Distribution Innovation - The emergence of real, online approval has been the major innovation in distribution in the Australian life insurance industry. Historically, Australians have bought the majority of their insurance as part of their mandated, retirement-savings plan, or for a small percentage of relatively wealthy Australians, via financial advisors. Recently, high quality, online coverage options are beginning to emerge, increasing the ease of access for ordinary Australians. This online approval functionality is also being rolled out to third-party intermediaries (such as financial planners) in the hope that it will increase sales of the product given the quick turnaround time for approval. ING Direct recently launched an online approved product allowing the customer to buy up to US$450,000 of coverage in 10 minutes.
Allianz have launched a similar product allowing coverage of up to US$1 million. This market is still young with great potential for growth. In particular, offshoring or outsourcing the underwriting and claims processing for these types of polities has the potential to yield significant cost savings.
Beyond online approval, innovation is also needed in the delivery of effective advice, without directly linking advice and sales. The current model places excessive reliance on the role of intermediaries and commission-based sales. Establishing independent advisory services would provide a solution to this, as would the delivery of advice through the workplace.
Such services could be funded through service fees, industry-sponsored funds set up for this purpose, or in the case of the latter, through salary packages. This would help to dispel consumer confusion and misinformation around available insurance products. It would also encourage product innovation among insurers as consumers become able to make more informed financial decisions.
Product Innovation - Many industry participants see product innovation as the key to creating and capturing new growth opportunities in the Australian life insurance industry. For example, Simon Swanson, the managing director of Australia's largest life insurer, CommInsure, sees three main opportunities in the life insurance market.
But product innovation should not stop at the creation of new risk products. For annuities, there is "also significant scope for innovation in the structured payout market, which has large potential given the gap between the US$56 billion of superannuation outflows and the US$6 billion of annuity sales in 2007. As we have seen above, Australians are not prepared for the risks they will be exposed to in retirement. In particular, they are not prepared for longevity and morbidity risks such as home care, nursing, and prescription medicines.
While there has been resistance against annuities due to their high capital cost and the forfeiting of residual value in the event of early mortality, there may be other options. Such alternatives may include reverse mortgages (popular due to the high concentration of Australian wealth in primary residences), longevity insurance, and retail longevity options.
There is also scope for innovation in the market for hybrid products, which integrate savings and risk-transfer components. Potential products that have seen success in other markets, such as in the US, include variable annuities with guaranteed minimum balances and wrap accounts that allow investors to move funds between investment and risk-management products, allowing a greater level of control. Due to the central role of agents in the sales of insurance products, hybrid products - that include both savings and risk-management functions and retain the need for ongoing financial advice (to maintain agent commissions) - should prove popular.
Finally, the wholesale risk-management market is also in need of further innovation. However, this is likely going to be driven by innovation in countries with more developed retail insurance and annuity markets. Interesting developments are already happening. For example, the UK bulk purchase annuity businesses (such as Paternoster) provide a viable way for transferring longevity risk exposures to specialist risk managers. Longevity and mortality bonds, forwards, and options are also areas of active research and development on the international stage, which may in the future provide new methods for managing wholesale risk exposures.
Cost Innovation - In the Australian market, cost efficiency and effectiveness remain an area of critical importance. For many players, the major constraint to creating more efficient and flexible cost bases is a legacy of archaic and overlapping systems.
Distribution cost savings involve pursuing the development of online approval and revisiting the use of existing channels. Alongside the convenience and data-mining advantages of real online approval, it also presents significant cost savings through reduced overheads and the capacity to outsource back-office operations. In the UK, Prudential has utilized its joint venture with ICICI to supplement its advanced online distribution channel with outsourced back-office operations in India.
The emergence of online underwriting programs has the potential to provide a window into the once opaque art of insurance underwriting. Greater transparency in underwriting standards may lead to more standardized underwriting practices. This will then provide scope for competitive advantage in those players able to maintain distinctive underwriting practices.
Wholesale risk-management developments will provide the ability to more efficiently manage risk exposures through the transfer and hedging of mortality, morbidity, and longevity risks. If effectively structured, these have the potential to reduce the level of required capital. These reductions could then either be translated either into more attractive profit margins or be passed on to policyholders through reduced premiums.
Foreign Entrants
Given the modest size of the market, the large number of existing, sophisticated foreign players (for example, AXA, ING, and MetLife), and the consolidation that has already taken place in the industry, a pure-play life insurance entry into the Australian market is not likely to be attractive at this stage.
A combined life and wealth strategy that brings together risk- and wealth-management skills is a plausible proposition. However, creating an end-to-end presence in the wealth-management space is unlikely to be achievable due to the critical importance of platforms in accessing distribution. Platforms bring together multiple product manufacturers to wrap products for retail investors and financial intermediaries. There are currently six scale platforms in Australia and the opportunity to create or acquire a platform is low.
The likely implication is that new entrants would need to focus on a play in either the distribution or manufacturing ends of the value chain. A number of players (for example, AXA) have been focusing on rolling up independent financial advisors. The industry is fragmented; it comprises around 16,000 planners but the five largest groups only account for around 30 percent of planners. However, rolling up planner groups is a complex and risky process. Holding onto individual planners during the roll-up process is risky, and driving economies of scale and preferential distribution through the network are equally challenging.
In summary, the nature and size of the Australian life insurance market is unlikely to justify a pure-play organic entry. The wealth-management market is extremely sophisticated, well-populated, and has a critical choke point around platforms with few significant assets likely to be for sale. However, the consumer and regulatory drivers for the industry are attractive, highlighting the opportunity of creating an innovative new model that can connect directly with planners and disrupt the current platform-based status quo. To find out more, you can check out Diffusion Of Innovation In Health Care.
