Insurance in Superannuation Newsletter

Transcription

1 Insurance in Newsletter September Quarter 217 In this newsletter, we review APRA s latest quarterly statistics on the profitability of the Insurance in sector at an aggregate and a product level, as well as exploring how to achieve the best possible group insurance premium rate. Adam Gee Partner Advisory Partner Insurance in Profitability Profits for Group Risk Products was $6m for the September 217 quarter, compared to $138m for the June 217 quarter. Figure 1: Net profit after tax by quarter Profit/Loss ($M after tax)* Group Super LS Group Super DI Source: APRA Quarterly Life Insurance Performance Statistics September 217 Group lump sum profits decreased to $61m in the September quarter, while group disability income profits decreased sharply to a loss of $1m in the September quarter. 218 KPMG Financial Services Consulting Pty Ltd, ABN , Australian Financial Services Licence No.3925, an affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

2 2 Insurance in Newsletter - September 217 Quarter Group lump sum Figure 2: Quarterly group lump sum net of tax profits* Group lump sum profits decreased from $78m in the June 217 quarter to $61m in the September 217 quarter. Net profits were 5.3 percent of net policy revenue for the September quarter, down from 8.1percent in the June quarter. The discussion on page 4 highlights that this level of profitability is on the low side of the profit margins targeted by insurers. Profit/Loss after tax ($m) (5) (1) - Group Lump Sum * Source: APRA Quarterly Life Insurance Performance Statistics September 217 Figure 3: Components of group lump sum profits by quarter* $m 1,4 1,2 1, (2) Net Policy Revenue Net Policy Expenses Effective movement in net policy liability Net Profit/Loss after t * Source: APRA Quarterly Life Insurance Performance Statistics September KPMG Financial Services Consulting Pty Ltd,ABN , Australian Financial Services Licence No.3925, an affiliate of KPMG. KPMG is an Australian partnership and a member

3 3 Insurance in Newsletter - September 217 Quarter Group disability income Figure 4: Quarterly group disbability income net of tax profits* Group disability income profits remain highly volatile. The September quarter profit fell from $59m in June to a loss of $1m, which is the first reported loss in the past five quarters. Profit/Loss after tax ($m) As shown in the graph below, the poor experience in the September quarter appears to primarily reflect unfavorable net policy liability movements combined with a small investment loss over the quarter. 2 (2) (4) As noted previously, the large profit in the March 217 quarter appears to be due to one-off reinsurance treaty changes. (6) * Source: APRA Quarterly Life Insurance Performance Statistics September 217 Figure 5: Components of group disability income profits by quarter* ($m) , -1,2 Net Policy Revenue Effective movement in net policy liability Investment revenue Net Policy Expenses Net Profit/Loss after tax * Source: APRA Quarterly Life Insurance Performance Statistics September KPMG Financial Services Consulting Pty Ltd, ABN , Australian Financial Services Licence No.3925, an affiliate of KPMG. KPMG is an Australian partnership and a member

