Most life insurance is currently sold through superannuation funds or via retail markets, but competition in these markets means insurers are looking to direct sales as a means of diversifying distribution.
Direct life insurance
To date, the life insurance market in Australia has been dominated by two broad forms of distribution, namely:
- The group insurance segment, which has grown in parallel with the increase in superannuation accounts. Group insurance business is underwritten directly on non-commission terms in non-profit superannuation funds (industry, corporate and public sector) and retail master trusts with a commission structure for the operator and the intermediaries using the fund, and
- The retail segment is intermediated via licensed financial planners, providing death, total and permanent disability, trauma, income protection and business expenses cover, generally on a commission basis, but also for a fee.
However, a number of factors have led insurers to seek new methods of distribution. These include:
- Increasingly intense competition in the retail market, in terms of product features, price (premium rates) and services.
- Increasing difficulties in gaining and retaining access to distribution capacity, as dealer groups have either been acquired by major wealth management companies or have entrenched alliances with a number of insurers.
- Financial service reform (FSR) advice requirements, which have made it expensive for advisers to write business and ultimately this cost must be passed onto insurers and customers.
- Partly as a result of FSR requirements, the costs of providing comprehensive financial advice are high and advisers are unable to pass such costs onto customers who require relatively straightforward insurance arrangements. Advisers have therefore moved increasingly up-market (to older, wealthier Australians with less need for insurance), leaving large numbers of people without access to adequate levels of cover. As a result, underinsurance remains a significant issue, but also a significant opportunity for companies that can develop the right distribution model.
- Many people obtain a basic level of default cover via their superannuation fund but do not voluntarily opt for additional cover to meet their needs. For example, most industry funds experience a take-up of additional cover by no more than 5 per cent of their members.
- Technology has opened up new opportunities in the areas of customer data mining, insurance needs analysis, application for cover, underwriting and completion of business. It is rapidly becoming feasible to identify high-potential product customers based on demographic profiling and other available data such as salaries (via superannaution guarantee contribution levels) and previous buying habits.
Given these trends and the significant potential afforded by underinsurance, we believe direct life products and direct distribution will be a key growth area for life companies in the next few years.
Super funds and health insurance
Rice Warner Actuaries surveyed 28 industry superannuation funds to inquire if they offered health insurance through the fund to their members.
We received responses from 15 of the funds. Sixty per cent of the funds provide health insurance to their members. Seven different insurers provided health cover, with the main insurer being Manchester Unity, which provided cover to four funds. Three other insurers provided cover to two funds (Australian Unity, NIB and GMHBA)
All the funds that provide health cover offer a discount to members, apart from one fund, Combined, which offered its members improved benefits. The discounts provided range from 5 per cent to 12.5 per cent, with the median discount being 7 per cent.
Industry funds introduced discounted health insurance to provide competitive advantage; they are part of a suite of ancillary benefits offered to members. The funds do not earn a commission from the sales but pass the discount straight through to members.
As the funds receive no remuneration from the health insurers, they are reluctant to spend much on promotion of the health cover benefit. In fact, it could be argued active promotion of a non-superannuation benefit (except in passing) would breach superannuation law.
Consequently, the main marketing is incidental coverage on the website and through free advertising in the fund's annual reports.
For all of the funds, the take up rate of health insurance to date has been very low - less that 1 per cent in most cases and considerably less than that in some cases. This is surprising given the tax advantages in taking out health insurance and the size of the discount available.
This experience suggests success in direct marketing of life products will require an analytical approach to identifying an appropriate target customer base (for example, via data mining) and a product tailored to appeal specifically to them.
Article extracted from "Direct Life Products - A Survey of Life Insurance Products Sold Without Using Intermediaries", April 2009. Research by Rice Warner Actuaries.
This report was prepared by a team of researchers under the supervision of Rice Warner life and health practice group head Richard Weatherhead.
