Slides from Deloitte Australia Super Forum 16 July 2014

1. Insurance in Superannuation
The Challenges of the Current Market
Stephen Huppert
Partner, Deloitte
July 2014

2. AFR front page, Sat 26 Oct 2013
AFR back page, Tues 23 July 2013

4. 1 The Situation
2 The Contributors
3 The Responses
4 The Future

5. 1 The Situation
2 The Contributors
3 The Responses
4 The Future

6. Degrees of separation
members
= insured
employer
administrator
trustee
insurer

7. Economic downturn
Insurance payout in lieu
of retrenchment
Significant
premium
increases
Late reporting of TPD
limits opportunities to
rehabilitate or reduce
benefit
Reinsurance market
tightening
Increases in default
cover, especially TPD
leading to incentives to
claim
Definitions becoming
complex leading to
unanticipated claims
SLAs take precedence
over rigorous
assessment of claims
AALs becoming more
and more generous
Return to work
definitions not able to be
readily enforced
Poor data quality
Pricing on incomplete
data
Increased involvement
of lawyers
Aggressive competition
for business
Worsening DI claims
experience
Greater incidence and
longer duration
Observations from the market
Experience now very
different to when priced
Incidence of mental
health now up to 30-40%
of disability claims

8. “As a result of the poor group claims experience, there have been some very
significant increases in premium rates for large superannuation funds in recent times
— of the order of 25 per cent to 40 per cent in a number of cases".
"This is a direct reflection of poor past pricing and governance practices, and
recognition that the premium rates were just not sustainable.
“[While the insurance industry is] starting to address its shortcomings, unfortunately,
superannuation members bear the brunt of the mispricing that occurred in the past“.
Perspective from APRA
Ian Laughlin
Deputy Chairman,
June 2013

9. Source: APRA Statistics
$0
$500
$1,000
$1,500
$2,000
$0
$1,000
$2,000
$3,000
$4,000
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
$Billions
$millions
Growth in Group Risk Premiums (LH axis)
vs Growth Superannuation Assets (RH axis)
Superannuation Funds Premiums
Perspective from the superannuation funds
Source: APRA

10. 0
1,000
2,000
3,000
2004 2007 2010 2013
PremiumsPaidtoInsurer($m)
Premiums Paid
0
200
400
600
800
1,000
1,200
1,400
2004 2007 2010 2013
ProceedsonInsurancePolicies
($m)
Proceeds on Insurance
Policies
0%
50%
100%
2004 2007 2010 2013
LossRatio
Loss Ratio
Perspective from the superannuation funds
Source: APRA

11. Perspective from insurance companies
“While claims experience improved overall, Wholesale Life
net revenue declined significantly due to unfavourable claims
experience and claims reserve increases”
Comminsure Full Year Profit Announcement, 14 August 2013
“Australian wealth protection operating earnings down 52%
on 1H 12, reflecting poor claims experience and increased
lapse rates.
The result was impacted by experience losses of A$33m and
lower profit margins reflecting lapse assumptions
strengthened in FY 12.”
AMP Half Year Profit Announcement, 15 August 2013
-$500
-$400
-$300
-$200
-$100
$0
$100
$200
$300
$400
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
$m
Profit by Product
(12 mth rolling average)
Group disability income insurance
Group lump sum risk
Source: APRA

12. 0
400
800
1,200
1,600
2,000
Jun 2008 Dec 2009 Jun 2011 Dec 2012
Lump Sum Risk
Net Policy Revenue ($m)
-400
0
400
800
Jun 2008 Dec 2009 Jun 2011 Dec 2012
Lump Sum Risk
Profit before Tax ($m)
0
100
200
300
400
500
600
Jun 2008 Dec 2009 Jun 2011 Dec 2012
Disability Income
Net Policy Revenue ($m)
-150
-100
-50
0
50
100
150
Jun 2008 Dec 2009 Jun 2011 Dec 2012
Disability Income
Profit before Tax ($m)
Perspective from insurance companies
Source: APRA

13. 1 The Situation
2 The Contributors
3 The Responses
4 The Future

14. Relaxing of product definitions
and policy terms
Legal involvement driving increased
awareness of benefits available to customers
Improvements and
increases in benefits

17. 1 The Situation
2 The Contributors
3 The Responses
4 The Future

18. Review product features
• Review Terms & Conditions including AALs
• Tighten definitions including eligibility, default cover, return
to work rules
• Consider a time limit by which past claims will not be
allowed to be admitted
• Are all the insurance benefits relevant to fund members?
Reduce or remove benefits of limited value to members.

19. Improve claims management
• Review claims philosophy
• Process mapping
• Roles and responsibilities
• Decision making process
• Check adequacy of quality assurance procedures
and controls.

20. Better data/better use of data
• More effective use of data to understand
behaviours and processes
• Maintain better quality data for pricing. Undertake
regular reviews and cleansing of data
• Need more than three years’ data to price TPD
• Understand the performance of insurance portfolio.

21. Work with employers
• Wellness initiatives
• Early intervention
• Return to work policies.

22. 1 The Situation
2 The Contributors
3 The Responses
4 The Future

23. Additional contributions above SG
rate for comfortable retirement
Australians need to contribute more to super. The Superannuation Guarantee
contribution will still be insufficient when it increases to 12% of salary
5.4%
7.5%
Should superannuation be
used for life insurance?

25. How will the cycle stabilise?
Reported
Losses
Increases
to
premiums
Increase in
tender activity
Lack of
reliable data
What pricing
Basis?
Increase in
claims
Question arises for the sustainability of
insurance in super
If premiums keep going up…
Do members (and Trustees) opt out
at some point?
This may increase the proportion of ‘sub
standard’ lives
The cycle continues…

26. Insurers seeking
profit
Funds questioning
value
Previously thought low margin but profitable
LAGIC increasing capital requirements
Profitability falling with claim deterioration
ROC not sustainable at current levels
Funds must justify cost to member balances
Significant increases in price
Insurers choosing not to respond to tenders
Balance between cost and benefits delicate
Need a mutually sustainable understanding of cost & benefit
Supportive roles of each in ensuring fair claim payment systems
Insurers need to make a margin to continue to offer services

27. “Never let a good
crisis go to waste”
Winston Churchill

28. A word from the Sponsor

29. About Deloitte
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