Life insurance markets are dynamic, but few can match Australia’s for change over the past two decades.
While there are many aspects to the change that have occurred in the Australian life market over this period, the shift in its ownership structure and consolidation stand out as being amongst the most significant.
Back in 1990, Australia’s 55-member life insurance industry was still characterised by the significant presence of mutual insurers of which there were seven holding a combined share of premium income of just over 40%.
Presenting a rather fragmented picture, the 42 non-mutual insurers had a combined market share of just over 50%. At that time there were also two state-owned life insurers holding a small market share while bank-owned life insurers, then represented by four participants, were only just starting to get to grips with the market.
The entry of banks into the life insurance market was made possible by deregulation in the 1980s. The first move was made in 1986 by National Australia Bank (NAB) with the establishment of an insurance unit, National Australian Financial Management.
During the 20 years to 2010 the Australian life insurance landscape changed dramatically.
Of major importance was demutualisation which swept through the mutual sector in the 1990s.
Demutualisation by Australia’s oldest and largest life insurer, Australian Mutual Provident (today AMP Group), in January 1998 set the seal on the fate of the mutual model and by 2000 all the major mutual insurers had followed its lead.
Some small mutual insurers continued to resist demutualisation and by the end of 2010 there were still two remaining, HCF Life owned by HCF, an Australian health fund, and CUNA Life, a unit of US-based CUNA Mutual Group.
Of minor significance in terms of premium income, both mutual’s had market shares of about 0.1% in 2010. The two state-owned life insurers were gone by 2000 having followed the route of privatisation.
During the 20 years to 2010, banks also steadily increased their foothold in the life insurance sector through the establishment of their own insurance units and acquisitions, the most significant of which was in June 2000 when NAB bought MLC Life in June for A$4.56bn ($4.7bn).
NAB went on to consolidate its life interest in MLC Group which is today the second largest player in Australia’s life market.
Among other significant acquisitions by banks was NAB’s purchase of UK insurer Aviva’s Australian life and wealth management operation in June 2009 for A$825m. In the same year Australia and New Zealand Banking Group (ANZ) acquired the outstanding 51% stake in its joint venture with ING Group for €1.1bn ($1.5bn).
Renamed OnePath Life, ANZ’s insurance unit ranks as Australia’s third-largest life insurer. Banks have become by far the biggest force in Australia’s life insurance market.
This is with the seven banks involved commanding a combined premium income market share of about 65% in 2010 compared to non-bank insurers at 35%, according to data from the Australian Prudential Regulation Authority (APRA).
In addition to NAB and ANZ, Australian banks involved in life insurance are: Commonwealth Bank of Australia, Westpac, Bank of Queensland, Suncorp and Macquarie.
Australian Premium Income: 1990 figures
The past two decades have also witnessed considerable consolidation of the Australian life industry. From 55 life insurers in 1990 the number had by early-2011 shrunk to 25 owned by 18 financial service groups, according to APRA.
A more recent striking aspect of the Australian life industry’s development since 1990 has been the drastic reduction in the involvement of foreign insurers.
According to APRA, in 1990, foreign insurers from seven countries represented 18% of the industry’s total assets.
By 2010 the share of total assets of foreign insurers from five countries had fallen to 8% while in 2011 APRA reports that it fell further to a negligible 2%.
The drop in 2011 was triggered by AMP’s acquisition of AXA Pacific Life’s Australian and New Zealand unit, AXA Australia in April of that year for A$4.2bn. Cuna Group also exited the Australian market in 2011 through the sale of Cuna Life to Australian general insurer and reinsurer QBE
Insurance Group for an undisclosed sum. In terms of premium income, foreign insurers held a 14% market share in 2010, unchanged from 1990.
This share will have fallen in 2011 following AMP’s acquisition of AXA Australia. However, the decline will have been offset to an extent by Japanese insurer Dai-Ichi Life’s acquisition in 2011 of the remaining 70% minority interest in Australia’s seventh largest life insurer, Tower Group which it did not already own for A$1.17bn.
Based on data for the 12 months to September 2011 supplied by Australian actuarial and research firm Plan For Life (PFL), foreign insurers’ combined share of premium income was about 9%.
