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Commission cuts positive for Australian life insurers: Fitch

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The reduction in adviser commission payments will remove some risk from life insurers’ businesses, according to Fitch Australia director John Birch.

“I think from the life insurers’ point of view, it is not a bad thing,” he told Life+Health insuranceNEWS.com.au. “It takes away the vulnerability of the insurer paying a commission and then having to see how long the policy lasts.”

Mr Birch says it will reduce the risk of policies lapsing before commissions are factored into insurers’ costs over a number of years.

“It will align the interests of the adviser and the insurer better, and reduces that income volatility.”

In a new report on the Australian and New Zealand life insurance markets Fitch rates the industry as stable.

“Fitch expects life insurance sector earnings to improve in Australia [next year] and remain at a high level in New Zealand. The Australian life sector had years of strong profitability, but problems had developed that are still being resolved.”

The ratings agency expects lapse and claims rates to stabilise but remain high in the next year.

It notes insurers are tackling these problems through expanded retention and claims teams, and improved claims management systems and processes.

“New Zealand’s life insurance sector has not experienced the same adverse claim and lapse developments as Australia,” the report says.

“But competition and tax changes are pressuring profitability.”

The report notes New Zealand advisers are still paid upfront commissions of more than 200%, but changes in Australia may cross the Tasman, especially if the same financial institutions apply pressure for reform.

Fitch says Australian life premiums have moderated this year, although from a much higher level.

“We are expecting net policy revenue growth to remain subdued [next year] as a result of constrained household finances,’ the report says.

Johnson & Johnson exec takes reins at PHA

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Private Healthcare Australia has named Johnson & Johnson executive Rachel David as its CEO, replacing Michael Armitage, who stepped down last month.

She will take up the position late next month.

Ms David, a former medical practitioner, is currently medical company Johnson & Johnson’s Director of Government Affairs, Policy and Strategic Market Access.

She was previously management consultant McKinsey & Co’s expert adviser for healthcare and infrastructure.

Advice industry ‘losing expertise’ as Baby Boomers sell up

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With Baby Boomer advisers looking to retire, the industry faces a considerable loss of expertise, a consultant has warned.

GRG Momentum founder Geoff Green says neither the Federal Government’s recent innovation package nor the Productivity Commission’s report on businesses have addressed the issue.

“We are going to lose a lot of that expertise in the financial advice industry when Baby Boomers start leaving,” he told Life+Health insuranceNEWS.com.au. “If we take a view innovation is part of a business, if that is not sold on then we lose a lot of knowledge.”

Mr Green says this is a sleeper issue in business transition, with nobody focusing on it.

“We are moving into uncharted waters in terms of business ownership transition due to Baby Boomer business owners rapidly heading towards retirement. But many Baby Boomers are putting off the decision about selling their businesses until some future date.

“I have been trying to get them to focus on this earlier.”

Mr Green says assessing a business’ innovation and expertise should be among the first steps in deciding to sell.

“Too often the focus on the value of the business is just looking at the cashflow. In more than 30 years working in this area, I’ve never seen such high levels of innovation being lost due to private business owners not effectively passing on their businesses to new owners.

“And it’s only going to get worse as more Baby Boomer owners look to exit their businesses.”

AFA rejects bid for planners to set own code

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A government proposal to require planners to establish and adhere to new ethics standards is likely to backfire, the Association of Financial Advisers (AFA) says.

Increased red tape and higher costs of providing financial advice will follow if Canberra proceeds, it warns. The Australian Securities and Investments Commissions will require extra resources to handle numerous submissions for ethics standards.

AFA CEO Brad Fox says the industry is already well served by the association’s code of conduct.

“The AFA code has proven to be extremely effective in guiding the culture and professional conduct of our members,” Mr Fox said. “It was developed… to be appropriate to our members and their clients, and to effectively set expectations for ethical and professional conduct above and beyond the letter of the law.”

Allowing planners to set their own code of ethics will produce a conflict of interest, even if third parties will monitor their compliance, the AFA says.

“This would mean licensees would need to sanction themselves for failure to adhere to their own code,” Mr Fox said.

“We don’t see this as best practice for an industry in the process of establishing itself as a recognised profession.”

New drug combo gives hopes to blood cancer patients

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Melbourne researchers hope to find a cure for advanced blood cancer, after patients in a clinical trial showed improvement when two drugs were used in tandem.

A team from Peter MacCallum Cancer Centre discovered sufferers fared significantly better when taking everolimus and CX-5461 together.

Everolimus is commonly used for other cancers, while CX-5461 is used to treat incurable blood cancers such as leukaemia, lymphoma and myeloma.

“CX-5461 targets a particular process that is required for cancer cell survival,” the centre’s Cancer Signalling Laboratory Head Rick Pearson said.

“Our experiments show that adding everolimus synergistically strengthens this attack, more rapidly and more effectively eradicating the killer disease.”

Results from the clinical trial have convinced researchers they are on the right track, and hopes are high for a breakthrough soon.

“This novel therapy works to inhibit ribosomes’ protein production capability, effectively starving the cancer cells of a key ingredient they need to survive and proliferate,” Professor Pearson said.

“By adding everolimus to this treatment, we have shown the potential for even more powerful results.”

