Direct life insurers face sales headwinds

Australia’s $1.526 billion Direct risk insurance sector faces significant headwinds as momentum for life insurance sales swing heavily towards Group policies sold through superannuation, the Rice Warner Direct Insurance Report 2015 shows.

With a relatively stagnant sales environment and increased pressure to reduce policy lapse rates, the Direct sector experienced a slow year for the period ending 31 December 2014.

Sales in 2014 were $496.5 million, representing a 6.5 percent drop in sales compared with 2013.

Conversely, in-force annual premiums have increased by 4.6 percent rising to $1,526.9 million at 31 December 2014.  A challenge for Direct insurers and distributors is clearly maintaining sales momentum and avoiding early lapses.

Such challenges are not new to Direct, but mean that smaller insurers who cannot leverage scale, will continue to find it challenging to grow.  Outside of Consumer Credit Insurance, the Direct market remains dominated by two major players, and although Rice Warner sees steady growth from smaller insurers, this picture is unlikely to change in the short-term unless a smaller player invests significantly, or technology plays a disruptive role.

The Direct Insurance Report shows pricing of Direct products has remained stable.  Interestingly, this contrasts with the volatility of Retail and Group insurance prices, which rose in response to a spike in claims over this period.

Perhaps ironically, Direct insurance is currently more competitive, especially for life cover at younger ages.

Some further positives for Direct?  The 2014/2015 year may yet prove to be the seed for market share growth with the retail insurance industry likely to have a challenging 2016, if insurers decide to focus more on Direct distribution models in reaction to potential impacts from the “Trowbridge Report”[1] – now known as the Life Insurance Framework (LIF).

Should it survive the uncertainties of modern day politics, certain recommendations contained in the LIF suggest a reduction to adviser commissions from January 2016.

However, increased competition has arisen from superannuation funds marketing directly to members to encourage them to increase insurance amounts with no underwriting (if the insurance is taken out immediately after the member joins the fund) or with minimal underwriting (after that time period).

Rice Warner expects superannuation funds to increase this cross and up-sell of insurance, as further funds focus on expanding their financial services offers to members.

Of additional interest, Rice Warner has also seen insurers respond to earlier criticism from ASIC on Funeral products providing value for money to policyholders.  These products have been largely redesigned and in some cases removed.

Overall, the Direct market has the key advantage (over Retail and Group) of greater agility and speed to change.  It continually tests and re-tests distribution models.  With the right focus and technology spend, Direct retains the potential to perform well.

– Jenni Baxter, Head of Consulting & Research