On 5 April 2023, the Reserve Bank of Australia chose to keep interest rates at 3.6% after 10 consecutive increases over the past 12 months.1 The annual CPI movement of 7.0% for the 12 months to 31 March 2023, is down from the annual CPI movement of 7.8% for the 12 months to 31 December 2022 (which was the highest CPI since 1990).2 The past four quarters have seen strong quarterly rises off the back of higher prices for medical and hospital services (+4.2%), tertiary education (+9.7%), gas and other household fuels (+14.3%), and domestic holiday travel and accommodation (+4.7%).3

In the 12 months to 31 December 2022, risk insurance products returned a net profit after tax of $1.1357 billion and increase from $745.6 million in the 12 months to 31 December 2021. The result was driven by the $1.0792 billion profit recorded by Individual Disability Income Insurance (IDII), due to movements in bond yields, repricing activities and releases of COVID-19 reserves throughout 2022.  Individual lump sum business reported a loss of $329.2 million, which can largely be attributed to an increase in net policy expenses (i.e., claims).4

In February 2023, APRA listed IDII as among its supervision priorities, highlighting concerns over the product’s financial state, indicating that recent profits were partly driven by COVID-19 reserve releases and financial market movements that favoured insurers.  APRA remains focussed on the long-term sustainability of IDII, to ensure the gains of the past few years are not eroded. APRA will continue to monitor IDII product development to ensure responsible market behaviour by life insurance companies, and to assess whether a change in their IDII capital charge is warranted. APRA expects life insurers to apply the recent learnings and sustainability practices introduced for IDII to other products in their portfolios.5 

S&P Global Ratings reported in February 2023 that IDII profitability could deteriorate, despite improving IDII profitability over the past two years, as there is still a risk that claims experience could deteriorate as the market is still exposed to legacy policies.6

In force premiums in the Retail Life Insurance Market increased by 3.4% from $9.007 billion in 2021, to $9.303 billion in 2022, with income protection premiums increasing by 3.5% and lump sum premiums increasing by 3.4%.7 New business sales for Retail Life Insurance decreased by 21.5% from $344.0 million in 2021, to $270.0 million in 2022.8  This continues the trend of lower annual new business sales from the past 4 years.9

On 8 February 2023, the Quality of Advice Review – Final Report was released, and confirmed that, “Commissions are justified in all of the circumstances for life insurance.”10  The report stated that the adviser may receive remuneration as either a fee for service or as a commission, but informed consent must be obtained from the client in either case. 

Dr Jeffrey Scott PhD CFP© SSA™ FTI
Head of Advice Strategy

Reference

  1. Reserve Bank of Australia – Cash Rate Target.  https://www.rba.gov.au/statistics/cash-rate/
  2. Australian Bureau of Statistics – Consumer Price Index, Australia, Reference Period March Quarter 2023.
  3. Australian Bureau of Statistics – Consumer Price Index, Australia, Reference Period March Quarter 2023. 
  4. APRA – Quarterly life insurance performance statistics – highlights – December 2022 (released 2 March 2023)
  5. APRA – Information paper – APRA’s Supervision Priorities February 2023
  6. SCOR Life & Health – Market Activity Report: Australia – March 2023
  7. [7] NMG – Risk Distribution Monitor – Retail Advice Inforce Analysis – Q4: October – December 2022.
  8. [8] NMG – Risk Distribution Monitor – Retail Advice New Sales and Lapses Analysis – Q4: October – December 2022.
  9. [9] NMG – Risk Distribution Monitor – Retail Advice Trend Analysis – Q4: October – December 2022.
  10. Australian Government – Quality of Advice Review – Final Report – December 2022
Posted: 13-04-2023

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