4 4 Insurance in Newsletter - September 217 Quarter Insurance in Observation Group Lump Sum Paid claims are claims payments made by the insurers. Pending claims (i.e. RBNA claims) and Appeals reserves are actuarial estimates to allow for claims that are already notified to the insurer but awaiting for claims / appeals assessment. Incurred But Not Reported (IBNR) claims reserves are actuarial estimates to allow for claims that have already incurred but have not been notified to the insurer yet. Adjustments are factors that influences claims experience assumptions about the super fund s profile and future trends. These factors include: Historical Scheme claims experience and trends Industry experience and trends. This includes credibility adjustments Economic outlook for industry and economy. Member s Awareness and Cross-subsidies. Changes in claims management practices. Benefit Design and Member s Behaviour changes. Expected demographic changes. Workers compensation experience and offsets. Rehabilitation and RTW programs. Anti-selection and AAL Achieving the Best Possible Group Insurance Premium Rate Introduction When a fund puts their insurance out to tender, it is common for a broad range of premium rates to be quoted. This article explores the reasons for this, and how superannuation funds can present the information to get the best possible premium rate for their members. To address these points, we first look at the key components of a group risk premium. Components of Group Risk Premiums The key components of the group risk premium are expenses, profit margin and claims cost. The chart above summarises the size of the key components for a typical Death and TPD scheme: The profit margin is derived based on the cost of capital for the insurer. This reflects the level of capital held and return on capital target adopted (typically between 8-15 percent per annum). Factors that influence the cost of capital include the potential volatility of the claims experience and the level of guarantees provided. Expenses typically make up 5-15 percent of the premium and consists of administration expenses, claims management expenses, stamp duties, a contribution to overheads and management expenses. The Claims cost is the largest component. Paid claims only makes up a proportion of this, whilst the ultimate claim cost is uncertain and requires actuarial judgment and assumptions to estimate the claims reserves. The chart highlights that a large proportion of the claims reserves requires actuarial judgement to set them accurately, with a number of adjustment factors possible. Getting the Best Possible Premium Rates We estimate that up to 5 percent of the premium is uncertain and requires actuarial judgment and assumptions. Super funds can get the best possible premium rates by: Providing detailed, complete and accurate claim and member information. This: Minimises the margins for conservatism built into claims reserves. Maximises the time the insurer can spend on setting adjustment factors that reflect the funds circumstances. Maximises the number of insurers quoting. Understanding why the claims experience of the fund is better or worse than the industry, and how the insurer will interpret this information when setting adjustment factors. Providing fund specific information to support the best possible adjustment factor. For example a fund with low historical mental illness claims should provide information about programs that support this experience continuing in the future. If this information is not provided, it is common for the insurer to adopt industry specific assumptions, or not fully reflect the fund experience. Obtain a break down of the premium quoted, and an understanding of key judgements and adjustments made. Identify areas of conservatism adopted by the insurer, and provide further details to help insurers reduce these margins. 218 KPMG Financial Services Consulting Pty Ltd, ABN , Australian Financial Services Licence No.3925, an affiliate of KPMG. KPMG is an Australian partnership and a member

5 KPMG s Insurance and team provides a broad range of services including: Claims management advice including independent reviews, trustee support and model advice SPS25 advice Insurance tender assistance Insurance benefit & product design, and claims experience analysis Insurance operating model advice Insurance administration system reviews Contact us Insurance in specialists specialists Martin Paino Partner P: (2) E: mpaino@kpmg.com.au Adam Gee Advisory Partner P: (2) E: adamgee@kpmg.com.au Wendy Tse P: (2) E: wtse1@kpmg.com.au Sean Hill National Leader P: (3) E: seanhillkpmg.com.au Jane Dorter P: (2) E: jdorter@kpmg.com.au Platon Chris P: (2) E:pchris1@kpmg.com.au Samantha Gordon Associate P: (2) E: sgordon@kpmg.com.au Katrina Bacon P: E: katrinabacon@kpmg.com.au Edward Tam Associate P: (2) E: edwardtam@kpmg.com.au kpmg.com.au If you would like to be added to the distribution list for this newsletter, please contact Tamzyn Wigglesworth (twiggleswort@kpmg.com.au or ). The information contained in this document is of a general nature. It has been prepared to provide you with information only and does not take into account your objectives, financial situation or needs. It does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on the information contained in this document. Before acting or relying on any information, you should consider whether it is appropriate for your circumstances having regard to your objectives, financial situation or needs and also whether or not any financial product is appropriate for you. If applicable, you should obtain the Product Disclosure Statement relating to any financial product mentioned and consider the statement before making any decision about whether to acquire the financial product. To the extent permissible by law, KPMG Actuarial Pty Ltd, KPMG and their associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise). 218 KPMG Financial Services Consulting Pty Ltd, ABN , Australian Financial Services Licence No.3925, an affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.