Issues and trends in life reinsurance

22 February 2016

Recent changes in the Australian life reinsurance market have caused a seismic shift in the market dynamic between direct insurers and reinsurers.

This shift started in the group life insurance space and has now trickled down through the entire industry. So where does the market go from here?

2013 is a year the Australian life reinsurance industry would not like to repeat, having reported losses across the Australian market of approximately $1 billion for the second and third quarters. Predominantly, these losses arose as a result of business written in the group life space, particularly with respect to TPD cover.

There were various reasons for these losses including:

  1. Underwriting in both the life insurance and reinsurance industry left both the direct and reinsurance market exposed to adverse movement in market conditions. In particular, thin margins were exposed by pricing that did not properly align with the policy benefits. A notable example was a trend whereby default coverage increased in group life schemes, but the underlying premium rates increase at a similar rate to match the increased exposure;
  2. Decreases in global interest rates reduced investment returns;
  3. The Australian reinsurance market was highly concentrated in a few international reinsurers;
  4. Competitive tension in group life market tendering saw the process often weighted toward acquisition and retention of business rather than sustainability; and
  5. The rise and, what some may call the discovery, by plaintiff solicitors driving an expanding TPD claims ‘market’ by acting for members against superannuation/industry funds. The resulting increase in claims has been seen, in part, as a market correction against a rate of claims which may not have accurately reflected the industry’s true exposure. For instance, prior to targeted marketing by plaintiffs’ firms, individual members may not have been aware of their available cover. An increase in the number of TPD claims related to mental illness and other complicated injuries also require greater claims management and resourcing.

What has been the impact to the market from these developments?

At the time a number of life reinsurers authorised in Australia took protective action by significantly reducing or even ceasing to write or tender for new business.

An obvious consequence of this has been a change in pricing to policy holders, in circumstances where the treaty permits it, which has inevitably been passed on to individual members of the funds.

From an industry perspective, this reduction in domestic reinsurance capacity has seen the establishment of a new domestic reinsurer, Pacific Life Re, and foreign life reinsurers looking for opportunities to provide capacity to the Australian direct market.

The use of foreign reinsurers is not without issue given Australian life insurance is not as regulated as the Australian general insurance market in the use of foreign capacity. Accordingly, while foreign reinsurance has been a welcome development for some insurers (and policyholders), a measured and planned approach is required.

APRA has already considered some of these issues and, while its first preference is unlikely to favour the use of foreign reinsurance capital, it has indicated a preparedness to review, on a case by case basis, the use of foreign reinsurers to support direct group life contracts. However, any use of off-shore life reinsurers will, at this moment, likely need to be supported by some form of Australian based collateral arrangements.

Another area in which the industry is experiencing an evolution is in product design and development. Many insurers have undertaken reviews of existing products and policy terms, especially TPD cover, to determine what, if any, changes can be made. For instance, discussion is taking place to determine whether TPD benefits can be changed to provide for multiple payments rather than lump sum payments. Claims management processes are also being considered which allow life insurers to better prioritise treatment of injuries and approve rehabilitation processes more quickly. The life industry is looking to workers compensation injury management and rehabilitation processes to increase the likelihood of a claimant returning to work.

While these changes reflect a progressive industry focussed on future business, the domestic life insurance industry is still dealing with significant losses which are continuing under legacy reinsurance treaties. These legacy arrangements are straining cedant/reinsurer relationships with the result that reinsurers have increased their engagement and role in claims processes.

Although more than two years have passed since the losses of 2013, many changes, particularly in offshore reinsurance and in product development, are still being developed. It can be assumed that the group life industry will not return to the halcyon days prior to the significant losses unless those participants in the Australian life market are creative, dynamic and willing to seize market opportunities when they present themselves.

This article was written by Mark Kimberley, Partner.

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