More than 12,000 Australians are diagnosed with blood cancer every year.

PHA calls for prostheses pricing reform

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The private healthcare industry has called on the Federal Government to reform prostheses pricing, claiming Australians pay too much compared with overseas consumers.

In a submission to a private health cover review, Private Healthcare Australia (PHA) Acting CEO Steven Fanner says domestic and international price benchmarks suggest that, on average, the Australian private health system pays nearly twice the efficient benefit level for prostheses.

He says regulatory conditions have driven and entrenched highly inflated prices, and the current price-governance model is flawed.

“Prostheses benefits payments comprise 14% of total reimbursements by private health insurers and current pricing mechanisms for prostheses have led to benefit levels that are often twice as high as prices in comparable systems, both domestically and overseas.

“There is an imbalance between who benefits and who pays, with the value tilted heavily towards the multinational manufacturers at the expense of Australian consumers and taxpayers.”

PHA has suggested reforms to alleviate pressure on the public health system and save $800 million in annual healthcare expenditure, Mr Fanner says.

Pricing reforms would also contribute to a more efficient health system, leading to improved patient outcomes, he says. Any change should take into account quality of care, affordability and cost transparency.

More super funds members eye move to SMSFs

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One in five super fund members may leave to set up self-managed super funds (SMSFs) in the next five years, new research by CoreData shows.

A further quarter could move to another fund during the period.

CoreData questioned 668 members of industry, retail or corporate super funds.

The proportion looking to set up SMSFs in the next year has grown to 7.8% this year from 4.1% in last year’s study.

The figures will concern group life insurers, because when members leave they often do not set up new insurance policies in their SMSFs. Insurance held in SMSFs has a penetration level of less than 1%, and this has remained static for many years.

High fees, including group life premiums, are key drivers in switching or leaving funds, the research shows.

CoreData Principal Andrew Inwood says super funds will not like the figures, “but stronger switching intention actually presents growth opportunities for funds if they are able to demonstrate value and utility to set them apart”.

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Corporate

Medibank and Ramsay seal deal for Illawarra

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Medibank and AHM members are now covered at the new Wollongong Private Hospital, following a deal struck with operator Ramsay Health Care.

Ramsay’s Operations Manager for Regional NSW Hospitals Malcolm Passmore says the 151-bed site will offer a full range of medical, surgical and maternity services for people in the Illawarra.

“We will be very pleased to welcome Medibank and AHM members… in the new year,” he said.

Medibank EGM Provider Networks and Integrated Care Andrew Wilson says the agreement was negotiated in the best interests of members and patients.

“Our members in Wollongong and the broader south coast region will now be able to access the new hospital with confidence and certainty about their care,” Dr Wilson said.

The hospital is due to open January 18.

Web-savvy consumers still value personal advice, study shows

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Consumers may research life insurance online but they still want to speak to an adviser before buying a policy, according to research by Asteron Life.

Its report says nine in 10 consumers think life products are complex, resulting in 65% using an adviser.

It also reveals a broad generational divide. Generation X consumers are more likely to have life insurance greater than $1 million, with many entering their 40s and having increased financial risks.

Baby Boomers are “very regular users” of financial advisers, primarily because of their life stage and need to plan for retirement.

Only 21% of Generation Y consumers see a financial adviser regularly, but they are generally considered early adopters, giving advisers an opportunity to establish relationships.

People aged 40-plus consider life insurance important and are more knowledgeable about it.

They also experience more “emotional reward” from insurance, with 46% saying life cover gives them peace of mind.

Asteron Life EM Mark Vilo says the research shows consumers still want advice on life insurance, despite online offerings.

But he says advisers should be online, to help consumers to find them.

“It’s essential for advisers to have an online presence and be seen where consumers are researching,” he said.

“By factoring this into an adviser’s business strategy and the way they provide their service, the adviser can use the power of the internet to help grow their business.”

Consumers who use advisers have considerable trust in the service they receive, the research shows. About 44% of clients would like regular contact with their advisers.

“Consumers are advisers’ strongest advocates to people because they can talk about the value of insurance,” Mr Vilo said. “With fewer than half of Australians regularly seeing an adviser, there is a huge potential market yet to be explored.”

Seven up, as AZ NGA adds another practice

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AZ Next Generation Advisory (AZ NGA) has added a seventh practice to its dealer group this year, with the acquisition of RI Advice Toowoomba in Queensland.

Principals Jeff and Linda English will be paid $7.5 million for the practice. 

The deal will involve a 49% share swap between AZ NGA and the principals, with the remainder paid in cash during the next two years.

AZ NGA will be able to buy back its shares during the next 10 years.

Its CEO Paul Barrett says the principals and their team run an efficient and highly profitable business.

“This is a proud and ambitious financial planning company with a great track record of serving its clients and staff very well,” he said. “We look forward to working with the RI Advice Toowoomba team to grow our southeast Queensland footprint.”

The practice was established in 1992 and offers a wide range of financial services, including life insurance.

Mr English has been heavily involved with the RI Advice Group’s proprietors’ advisory council for the past decade and is a regular member of RetireInvest’s high-performer program Platinum.

It uses a dual branding strategy, with the RetireInvest name attracting retirees and pre-retirees, while the RI Advice name appeals to a younger clientele.

