erosion will be those that are large providers of risk insurance products or those insurers which have been growing their risk insurance business significantly in the last few years."

Moody’s analysis is contained in its just-released report titled "Higher Claims and Policy Lapses Challenge Australian Life Insurers’ Profitability".

The report points out that lapses and claims for risk products rose from 2011 through to 2013, with high upfront commissions for financial advisers and stepped premiums on policies being some of the prominent causes.

Revising assumptions

The report said life insurers were forced to revise their assumptions and lower their outlook on future profits.

As policy lapses increase, Moody’s said the average duration of policies shorten, which means that life insurers may not earn the full level of expected profits from those policies.

Higher levels of claims could also lead insurers to revise up their assumptions on future claims, and consequently to reduce their future profit expectations.

Moody’s noted that Australia’s life insurance industry is responding to the deteriorating profitability of its risk products through a working group sponsored by the Financial Services Council.

A number of recommendations have been put forward; most significantly, with respect to adviser remuneration.

However, there is still much debate in the industry and Moody’s said the long transition period reflects the time needed to resolve the structural nature of the issue.

The ratings agency therefore believes that the industry’s profitability will likely stay weakover the next few years.

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