The emerging risks threatening life insurance

Vol: 44 Issue: 3 | Oct 2021

The biggest emerging risk in life insurance is that it has no future. In 2019, the Australian Prudential Regulation Authority called for urgent action regarding the sustainability of individual disability income insurance, citing a collective loss of A$2.5 billion to the industry over the past five years.

The following year, the Reserve Bank of New Zealand reported that ‘some life insurers have low solvency margins over the regulatory minimum, which raises questions about their ability to comfortably meet the minimum requirements in the event of an adverse shock or a major loss event’.

In the worst-case scenario, reinsurers leave, insurers end up losing so much money that the system goes into default and consumers are left without cover. So, what are the forces putting the sector under threat?

Ageing populations

Mark Judah, APAC insurance lead and partner at Bain & Company, believes that improving living standards across the Asia Pacific and increasing access to medical care are spurring demand for health insurance. ‘In many areas, people are living longer and the population is ageing, fuelling a need for life insurance and related products to help protect family living standards for the next generation.’

A potential increase in business may sound like a benefit but, in fact, it comes with a serious risk, according to one chief medical officer (CMO) at a major reinsurer, who spoke to the Journal on the condition of anonymity.

‘In Australia and New Zealand, life policies often terminate automatically at age 65 or 70, so the ageing population has limited impact,’ the CMO explains. ‘However, in many South-East Asian countries, life policies tend to be “whole of life”, so a longer life means a more costly claim.’

Medical advancements

In recent years, advances in screening, diagnosis and treatment have improved the outcomes of medical conditions such as heart disease and cancer. On the face of it, this seems like another positive, but rapid advancements can render underwriting practices out of date.

‘I’m not sure the industry is keeping up with these changes and their impact on definitions and cover,’ says the CMO. ‘We’re also seeing an increase in disability claims resulting from mental illness, and dementia is another major emerging risk. At the moment, there are no impartial tests for these conditions. This is a huge risk for insurers, because they must trust doctors to make the right clinical diagnosis decisions in what are often very grey areas.’

Poor definitions 

The CMO also sees insurers veering away from the principles that underpin a good definition of cover. ‘The industry needs to find a balance between being medically precise with good data to support pricing and communicating in consumer-friendly language,’ he says. 

‘When consumers are clear about what they have covered and exactly when they’re entitled to make a claim, there’s little room for dispute. When they aren’t clear, we see rising disputes, a resultant increase in prices and more unhappy customers. Add high sums insured and critical attention from the media, governments and regulators and you have a recipe for disaster.’ 

Low interest rates

As they struggled to manage the economic impact of the COVID-19 pandemic, governments and central banks around the world cut interest rates — many to record-low levels. 

‘This is significant because, in most markets, life insurance still bears financial guarantees and therefore financial risks — especially interest rate risks — that are sensitive to market fluctuations,’ says Bernhard Kotanko, a senior partner at McKinsey & Company, Hong Kong. 

‘The emerging risks we’re seeing are mainly related to health cost inflation, and any indemnity-based covers need continual adjustment in products and pricing.’ 

He adds that, other than in Australia, non-financial risks have been less critical in most markets. However, they’re becoming more relevant, with a need for more prudent management of operations, private data security and sales conduct, including anti-money laundering and ‘know your customer’ processes.

‘With the shift towards digital hybrid sales models, there is also a need to enhance processes related to operational and risk management,’ says Kotanko.

Rising regulation

Since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Australia and New Zealand have both seen a steady increase in regulation, oversight and self-regulation. These can bring higher costs of compliance as they increase the risk of non-compliance and subsequent reputational damage.

‘In New Zealand, there’s also a potential reduction in the number of professional advisers [due to a new regulatory regime that requires advisers to be licensed],’ says Richard Klipin, CEO of New Zealand’s Financial Services Council. ‘And, as most of the life insurance in New Zealand is distributed through this channel, it’s easy to see how the market in aggregate would remain flat or decrease.’

Across Asia Pacific, Judah believes that regulators are walking a tightrope between supporting and cultivating innovation on one hand and providing settings that deliver fair outcomes for consumers, companies and other stakeholders on the other. 

‘Each market is different, but we’ve generally seen regulators do a good job of this across the region,’ he says. ‘Countries like China and Singapore have really supported innovation — you can see that from the investment going into insurtech there — while Australia is leading the way on customer outcomes, with strong regulation around the design and distribution of insurance products.’

New technologies

Technology continues to change the way all insurance markets operate. ‘In New Zealand, we’ve seen a sharp rise in the use of digital products in investments, and we’re expecting insurance to follow closely behind,’ says Klipin. ‘Indeed, 38.2 per cent of New Zealanders have either invested, or are likely to invest, through a digital platform. That’s 1.5 million people who are choosing technology over personal contact — a material number.’ 

Kotanko sees technology, data and analytics rapidly transforming insurance all along the value chain.

‘Distribution is becoming a digital hybrid with customer engagement based on digital service platforms, and data and analytics allowing better personalisation and underlying insurance management,’ he says. ‘All markets are following similar patterns, with China, India and South-East Asia currently evolving the most rapidly.’ 

Digital transformation clearly offers tremendous new opportunities. However, it is also heightening the risks around data privacy and security, cybercrime and the connection between digital and traditional insurance distribution and service models.

‘From a risk management perspective, it’s critical that insurers keep pace with all aspects of non-financial risks,’ says Kotanko. ‘This is most important when it comes to the protection of data and risk management for new, digital ways of working.’

This is complicated by the fact that the Asia-Pacific region is diverse, with distinct market characteristics and maturity levels as well as specific product profiles and channel structures.

‘While the broader concepts of risk in life insurance apply, specific priorities differ widely from country to country,’ says Kotanko. ‘Insurers must have a granular understanding of the various markets, segments, channels and product lines. A deep understanding of the needs and preferences of markets and stakeholders will equip them to tailor their strategy to local requirements and to manage specific risks.’