Bupa calls for war on waste

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Bupa wants industry reform to weed out “waste and inefficiencies” and tackle spiralling healthcare costs.

Unless urgent cost-cutting measures are taken, affordable care will be increasingly beyond the reach of the country’s 13 million-plus policyholders, the health insurer warns.

The current model for prostheses pricing is long overdue for reform, it says.

Under current arrangements, health insurers are paying $800 million more annually for prostheses than public hospitals.

“While in many ways we have a world-class health system, there are many areas of waste and inefficiencies that are flowing through to consumers and ultimately increasing the cost of their insurance premiums,” Health Insurance MD Dwayne Crombie said.

“Given that about 87% of the money members spend on their insurance premiums goes towards payments to healthcare providers, health insurers and the wider health system have a responsibility to question how that money is being spent.”

Improving transparency and accountability are other areas for consideration, given most consumers have no idea why health costs are going up.

“For example, the industry can do more to help consumers understand the average fees and out-of-pocket medical costs they may be charged over and above what their insurance covers,” Dr Crombie said.

“We can also do significantly more to simplify and be more consistent in the language we use and the presentation of information, so people understand what they are, and are not, covered for.”

One-stop patient care ‘relieves pressure’

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A one-stop-shop patient care model would relieve pressure on Australia’s health system, according to a report commissioned by private health insurer Peoplecare.

Rates of chronic disease and patients suffering more than one complex illness are driving up costs.

The report, by the University of Wollongong’s Graduate School of Medicine, proposes two models to combat this.

The first is a bundled payment system enabling different elements of care for specific chronic diseases to be bought, delivered and billed as a single product or service.

The second is the patient-centred medical home model, which requires changes to the way everyday general practices are run.

This model provides a co-ordinated pathway of care, from first contact through to supplementary care, supported with practice tools such as health information technology.

Each care pathway is reviewed by the GP, and the physician is provided regular progress reports and takes overall responsibility for the welfare of the patient.

Andrew Bonney, who led the review, says it proves patient-centred care can lead to reductions in hospitalisations and emergency department visits, plus improved access to care, better prevention of illness and higher-quality chronic care.

“Our review of different healthcare systems identified a number of key principles that underpin successful cost-effective primary care models, as well as improve patient health indicators and reduce avoidable emergency department usage,” he said.

Fitch upgrades Southsure outlook

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Fitch has upgraded its outlook on New Zealand group Southsure Assurance to positive from stable, and affirmed its BBB+ insurer financial strength rating.

The revision brings the outlook in line with its parent Southland Building Society (SBS).

Fitch says the affirmation reflects “the operational synergies [Southsure] receives from being part of a larger financial institution.

“Fitch believes SBS, which trades as SBS Bank, would be willing to provide support to Southsure if needed, because Southsure provides complementary insurance products to SBS’ customers,” the ratings agency says.

“The relationship provides Southsure with access to strong distribution channels and a valuable customer base.”

The outlook also takes into account Southsure’s financial results for the year to March 31, in which pre-tax return on assets grew 17.5%.

Southsure’s regulatory solvency ratio stood at 124.5% as of September 30.

Busy small business owners ‘need advisers’

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There is strong demand for trusted advisers among small business owners, Financial Index Wealth Accountants (Findex) Chief of Adviser Services Michael Wilkins says.

It follows a Self-Managed Super Fund Association report on the small business sector, which shows owners are “time poor”.

This suggests a “pressing need for professional advisers to provide ‘specialised business advice services’ for both their business operations and personal finances”, Mr Wilkins says. “These are usually more intertwined the smaller the business.”

Mr Wilkins says Findex advice businesses are rolling out the family office model – a service traditionally available for only the very wealthy.

“Essentially, this is a structure that provides a comprehensive suite of financial service from under one roof – one stop with a trusted adviser as the key point of contact for relationship management,” he said.

“But the most concerning finding of the report is that four out of 10 business owners surveyed said they do not know who to turn to for advice on improving their business.”

Mr Wilkins says the report also shows business owners are unsure where to turn for professional advice on retirement planning.

“These are precisely the issues the new Findex model is designed to solve – the provision of a range of financial business and personal advice, managed and delivered from a single trusted source in the client’s primary professional adviser.”

Sentry rolls out new management structure

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Sentry Group has revised its management structure, creating four core divisions: business development, business solutions, compliance and corporate services.

It has also appointed Daniel Parry as Head of Business Development and Chief Investment Officer, David Newman as Head of Business Solutions and Executive Director, Hanna Abdullah as Head of Compliance and Chief Risk Officer, and Bryan Hills as Head of Corporate Services and Executive Director.

“The financial services industry is rapidly changing, and the changes to our business structure will capitalise on the opportunities this dynamic environment will present,” Chairman and CEO Murray Hills said.

“These changes position Sentry to deliver on our strategy while providing services and support for our advisers [to] increase productivity, efficiency and client engagement.”

Mr Hills says in the past decade Sentry has grown to be the fourth-largest non-aligned independent dealer group.

“This is quite an achievement considering everything the economy and industry has experienced during the past 10 years, with so many well-known brands disappearing from the landscape.

“Although Sentry has successfully weathered the challenges of change and capitalised on the opportunities, there are still many more to come.”