Of this share Tower Group represented 3.5%, AIA Group 2.9% and Zurich Life 1%. Market shares of the other foreign participants – Hannover Life, MetLife and Allianz – were all less than 1% each.
Australian Premium Income 2010 figures
While the number of life industry participants has fallen significantly over the past two decades this has not resulted in a significantly higher level of concentration, points out Ian Robinson, the principal industry analyst in APRA’s supervisory support division.
The reason for this, explains Robinson, is that many of the insurers no longer operating were small to medium operations, whether measured by assets or premiums.
Reduced concentration is most evident in premium income. This, says Robinson, is because the dominance of two participants has been replaced by a broader spread of market participants.
Specifically, in 1990 APRA data show the top two life insurers accounting for almost 60% of total premium income. In 2011 the share of the top-two had fallen to about 25%.
Taking the analysis of market concentration further, Robinson uses a quantitative measure, the Hirschmann-Herfindahl Index (HHI).
The HHI is the sum of the squares of the percentage market shares of companies. For example, if a company is a monopoly, HHI is equal to 10,000 while if there are 10 companies each with a market share of 10%, the market HHI is equal to 1,000.
“An HHI below 1000 is deemed prima facie to be a broadly based market,” says Robinson. “An HHI between 1,000 and 1,800 is considered a moderately concentrated market and an HHI above 1,800 is a highly concentrated market.”
The HCI, he notes, is used by the Australian Competition and Consumer Commission to screen merger and acquisition proposals for consideration of possible anti-competitiveness.
The results of Robinson’s analysis show that in terms of premium income concentration on a financial services’ company group basis the HHI fell from 1,800 in 1990 to 1,000 in 2010.
Robinson says the acquisition of AXA Australia by AMP has increased the HHI to about 1200, which represents a “moderately concentrated” situation.
Providing a comparison with another market, Robinson notes that in 2007 the HHI for new business in the UK was calculated at an extremely competitive 608.
In terms of asset concentration on a group basis in Australia, nothing changed between 1990 and 2010 with the HHI at 1,800 in both years.
However, Robinson notes that with AMP’s acquisition of AXA Australia, the HHI has increased to about 1,900, a level which represents a high-level of asset concentration.
Robinson uses another method of assessing concentration in Australia: the number of life insurers per million people.
In Australia this worked out 1.1 insurers per million people in 2010. n the UK the figure stood at 2.1 insurers per million people and in the US at 3.4 insurers per million people.
Australia was, however, better served than Canada which had a mere 0.3 insurers per million people.
Independent financial advisory firm Clear-View Wealth provides further insight into the level of competition in Australia.
Using data from nine countries compiled by RGA Reinsurance Company of Australia,
ClearView found that Australian insurers provided the cheapest group life cover premiums, the second cheapest adviser and direct life cover premiums and the fourth cheapest consumer credit life cover premiums.
In addition to Australia, the countries in the study were the UK, the US, Canada, South Africa, Hong Kong, Japan, India and Italy.
Robinson points out that it is arguable that the declining number of life insurers in Australia is partly an inevitable outcome of an increasingly competitive market. “For example, foreign companies decided they could no longer accept relatively low returns associated with the high investments of capital or the costs of maintaining distant operations,” he says.
Australian asset ownership – 1990 figures
Life insurers in Australia have also had to contend with a life market that on an overall basis has seen premium income stagnate for more than a decade.
Illustrating this, premium income since 2000, when it stood at A$39.6bn, managed to achieve a high of A$41.5bn in 2007 before falling for three consecutive years to A$38.3bn in 2010.
Data from PFL for the 12 months to September 2011 indicate that premium income last year came in just under 5% above the 2010 level at about A$38.6bn.
A major reason for the Australian life industry’s poor premium income performance has been its drastic loss of market share in the giant superannuation segment where it has been confronted by increased competition from non-insurers.
Competitors in the super space include master trusts, wrap accounts, industry super funds and do-it-yourself alternatives, notes Robinson.
Robinson adds that even though super assets represented 90% of life insurer statutory fund assets in 2010 compared to 65% in 1990, the industry’s share of super business has fallen steadily from a peak of 44% of total super assets in 1991 to only 15.5% in 2010.
