Features of Firm with Life Insurance

Firms in the life insurance industry are under a contractual obligation with consumers to pay out a lump sum of money or an annuity according to the terms of the product sold. In Australia, the four main life insurance products are death cover, Total and Permanent Disability, income protection and trauma cover. There are three primary avenues from which Australians can buy these insurance products; directly from the insurer, with an advisor or through their superannuation. In 2018, the total revenue in this industry was $35.7bn, which is 1.4 percent of Australia’s GDP. Recently, this industry has undergone unprecedented scrutiny during the Royal Commission resulting in expected volatility in future profits. There are numerous factors that are currently affecting profitability in this industry and this case study will examine internal rivalry and market structure, government policies, price discimination and technological changes.

There are a number of medium and large sized companies within the life insurance industry that makes it a competitive market. Not perfectly competitive since the products offered will differ slightly in prices and premiums etc.

The life insurance industry is heavily regulated by two primary government bodies; the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investments Commission (ASIC). According to IBISWorld, there is expected to be more regulation in the future which will influence the profitability of firms as the demand for insurance products is greatly affected when regulations change. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has set out a number of recommendations which the government took onboard that also affect the profitability of the life insurance industry. One such reform that has come into effect is the Protecting Your Superannuation Package act where new members under 25 and members with account balances of less than $6000 are opt-in instead of opt-out for the insurance component of their superannuation. In 2015, there were 14 million group policies out of a total of 21.9 million. Since group life insurance through an employer is one of the highest customer bases for this industry, although these recommendations were targeting the superannuation industry, the demand for insurance products will be profoundly impacted. Furthermore, as part of this act, accounts that have been inactive for 16 months or longer will have their insurance cancelled. Not only does this cancellation stop premiums being paid which decreases the demand and profitability of insurance firms, but these firms will also need to invest in technology and data analysts to identify the many portfolios that will be affected. This change indirectly increases their costs and further decreases their profitability. Government regulations can also directly affect costs in the industry. Based on recommendations from the Parliamentary Joint Committee on the Life Insurance Industry in March 2018, the government recently passed legislation on recommendations 9.1 and 9.3 which prohibit life insurers from ‘using predictive genetic information’. Previously, insurers could compel potential policyholders to disclose results from genetic tests to ensure that the premiums they charge will cover any additional risks, however since July 2019, this is no longer allowed. The risk to the insurer has increased thus increasing their cost of doing business. The life insurance industry is heavily regulated and reforms have affected and will continue to affect profitability.