Australian Unity planning arm notches a century

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Australian Unity Personal Financial Services has finished the year with 102 financial planning practices, 185 advisers and 24 mortgage brokers across all mainland states and the ACT.

Noting the addition of seven new practices in the past six months, GM Advice Paul Harding-Davis says the growth reflects “the attractiveness to advisers of our relationships-based full-service offering… and our account partnership program”.

“In addition, the fact we are a mutual organisation focused on helping our advisers improve the financial wellbeing of their clients, and not a bank or life insurance company, means advisers see us as being favourably positioned between the institutions and the self-licensing option,” he said.

“We are a good option for those advisers who want a financially-strong, compliance-focused and well-resourced licensee.”

Diversa chief joins board

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Super administrator Diversa Group has added CEO Vincent Parrott to the board, making him MD.

He has been CEO of operating company Diversa since September 2013 and was head of its trustee services division from 2011.

He is also a director of several Diversa super trustee companies.

Chairman Stephen Bizzell says Mr Parrott has been a key player in the group’s transformation.

“Since taking the role of CEO he has provided excellent leadership through a transitional phase of the group’s development,” he said. “Diversa will continue to evaluate its structure to maintain an appropriate mix of skill and experience as the group continues to grow.”

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Regulatory & Government

ASIC to demand more data on life policies

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The Australian Securities and Investments Commission’s (ASIC) implementation of the Life Insurance Framework contains no surprises for advisers, but insurers may be less happy.

A consultation paper released yesterday sets out changes to commissions and the timeframe involved, as previously detailed in draft legislation.

The clawback period of two years remains the same, with the only exclusion being suicide or self-harm.

But for life insurers, reporting requirements on policy details will be more onerous, with ASIC intending to collect more information than previously stated.

It will collect data on policies sold through personal and general advice, plus direct sales.

The data will include how many policies are inforce, including start dates, new clients, premiums, sums insured, trends and reasons for policies not being renewed.

Insurers will also have to provide detailed information on commissions, including clawback amounts.

“Reporting the proposed information to ASIC will enable us to monitor changes in industry practices in response to the life insurance reforms, and to establish whether problems in the sector continue to exist,” the paper says.

“The information will be used as part of our review in 2018 of the effectiveness of the life insurance reforms.”

Comments on the consultation paper close on January 29. ASIC aims to release legislative instruments for the reforms in April.

HIRMAA attacks move to scrap PHI rebate

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A proposal for the Federal Government to pay 40% of the cost of a hospital episode and scrap the private health insurance rebate has been slammed by HIRMAA.

In a submission to the Government’s industry review, the peak body for community health funds says this would turn insurance into a “marginal product”.

“Policy innovations should complement private health insurance, not undermine or destroy it,” the submission says.

“There are those who do not believe in the private health sector and private health insurance.

“To listen to those calls would be a mistake because they fail to understand the contribution the private health sector actually makes to the sustainability of the public system.”

Under the Government’s proposal, the 40% benefit would be determined using the “national efficient price” for services in public and private settings.

The balance of funding would be provided by state governments, regardless of the type of hospital.

HIRMAA says without comprehensive modelling and consultation with the insurance industry, there could be “dire and unintended consequences”.

“Scrapping the private health rebate would exacerbate existing premium affordability and exclusionary coverage, which the Government has identified as its top concerns about private health insurance,” the submission says.

“If private health insurance becomes marginal in hospital and related treatment services, the industry’s future would be as ancillary insurers rather than as comprehensive health insurers.”

The submission warns the move would render private health insurance unsustainable.

“We do not believe this is the Government’s intention.”

Another consequence would be the end of the cross-subsidy between younger, healthier groups of policyholders and high-claiming groups.

“If only people in poor health choose to remain insured, the required premium rates would become unaffordable. The resulting spiral of increasing premiums followed by the lapsing of relatively healthy policyholders would push additional costs onto public hospitals.”

HIRMAA says this happened in the early 1990s, when national coverage dropped to about 30% and it took the rebate to turn around the situation.

The association is also scathing on the lack of detail in the proposal, and the rushed consultation.

“Given the scale and potential consequences of the proposal, industry expects the Department of Health to provide much more detailed information to enable industry to form a considered view and come to an informed position. That detail has not been forthcoming to date.”

HIRMAA has called for the proposal to be explored at federal and state levels before any implementation.

“HIRMAA urges the [Federal] Government to investigate thoroughly how this payment model will address glaring concerns over health inflation pressures, listen to the private healthcare sector and not just the pleading of state governments.”

ASIC probe uncovers gaps in PI cover

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A review of professional indemnity (PI) insurance for advisers has found gaps in the cover offered.

The Australian Securities and Investments Commission (ASIC) examined how current policies stack up against Regulatory Guide 126, which sets out what cover an adviser should have.

It found a number of areas where policies do not meet the requirements.

The first area of concern is cover for defence costs. At the lower end of the coverage range – $2 million – ASIC found only 14% of 591 licensees reviewed had this.

“In addition to failing to meet our requirements, this creates the risk that the indemnity offered by a PI insurance policy will be used to cover defence costs rather than being available to claimants,” the regulator’s report says.

Another gap is in reinstatements. Regulatory Guide 126 requires at least one automatic reinstatement before a policy expires – but this is not necessary when a policy’s indemnity limit is at least twice the minimum cover required.

