Australian life profits squeezed - FREE

Australian life profits squeezed - FREE

Australian life insurer profits are predicted to be under pressure across 2015 and 2016, because of policy lapses and rising claims seen for their risk products, according to Moody’s.

The credit rating agency put a report out on the market segment today.

"The higher number of policy lapses and claims for risk products largely reflects a combination of fundamental issues, including product mispricing and premium and commission structures. These issues will take time to address," said Frank Mirenzi, a Moody's vice president and senior analyst.

"The insurers that are most at risk of profit erosion will be those that are large providers of risk insurance products or those insurers which have been growing their risk insurance business significantly in the last few years," said Mirenzi.

Lapses and claims for risk products rose from 2011 through to 2013, with high upfront commissions for financial advisers and stepped premiums on policies being some of the prominent causes, Mirenzi writes in Moody’s recent report on the issue.

Life insurers were forced to revise their assumptions and lower their outlook on future profits, according to Mirenzi. 

As policy lapses increase, the average duration of policies shorten, which, the rating agency noted, means that life insurers may not earn the full level of expected profits from those policies. 

Higher levels of claims could also lead insurers to revise up their assumptions on future claims, and consequently to reduce their future profit expectations, according to Moody's.

Australia's life insurance industry is responding to the deteriorating profitability of its risk products through a working group sponsored by the Financial Services Council, Moody’s pointed out.

There are several recommendations; most significantly regarding adviser remuneration. 

However, there is still much debate in the industry and the long transition period reflects the time needed to resolve the structural nature of the issue. 

Moody's has argued that the industry's profitability will likely stay weak over the next few years.

To read more on this issue, the forthcoming June issue of Reactions magazine will feature a special report on life models in re/insurance.

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