Australian Superannuation Companies
Deregulation and the Emergence of Bancassurance Models
Since the deregulation of the Australian financial sector, the major banks' desire to develop bancassurance models has played an important role in shaping the life insurance industry. A large percentage (63%) of the Australian banking sector is shared between its top four banks-Commonwealth Bank of Australia (CBA), Westpac, National Australia Bank (NAB), and Australia and New Zealand Banking Group (ANZ).
However, prior to the 1980s these colossi of the local market were not able to offer insurance products as a result of strict domestic regulation. For a period of 35 years, the Australian banking sector was one of the most heavily regulated in the world, as the government operated through the banks to implement monetary policy. While the tight regulation did not directly affect life insurers, it did prevent banks and other financial institutions from entering the industry.
Deregulation of the financial sector began in 1983 following a government-sponsored, broad-based review of the financial sector (known as the Campbell inquiry). The banks quickly took the opportunity to enter the insurance market, starting with NAB in 1985 and swiftly followed by the others in the subsequent years. Deregulation also led to other new entrants; the number of registered life insurers grew from 45 in 1980 to 58 in 1990. Since then, a consolidation has occurred, with the number dropping to 37 by 2008.
Once the banks had established a foothold in the insurance market, they quickly gained market share on the back of strong brand recognition and extensive retail distribution networks. By 1990, bank-owned life companies held 9 percent of the Australian insurance market. By 2000, this had grown to 44 percent, though much of this growth has been through acquisition. The competition presented by the bancassurance model placed new capital demands on existing life insurers as they sought to develop products to compete in new areas. This eventually led to the shift away from the "mutual" structure of life insurers during the 1990s.
Overall, the introduction of the bancassurance model has linked captive distribution channels and encouraged significant cross-selling between traditional banking and insurance products, reshaping the face of the industry. Australian Superannuation Companies
Demutualization and Changing Business Models
Traditionally, a handful of mutual life companies accounted for the majority of assets in the industry. In 1980, of the 47 registered life insurers, only four were mutually owned but they accounted for 69 percent of industry assets. However, since then all four mutuals have demutualised, starting with Capita (now MLC Life) in October 1990, National Mutual in September 1995, Colonial in December 1996, and ending with AMP in January 1998.
The goal of demutualization was to allow insurers to address the forces of banking deregulation and the more competitive environment faced by the insurers during the 1990s. Banking deregulation introduced a number of large, well-capitalized players into the market that were offering a full suite of financial services. The unbundling of insurance products brought insurers into direct competition with other financial service providers. The traditional information asymmetry considerations that inspired mutual structures seemed to no longer apply as data processing improved and the size of insurers grew. Intergenerational equity issues also began to arise as reserves were established from one generation's premiums yet paid out to another.
Therefore, all four mutuals decided to raise capital through issuing ordinary shares in exchange for membership rights, and listed on the Australian stock exchange.
Demutualization quickly led to a period of turbulence for the newly listed public insurers as they faced the harsh realities of the market. They quickly broadened their product offerings and sought to become integrated financial services providers. However, many did not effectively manage the major organizational transformation required. With competition heating up, rationalization took place in the market. National Mutual was purchased by AXA in 1998 and MLC was acquired by NAB in 2000. In the same year, Colonial was acquired by CBA. Only AMP managed to maintain its independence.
The combined effects of the introduction of superannuation, deregulation of the banking sector, and demurualization of life insurers have created the Australian life insurance market of today. We will now shift from a historic perspective and discuss the changing customer needs and the opportunities in the market.
Increased Risk, Responsibility, and a Collective Failure to Respond
Despite the maturity of the market, Australians today are still very much underinsured against the list of ever-growing risks (for example, health and adequate retirement savings). Coupled with this has been a shift in the responsibility for managing these risks from the public and private sector to the individual. The result is effectively a "double whammy" for Australians. A range of factors, including poor consumer understanding, limited product innovation by life insurers, and a laissez-faire government approach have contributed to these risks not being effectively managed today.
Increased risk and responsibility
Over the past 20 years, four significant changes have increased the level of risk for Australians.
First, Australians are more financially stretched than ever before, increasing their exposure to potential hardship following premature death, sickness, or accident. For example, in May 2008, mortgage repayments accounted for 29.1 percent of an average first-home buyer's income - the highest percentage on record. Australian Superannuation Companies
Second, Australian mortality rates are decreasing and this trend looks likely to continue with advances in healthcare. This is particularly the case at older ages, which increases significantly the spending on healthcare in the twilight years.
Third, retirees face longer retirement periods than at any other time in history, increasing the chances that they outlive their retirement savings. As seen in much of the developed world, longer life spans are being compounded by increasingly earlier retirements. Since the 1970s, the Organization for Economic Co-operation and Development (OECD) rate of labor participation by males aged 60-64 has dropped from 60-90 percent to 20-50 percent.
Fourth, as in many mature markets, due to the aging "baby boom" generation, fewer workers are supporting a greater number of individuals in retirement. This reduces significantly the ability for the government to provide an effective safety net.
At the same time, the responsibility for managing these risks - particularly in retirement - has shifted from the government and the private sector to the individual. Superannuation-defined benefit schemes, which provide consumers with a guaranteed benefit at retirement, are being phased out. In their place are the defined-contribution schemes that provide only an accumulation benefit, leaving consumers with exposure to investment and longevity risks that may leave them with insufficient savings in retirement.
Also, in retirement the preference has been for allocated rather than lifetime annuities. This is a result of their relative simplicity, strong investment returns in recent years, and the fact that consumers are generally unwilling to cede any residual savings they may have on death to insurance companies (as is generally required in lifetime annuities). Alongside this, the government pension provides only 25 percent of the male total average weekly earnings, all of which means that consumers are more exposed to longevity, morbidity, and market risk in retirement.
The result of these increased risks and the shifts in responsibility will have a real impact on many Australians. Approximately one-third of the population have no coverage, one-third are only covered through their superannuation fund, and only the remaining third have voluntary coverage. More surprisingly, two-thirds of Australians are fully aware that their level of insurance coverage is either inadequate or nonexistent. They simply choose to do little about it. This fact of underinsurance is well known and every year or so a new report is released revealing its extent. One of the drivers is the generally optimistic attitude of Australians.
For example, in 2007, AXA released its Protection Report which asked respondents whether they think something bad (for example, serious illness) may happen to them. Out of 11 developed countries Australians came out as the most optimistic in four out of five areas, and as the second-most optimistic in the fifth!
Similarly, Australians are not effectively managing their longevity risk exposure through superannuation and the annuity market: 3.4 million Australians, or one-third of the workforce, are expected to suffer from inadequate income in retirement at current rates of saving. On average those falling short will do so by US$3,125 a year (in today's terms). Even more worrying, of workers aged 45-55, 38 percent are expected to have insufficient retirement savings, suggesting that these shortcomings may start to materialize in the not-too-distant future. To find out more, you can check out Australian Superannuation Companies.