While most PI insurers include automatic reinstatement, ASIC found one that did not, covering 185 licensees.

With regards to fraud and dishonest conduct cover, only two of the four main PI insurers offered this, despite the Regulatory Guide 126 requirement.

ASIC is also concerned aggregation of claims into one event could exceed PI policy payouts. The regulator expects a licensee to have adequate resources to cover any gaps in such claims.

“In our view, advice licensees whose policies include an aggregation clause sub-limit, and who do not cover the potential gap by holding sufficient other financial resources, are unlikely to have adequate PI insurance,” the report says.

“While the PI insurance policies we reviewed generally allow the insurers to aggregate related claims, insurers have discretion in deciding whether to do so.”

ASIC says three of the major PI insurers had standard terms for aggregation of claims, covering 491 of the 591 licensees.

On compliance with minimum amounts of PI cover, the regulator found only three licensees fell short of the $2 million threshold.

ASIC Deputy Chairman Peter Kell says the review comes in response to licensees’ concerns about obtaining cover from a limited number of insurers.

“Advice businesses must have adequate PI insurance, and they should make sure this cover measures up with our requirements in Regulatory Guide 126,” he said.

“ASIC will follow up with surveillance of advice licensees’ PI insurance, and if we find problems we will take enforcement action.”

Life insurance fails to tempt Kiwis to seek advice

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Only 15% of older New Zealanders consider insurance a prompt to seek financial advice, a new survey has found.

The Commission for Financial Capability and the Financial Markets Authority (FMA) study questioned 1052 people aged over 50 last month.

The most popular reason for turning to an adviser is receipt of an unexpected sum of money.

About 59% of respondents have never spoken to a financial adviser.

Some 93% say integrity would be the most important factor in picking an adviser.

Disclosure of links between an adviser and the products they offer is considered important by 84%. Qualifications (82%) and quality of customer service (83%) are other key factors.

About 67% of respondents say disclosure of fees and commissions is important, but 70% say the actual cost is more important.

FMA Director of Regulation Liam Mason says the survey shows people see barriers to finding an adviser, including concerns about advice being in their best interests.

“The concerns coming through these surveys confirm the issues that have been raised in the review of legislation surrounding financial advice,” he said.

“We encourage the public and all sections of the industry to get involved in the review and make their own submissions on the options that have been proposed to improve current regulations.”

An options paper has been released under the New Zealand Government’s review of financial advice, with the deadline for submissions in February.

Ex-FPA chairman joins Tax Practitioners Board

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Assistant Treasurer Kelly O’Dwyer has appointed five new members to the Tax Practitioners Board (TPB), including financial planning industry leader Julie Berry.

NSW-based Ms Berry was chairman of New Zealand’s Institute of Financial Advisers from 2011 until June this year and chairman of the Financial Planning Association from 2007-10.

The other new board members are: Jim Hawson, Julianne Jaques, Ian Klug and Greg Lewis.

Ian Taylor has been reappointed Chairman and Yvonne Sneddon has been reappointed as a board member.

The TPB is responsible for regulating the provision of tax agent services across all Australian states and territories, including administering the registration of tax agents and tax (financial) advisers.

The appointments are effective from January 22.

World regulators united on culture drive: Deloitte

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Global moves to regulate the culture of financial services organisations will come on top of local laws, Deloitte says in a new report.

“Recent years have seen conduct and culture within financial institutions come under intense scrutiny,” it says.

“While high-profile enforcement actions for misconduct may wane [next year] – albeit with national exceptions – the industry’s culture and conduct in the Asia-Pacific region will continue to face strong supervisory and regulatory policy focus.”

Deloitte says regulators across the region are united on the importance of culture and conduct, and are talking to each other about possible measures to assess these.

“At the international policy level, the Financial Stability Board now sees misconduct as a systemic risk,” the report says. “This represents a significant elevation of the topic.”

Deloitte expects regulators to focus on strong supervisory measures to ensure companies have the right culture and conduct.

In Australia this will result in new regulations under the Federal Government’s response to the Financial System Inquiry.

“These will see the introduction of a product governance responsibility, product intervention powers for the conduct regulator, stronger sanctions and a professional standards framework for financial advisers,” Deloitte says.

“We believe an effective response to these issues would include maintaining a strong awareness of regulatory trends, particularly those from outside the region.

“We are already seeing many institutions developing strong risk frameworks for managing conduct risk and, with more difficulty, considering how they can prove the artefacts of good culture to regulators.”

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General Insurance

Automation won’t replace human underwriting skills: Suncorp

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Human underwriters still have a crucial role to play, despite the rise of automated risk-selection and pricing, according to Suncorp.

“Of all the insurance services... it is underwriting that has been most affected by digital automation,” the insurer says in a new white paper.

Suncorp says human judgement and intuition are as important as ever.

However, technology will “dramatically reconfigure the underwriting workforce”.

EGM Commercial Portfolio Darren O’Connell, author of the paper, says the right education and training is vital for younger staff members to build the skills required for more complex risks.

“One way is to adjust the traditional underwriting career pathway to incorporate rotations in other disciplines, such as claims and distribution,” he said.

