Life risk insurance not profitable: KPMG

Profitability in life risk insurance has dropped to the extent that the sector is now loss-making in aggregate, according to KPMG.

The global consultant's analysis of the financial results of Australia's life insurers shows the sector made an $86 million loss from risk products in the first half of this year, on the back of a $33 million profit in 2018, which KPMG deemed as reaching "essentially breakeven position".

Comparatively, the industry made an aggregate profit of $1.5 billion in 2017.

KPMG said ordinary risk products were continuing to make losses, noting the line of products made a $130 million loss in the first half of 2019 alone, following a $341 million loss in 2018.

Pauline Blight-Johnston, KPMG partner and head of life insurance said the results were driven by the high-level of change the sector had experienced within recent times.

"The last two years have been a period of considerable challenge for the Australian life insurance industry," Blight-Johnston said.

"Customers and the public are increasingly asking questions about the value the industry provides.  At the same time, the profitability challenges driven by higher than expected claims payments across the industry are perhaps the greatest we have seen in a generation."

Blight-Johnston - who joined the firm in October following stints at Challenger and AMP, including more than two years as head of the wealth manager's insurance and superannuation division - said there was "clearly" a large disconnect between the perceived and actual value being delivered by life risk products.

"Unsurprisingly, the disruption to life insurance distribution models has noticeably affected revenue growth across the industry," she said.

"Subdued growth rates reflect the impact of lower initial commissions due to the Life Insurance Framework that came into full effect in 2018, as well as a retreat from direct distribution models following the exposure of problems with these models during the Banking Royal Commission.

A well-functioning, sustainable, accessible and trusted life insurance industry is important for all Australians, particularly for the more vulnerable members of our society, she added.

"Leaders in this industry must continue their efforts to reshape its customer proposition to simultaneously rebuild public trust and put the industry on a more sustainable financial footing," she said.

The firm said that consistent with declining profitability, benefit payments to policyholders had continued to increase in amount and as a percentage of premiums, with 62.9% of premiums paid as benefits in the first half of the year.

The analysis also noted group insurance reported a small loss of $50 million in the first six months of the year.

KPMG's analysis does not yet take into account the impact of the government's now-implemented Protecting Your Super legislation, which it said was likely to put more "downward pressure" on sales in the coming years.

KPMG partner and head of insurance David Kells reiterated the influence of the difficult environment life insurers were operating in, and said there was "no simple solution to the very poor experience of income protection business".

"The extensive regulatory changes for life companies are impacting the expense line and investment budgets and, understandably, require a lot of management and board focus," Kells said.

"The macro overlay of an uncertain economic environment - with implications on both sides of the balance sheet - adds to the difficulties."

"The key really is about prioritising and managing these complex challenges - insurers need to ensure a tactical response to regulation does not result in more remediation issues."

However, Kells urged onlookers to remember the underlying premise of life insurance is "still very much alive and well.

"The product definitely has value to customers - Australia still has a significant under-insurance issue," he said.

"There are significant opportunities for life insurers who can leverage new technology and ways of working to provide a better experience and simpler products to their customers."

Read more: KPMGLife insuranceLife riskSuperBanking Royal CommissionChallengerDavid KellsLife Insurance FrameworkPauline Blight-Johnston
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