
The scale game gripping Australia’s group risk insurance market
- On 19/02/2015
- insurance
On the surface, Australia’s wholesale insurance market looks in robust condition.
But new evidence to emerge from the most recent Rice Warner Wholesale Insurance Market Report reveals underlying structural tensions: the biggest insurers getting bigger, operating on decreasing profit margins and seeking to service heightened claims, pricing and product demands from the underlying funds.
The significance of scale in the wholesale risk insurance market cannot be underestimated.
To put the market in perspective, the wholesale segment accounts for a third of risk insurance policies by revenue sold in Australia, and over half of the market (55 per cent) in terms of the cover provided to Australians via their superannuation fund.
In a nation of underinsured citizens, many owe what risk cover they have (including for example life insurance, trauma and income protection policies) to their superannuation fund membership. Around 12 million Australian fund accounts are insured via this wholesale means.
In revenue terms, the wholesale (otherwise known as group) risk market represents a healthy $5 billion annual segment.
Yet, perhaps surprisingly to some, the market sustains just a small and shrinking number of product manufacturers. Ricer Warner’s media release explains this market concentration in more detail.
Suffice to say, the wholesale insurance game has become one of scale, as manufacturers develop the required infrastructure to support new client needs. This, coupled with the merger trend amongst superannuation funds, means those insurers with the capability to manage larger sum contracts from fewer funds are best positioned.
From a practical infrastructure standpoint, insurers must meet the growing requirements from funds for:
- Sophisticated claims management – Rice Warner now sees insurers employ permanent teams of medical professionals, including rehabilitation, mental health and musculoskeletal experts
- Pricing – the capacity to price and reprice multiple insurance plans on a regular basis
- Operating models – being flexible enough to support the unique operating models of individual superannuation funds, brokers and employers.
Future Growth
The wholesale insurance market has grown by 12.8 per cent over the past 15 years (or 9.6 per cent per annum in real terms). Rice Warner expects the rate of growth to slow over the next 15 years to 7.6 per cent per annum (or 4.4 per cent in real terms).
And while these numbers paint a picture of slowing growth, Rice Warner also expects the future to be marked by tailoring of insurance programs to the needs of individual members, as opposed to overall growth derived from increases in default cover.
The challenging future of scale-based product manufacturing awaits the wholesale market segment.
Pricing and Lawyer Intervention
Rice Warner has observed over the past 12 months evidence of significant price increases by superannuation funds and a number of corporate plans, reflecting a deteriorating (higher) claims experience and increased capital requirements for insurers, among other drivers.
However, the good news for fund members is that wholesale cover remains, on average, significantly cheaper than for the equivalent cover in other market segments, including direct and adviser sold cover.
Finally, Rice Warner remains wary of the value of lawyer intervention at the claim level. Of superannuation funds responding to our survey, none believe the trend of lawyer involvement in claims is decreasing, nor that lawyers are contributing to a greater proportion of claims being accepted. This is interesting, particularly after lawyer fees are taken into consideration.
Thierry Bareau, Head of Life Insurance