“Many claims and distribution employees will develop a strong understanding of products. Young underwriters could spend time in these teams as a ‘risk apprenticeship’.”

Mr O’Connell warns underwriters could easily become over-reliant on technology, and not have the expertise or confidence to make decisions.

“This could lead to mistakes and missed opportunities, which will have a serious impact on an insurance business.

“Some risks may appear to fit within the business’ risk appetite based on data modelling, but an experienced underwriter may spot something that causes concern.”

Mr O’Connell says insurers should look to capture as much of the older generation’s knowledge as possible before they retire.

“The industry should look to harness their knowledge and experience and pass it on to the next generation. For example, you could establish mentoring programs for recruits and experienced underwriters.”

Ratings agencies deliver new year outlooks

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The economy and natural disasters loom as the biggest threats to Australasian insurers next year, according to Fitch.

“Rising unemployment and a deteriorating economic growth outlook would have a number of negative implications for Australian and New Zealand insurers,” it says.

“Related-party banking businesses, if affected, could weaken group credit profiles and reduce surplus capital within the insurance entities.”

Fitch warns premium income will be hit if economic growth falls below the ratings agency’s projections of 2.7% for Australia and 2.5% for New Zealand.

Natural catastrophes are a major unknown, and it is unclear what impact El Nino will have.

NSW storm damage and other weather-linked events have already cost insurers in Australia and New Zealand $2.2 billion this year.

“Larger and more frequent loss events could threaten outlooks,” Fitch says. “Initially this might only affect earnings, but an increase in the frequency of events could potentially reduce available reinsurance capacity, and lead to higher net retentions and exposures.”

Fitch is keeping its rating and sector outlooks at stable.

The agency “expects the non-life sector to strengthen earnings [next year], subject to a more benign level of natural catastrophe losses than [this year]. Better underwriting margins should be complemented by improved investment yields, but competition is affecting premium rates.”

Meanwhile, fellow ratings agency Standard and Poor’s (S&P) has delivered its own verdict on Australian and New Zealand general insurers, maintaining a stable outlook for the sector.

Insurers are starting to recoup higher costs from currency depreciation and weather-related disasters through moderate price rises in some personal lines, it says.

“The insurers we rate are very strong,” S&P analyst Caroline Strahan said. “They have very strong business and financial positions, which make them less susceptible to rating changes.”

Challenges ahead include fierce pricing competition in property and casualty insurance and reinsurance, and catastrophe risks at elevated levels.

“Insurers are still continuing to see – on renewals – requests for discounts,” Ms Strahan said.

“They have been able to retain their business but not… to put through price increases. It has been exacerbated by broker competition for business.”

Across the wider Asia-Pacific region, the credit trend for insurers is stable and industry growth is poised to outpace economic growth next year, S&P says.

Fears about the slowing Chinese economy will not cloud the region’s overall growth prospects.

Consumer group demands action on credit cover

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Consumer credit insurance and gap insurance sold with car finance and other credit lines are junk products, a campaign group warns.

The Consumer Action Law Centre says add-on cover is often sold to people who are ineligible to claim or who don’t even know they have bought it, due to manipulative sales techniques.

“These products truly are junk,” CEO Gerard Brody said. “Bundling of low-value insurance with a car or other loan takes advantage of Australians. Many people don’t even realise they’re purchasing the insurance because they’re focused on buying the main product.”

The report says up to 65% of the premium paid for gap insurance goes to commissions, and consumer credit insurance salespeople typically retain one dollar in every five.

“We’re calling for the insurance industry to make these products worth something or we’ll seek to have them banned,” Mr Brody said.

“Conflicted remuneration has contributed to scandalous practices across financial planning and life insurance, and here it is again. High commissions drive this industry.”

Shareholders back Willis Towers Watson

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Willis Group Holdings and Towers Watson shareholders last week voted in favour of an $US18 billion ($25 billion) “merger of equals” to create Willis Towers Watson.

Willis CEO Dominic Casserley says the priority now is “successfully integrating the businesses and realising the combination’s full value-creation potential”.

“These efforts are well under way and we expect they will create substantial incremental shareholder value through revenue, cashflow and [earnings] growth superior to what either company could achieve independently,” he said.

Towers Watson CEO John Haley has thanked shareholders for their support.

“We are confident combining Towers Watson and Willis will accelerate both companies’ long-term strategies and create substantial incremental value for shareholders,” he said.

“We look forward to working with Willis to successfully complete the transaction and realise the full benefits of the merger for all of our stakeholders.”

The transaction is expected to close “very early in the new year”. The combined entity will trade on the NASDAQ.

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International

Underwriters urged to embrace technology

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Life insurers still struggle with the use of technology to evaluate the accuracy of predictive models, according to Gen Re.

Proponents of predictive modelling say it helps underwriters use consumer data more accurately to assess risk.

“One of the many challenges life underwriters and actuaries face in adopting new prediction technology is how to evaluate the accuracy of the model,” US-based Life/Health Chief of Decision Analytics Guizhou Hu said.

Technology has made it easier for life insurers to store medical records and other important data, but they have yet to fully utilise it in predicting mortality, he says.

“The challenge for every industry is how to harness and effectively utilise that data to drive more profitable business. The insurance industry is no exception to that rule.”

