Moody's: Australian life insurers' profits under pressure through to 2016

Moody's Investors Service says the profitability of Australian life insurers will be under pressure throughout 2015 and 2016, due to the policy lapses and rising claims seen for their risk products. 

"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," says 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," adds Mirenzi. 

Moody's analysis is contained in its just-released report titled "Higher Claims and Policy Lapses Challenge Australian Life Insurers' Profitability," and is authored by Mirenzi. 

Moody's report points out that 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. 

Life insurers were forced to revise their assumptions and lower their outlook on future profits. As policy lapses increase, the average duration of policies shorten, which 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. 

Moody's further points out that 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. 

A number of recommendations have been put forward; most significantly, with respect to 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 therefore believes that the industry's profitability will likely stay weak over the next few years.