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.
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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.
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By GlobalDataDemutualisation
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
Major consolidation
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%.
Analysis tool
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,
Cheaper cover
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
life industry.
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.
Asian interest
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.