Zurich promotes UK life chief to global role

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Zurich Insurance Group has appointed Gary Shaughnessy as CEO Global Life, replacing Kristof Terryn, who became CEO General Insurance in October.

Mr Shaughnessy has been Zurich UK life CEO since June 2012. Before joining the insurer he was MD of Fidelity Worldwide Investment.

He has also worked for the Prudential Group, Axa, the Automobile Association and the Bank of Scotland. 

Zurich’s Acting CEO Tom de Swaan says Mr Shaughnessy has made a significant contribution to the UK business. 

“Mr Shaughnessy is a great leader with a wealth of industry experience, which makes him perfectly suited for the role,” Mr de Swaan said.

“The appointment demonstrates the strength of our internal talent pipeline.” 

Mr Shaughnessy is a member of the Association of British Insurers board and chairman of its protection committee.

US advisers clock up plenty of face time: report

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US insurance advisers spend 62% of their time talking face-to-face with clients, a new report from Cerulli Associates says.

This includes 21% of their time meeting current clients. They also spend 16% on plan preparation and 14% on new client acquisition. A further 10% of time is spent dealing with problems.

Administration takes up 19% of insurance advisers’ time, with 4% allocated to compliance.

Training and development accounts for 7%, and 23% of time is spent on investment advice, because US advisers sell pension-based products.

The researcher’s Associate Director Tom O’Shea says the amount of time advisers spend with clients means they still have a role, despite the growth of robo-advice.

“There is a misconception that digital advice means no human interaction between the customer and the firm delivering the advice,” he said.

“Cerulli has found even the most automated advice platforms allow a consumer to reach a representative through a toll-free number or online chat.”

The researcher questioned direct firms and found consumer satisfaction increases at least 15 percentage points when a human is involved in delivering advice.

It says the term robo-advice is deceptive “because most robo-advisers offer clients access to a representative via the telephone, web chat, or video chat. Cerulli believes several retail direct firms will enter the digital advice market because these firms grow by realising new ways to scale their interactions with consumers.

“Digital advice is an obvious and powerful opportunity for direct firms to build scale.”

After questioning US wealth managers that use robo-advice, Cerulli arrived at a typical client for the channel. They would be 27 years old, earn $US80,000 ($111,283) per year, have $US100,000 ($139,118) in savings and a goal to retire by the age of 67.

Cerulli says firms providing robo-advice are expanding their services beyond the direct-to-consumer space. They are including automated financial management systems to link human advice with a back-office service to the customer.

“According to Cerulli research, 54% of millennials are comfortable with an online advisory relationship,” the report says.

“All financial services firms will find they must deliver advice via the internet, further increasing the convergence between the digital and the human element.”

Swiss Re reveals new strategy

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Swiss Re unveiled a new “four-pillar strategic framework” an investors’ forum in Zurich last week.

Group CEO Michel Liès says the insurance environment is “challenged” by low interest rates, industry consolidation and volatility in high-growth markets. The new strategic framework has been to designed to “to seize new and emerging opportunities and tackle existing challenges”.

The four “core pillars” of Swiss Re’s new strategic framework are: to systematically allocate capital to risk pools and revenue streams; broaden and diversify the client base to increase access to risk; optimise resources and platforms to support capital allocation; and emphasise differentiation.

Mr Liès says the reinsurer’s reputation as a “knowledge company” is a key differentiator.

“The company has about 300 employees working on research and development alone,” he said.

“Swiss Re’s clients benefit from these leading-edge research tools and insights, for example, in more informed pricing of life and health risks.”

Swiss Re says business units will be responsible for “bringing the framework to life”.

As announced in October, the reinsurer will launch its Life Capital business unit on January 1.

The unit will manage all closed and open life and health insurance books, including the Admin Re business and, subject to regulatory approval expected early next year, the newly acquired Guardian Financial Services business in the UK. The unit will manage 4.5 million life policies.

In addition to its extensive closed-book life business, Life Capital aims to broaden Swiss Re’s access to open-book primary life and health business, for example by partnering with distribution partners such as primary insurers to offer new consumer products.

“We’ve looked extensively at our opportunities and challenges and we believe our strategic framework equips us very well to address changes with greater agility and selectively capture opportunities for profitable growth,” Mr Liès said.

Insurers must use head to understand the heart

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Congenital heart disease (CHD) sufferers have been unfairly refused life cover because insurers have not properly understood their condition, according to a Gen Re report.

Life/Health Chief Medical Adviser John O’Brien says there are varying degrees of the disease and surgical correction means 85% of babies born with CHD will live to adulthood.

One in 100 children are born with the condition, and an estimated 1 million US adults live with it.

Dr O’Brien says insurers need to understand the details of a potential customer’s CHD to make an accurate and fair risk assessment.

For example, someone with a simple defect such as a small hole between heart chambers can have near-normal expected mortality.

“More complex CHD can have very high mortality, particularly if surgical correction isn’t an option.”

Despite such variances, people with CHD have a higher incidence of premium loading or outright refusal for cover.

One study showed “severity didn’t appear to influence the decision – those with mild disease were just as likely to be refused, or to have premium loadings, as people with complex conditions”, he said.

About 40% of applicants who were initially declined life insurance were later offered cover, while 30% with complex CHD obtained cover at standard rates. 