According to APRA, total super assets increased by A$15.8bn in 2011 to A$1.2trn. Life insurers slipped further behind in the super segment in 2011, according to PFL.
Specifically, life insurers’ premium income in the super segment fell from A$21.61bn in the 12 months to September 2010 to A$20.96bn during the same period in 2010/2011.
PFL’s data also highlight the very high level of concentration amongst insurers in the super segment.
In the individual super segment, which saw premium income of A$9.786bn in the 12 months to September 2011, AMP Group dominated with a market share of 57.7%.
It was followed by ANZ’s OnePath Life at 21.7% and NAB’s MLC Group at 11.9%, giving the top-three players a combined market share of 91.3%.
In the larger group super segment which recorded premium income of A$11.18bn, MLC Group led with a market share of 37.7%.
It was followed by AMP Group at 36.3%, Westpac at 9.9% and One Path Life at 9.1%. This gave the top-four players a combined market share of 93%.
Despite making heavy weather in the super segment it has not been all bad news for Australia’s
Reasons for optimism
The risk business segment in particular has generally provided solid growth numbers for several years and 2011 was no exception.
According to PFL, new risk business premium income in the 12 months to September 2011 came in at A$10.18bn, an 11.5% improvement over the same period in 2009/2010.
The increase in risk premium income to September 2011 came after a fairly flat showing in 2010 when premium income lifted by only 0.4% but appears to signal the resumption of a growth trend that in 2009 saw premium income grow by 14.8%.
As a country Australia can hardly afford any slowdown in growth in its life risk insurance market given that Australian’s remain underinsured in the extreme.
In a study published in 2010 actuarial firm Rice Warner Actuaries estimated that over 95% of Australian families do not have adequate long-term life insurance cover, while the total level of underinsurance was a mammoth A$1.37trn.
It is also notable that Australia’s risk segment is the least concentrated which may also account for ClearView’s finding that premiums are highly competitive compared to those in other countries.
According to PFL, the largest share of the risk segment – a relatively low 16.2% – was held by AMP Group, followed by MLC Group at 14.4%, OnePath Life at 12.4% and Tower Group and CommInsure Group both at 12.2%. This gave the top-five players a combined market share of 67.4%.
Australian asset ownership 2010 figures
The outlook for Australia’s risk segment remains very positive, believes Rice Warner Actuaries. Based on a study published in late 2011, the firm predicts that risk premium income will grow at a CAGR of 8.4% up to June 2026 which indicates premium income rising to some A$33.5bn.
The actuarial firm also sees a shift in the market with wholesale business increasing from 53% to 57% of the total and retail business falling from 57% to 47%.
While the outlook for risk business growth is a positive for life insurers, increasing their share of super business would be the big prize.
This is indicated by Rice Warner Actuaries’ outlook for the super segment ,which it projects will see total assets rise by A$2.1trn to $3.3trn by 2026. This represents a CAGR of just on 7% over the 15 years.
Forecasting where Australia’s life industry will be 20 years hence is no easy task, stresses Robinson. However, he does provide some potential developments.
In the longer-term one, Robinson says, could be the re-entry of British and other European insurers or expansion by existing US players.
More likely in the short-term, he feels, is an increasing interest by Asia-based groups in ownership of or support for Australian insurers.
But despite potential increased interest by foreign players, he notes that the number of life insurers in Australia is likely to continue to fall further and banks retain their dominant position.
Finally, Robinson believes current trends indicate that life insurance licences will in future be used less for supporting investment and super business and be focused instead on the provision of protection for death, disability and longevity risks.
In addition, as Life Insurance International has previously reported, income protection is said to be widely neglected by Australians.
However, Australian life insurers must first educate consumers. For example, in a 2010 survey Australian internet-based insurance broker Lifebroker found that 67 percent of consumers believe
insurers will use loopholes to avoid payouts.
Ignorance has also been an issue. For example, Lifebroker’s survey found 71 percent of consumers mistakenly believe the federal government is required by law to provide financial support to families in the event of the premature death of a family member.