“While this may suggest difficulty in underwriting people with CHD, it also hints that current practice may have room for improvement,” Dr O’Brien said. 

CHD causes the heart structure to be compromised or miss essential parts, meaning chambers and valves do not function properly.

Long-term complications include arrhythmias, heart failure and infective endocarditis – infection of the heart’s valves or inner lining.

A study of people with complex CHD found 20% required hospitalisation during a year, while 6% required two to four hospitalisations.

Global life to stay profitable, Moody’s says

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The global life insurance industry will remain profitable due to changes in product mix and higher fees, according to a Moody’s report.

“Reduced emphasis on spread-based and guaranteed products will partly offset declining investment margins,” the ratings agency says.

“Still-robust equity markets will also support income from fee-based products [next year].”

Moody’s has given most countries a stable rating, although the UK, Netherlands, Germany, Argentina and Taiwan have negative ratings due to guaranteed products’ exposure to low interest rates.

The report says countries where the investment return is already close to the guaranteed return pose a high risk to insurers’ profitability.

Low interest rates could pose a threat to countries such as China and Australia if they persist for the next five years. But in Asia the increasing mix of higher-margin, protection-type products will drive profits, while European insurers move to unit-linked products and a focus on health and protection to improve the bottom line.

The Asian market will also benefit from low penetration rates in certain countries.

China is one of the largest life insurance markets, but Moody’s says the penetration rate is less than 2%. This compares with more than 8% in Japan and the UK.

“We expect Chinese annualised premium growth of 15-20% during the next 12-18 months,’ the report says. “Recent sharp stock market corrections, which raise risk awareness and aversion, and other policy initiatives will also contribute to life insurance growth in China.”

Moody’s predicts the spate of mergers and acquisitions will continue next year, driven by regulatory change such as Solvency II in Europe and low interest rates. Chinese and Japanese companies are looking to acquire other insurers to drive growth.

Many deals will be funded through debt and the use of “excess” cash, which is a concern, Moody’s says.

Japanese insurers eye more overseas acquisitions

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Japanese life insurers will continue looking to Australia and other developed markets for investment targets to bolster earnings growth, Fitch says in its outlook for next year.

They see the strategy as key to offsetting the long-tern impact of a shrinking workforce and greying population at home.

Nippon Life, one of nine insurers covered in the outlook, most recently employed the acquisition tactic, paying $2.4 billion in cash for an 80% stake in NAB subsidiary MLC.

“These developed markets will provide both sizeable premiums and earnings just after the acquisitions,” Fitch says. “Their markets are mature, similar to Japan, but their growing population will provide moderate growth for Japanese life insurers.”

Fitch has upgraded its ratings outlook for Japanese life insurers from negative to stable, and maintained the sector outlook at stable.

Japanese life insurers continue to enjoy solid capitalisation and healthy profitability.

The nine insurers covered by Fitch are Nippon Life, Dai-ichi Life, Meiji Yasuda Life, Sumitomo Life, Mitsui Life, Daido Life, Taiyo Life, Asahi Life and Fukoku Life.

Their combined core profit in the half-year to September 30 grew to ¥1.19 trillion ($13.68 billion) from ¥1.12 trillion ($12.87 billion) in the corresponding period last year.

“Fitch expects strong earnings to be maintained [next year],” the ratings agency says. “The investment spread is likely to improve further because of accumulated foreign bond investments, unless the yen appreciates substantially.”

Fitch has affirmed Nippon Life’s insurer financial strength and long-term issuer default ratings at A with a stable outlook.

“Nippon Life’s ratings are supported by a market-leading position in Japan’s individual life industry…  high-quality capital, low leverage and stable operating performance,” Fitch says.

Interest rates keep up squeeze on Asia-Pacific insurers: S&P

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Asia-Pacific life insurers’ investment income will face pressure from prevailing low interest rates, Standard & Poor’s (S&P) says.

Worries over a looming slowdown prompted China to cut benchmark interest rates in October – its sixth drop in less than a year – to record lows in a bid to prop up growth.

“Under the current low interest rate and volatile investment market environment in Asia, life insurers’ investment performances remain under pressure, although bottom-line profits are generally in line with our expectations,” S&P says.

“Volatility in investment markets remains and may contribute to performance deterioration for some insurers.” 

The credit trend for life insurers in the Asia-Pacific region, including Australia, remains stable, and industry growth is poised to outpace economic growth next year.

Worries about the slowing Chinese economy will not cloud the region’s growth prospects, the ratings agency says.

“Premium growth could maintain in the low double-digit level in emerging Asia, including China, outpacing most global markets.

“The region’s low insurance penetration rates relative to more mature markets in North America and Europe, and its booming middle class, should support demand.”

Demand for cover related to annuities, medical and pension risks are expected to fuel the take-up of insurance in developing Asian economies.

In southeast Asia, strong domestic consumption will offset any fallout from a Chinese slowdown. 

Japanese insurers’ continued push into foreign markets and diversification into new products will lift the sector to single-digit growth.

“Japan will likely lift modestly in the low single digits, benefitting from insurers’ diversification into new products, channels and overseas expansion,” S&P says. 

“Its life sector should rise slowly from third-sector sales and annuities as the population ages and declines.”

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