The Australian Life Insurance industry is facing a nexus of forces that threaten the long term performance of the industry, from policyholder behaviour to government intervention and regulation. To remain competitive businesses must gain deeper insight into their customer-base, increase the perception of relevance, and keep tighter oversight of claim and lapse behaviour. This article looks at some of these challenges and suggests increased access and quality of data can be used to overcome challenges and improve competitiveness.
Time for Action
According to ASIC’s 2013 figures, the Australian Life Insurance industry has total inflows of around AU$44bn, which is just under an average of $3000 per year for the 15.4 million Australians of working age. This figure is around five times higher than the $624 spent on average per year on mobile phone plans. Life insurance is a lot more serious and has a higher potential to impact the quality of your life and of those around than your mobile phone plan but it shows how skewed our priorities in life are and therefore the challenge that the industry has in appearing relevant.
Recent industry statistics make for disheartening reading and highlight some of the challenges the industry faces in the marketplace, particularly when it comes to policyholder behaviour and willingness to invest in life insurance. APRA’s Insight report from 2013 calls out that net policy cash flows (i.e. premium income less policy payments) have been in steady decline over the 3 years 2011 to 2013, with 2013 being a net negative result. Combining this with year on year increases in operating expenses for life insurers, results in negative non-investment cash flows for each of the 3 years. Fortunately, good investment income results have maintained the growth in the assets.
Individual life insurance (versus Group or Annuities) makes up around 45% of the total industry revenue. However, lapse rates (as a result of individuals discontinuing premium payments, for example) for term insurance have steadily increased over the last 5 years. Again, as the APRA Insight report states: Overall, annual lapse rates for both lump sum (death/TPD) and disability income benefits have increased from 11 to 12 per cent per annum when they were at their lowest level in 2006 to 16 to 17 per cent per annum in 2013.
APRA offers an explanation to this trend. They see it partly as a result of industry adviser remuneration schemes that promote the signing of New Business over persistency of existing policies.
Glancing through the 2013 Shareholder report of Australia’s largest life insurer reveals recognition of the issue:
……. high claims and policy lapses have significantly impacted the group’s results. The number of insurance claims and the length of time people stay on claim have increased. The number of customers not renewing their insurance policies has also increased. This is an industry-wide issue and one of AMP’s highest priorities is improving the performance of this area of the business.
Prepare for the Data Onslaught
One of the ways to address higher claim and lapse rates, particularly where they are occurring in a rapid fashion, is to implement real-time, operational analytics and alerting functionality. This may be as simple as operational reporting from claims workflow systems, however the ability of new technology to process large volumes of data in near real-time is not being lost on global insurers. Telematics is an emerging technology being reviewed in the motoring insurance industry, potentially providing the ability to monitor driver behaviour and adjust insurance premiums accordingly. This may seem a little far-fetched but examples already exist in the marketplace. AAMI is using a smartphone application to reward safe drivers and QBE are offering reduced premiums to safe drivers, determined by the use of their Insurance Box. Europe’s regulators are concerned about the potential and are looking to provide safeguards in data protection legislation. It is not too much of a stretch to imagine monitoring of individuals movements via smartphone technology to provide tailoring life insurance premiums or even provide evidence of fraudulent claims, subject to privacy considerations. In fact, one US insurer, John Hancock, is already doing this. It has recently published an iPhone app that integrates with the Apple Watch to track fitness activity and award ‘Vitality Points’ as part of the company’s rewards program for life insurance policyholders. At a minimum, a forward looking insurer in Australia should be building the foundational platforms that will allow for analysis of large volumes of external data in near real-time.
Typical functions supported by analytics within claims and lapse management should include:
- Loss forecasting models
- Dynamic premiums pricing models
- Claims Management
- Fraud detection models
- Claims rating models
Regulation and Political Interference – A Threat or an Opportunity?
Behaviour of policy holders is not the only challenge facing the industry. In late 2013, PwC published their annual survey results showing the perceived risk factors for Australian Insurance businesses. The top three areas of concern were Regulation, Political Interference and Distribution Channels, the latter two ranked particularly high in Australia when compared to the average results across the globe.
It is not without good reason that these concerns have been ranked so highly. After recommendations in the ASIC’s 2014 ‘Review of Retail Life Insurance Advice’, the Australian Federal Government has signalled their desire to take direct action in the affairs of Life Insurance companies. For example, a recent public announcement highlighted its intent to tackle upfront commission payments to financial advisors if the industry does not tackle it for itself. This announcement validates the concerns of Life Insurers, demonstrating the willingness of politicians to interfere with the methods in which insurers incentivise their distribution network. It came as no surprise that AMP, Australia’s largest life insurer with the biggest adviser network, announced the removal of upfront commissions for life insurance a few weeks after the announcement.
In December 2013, Treasurer Joe Hockey announced the Financial System Inquiry (FSI), a review of the Australian financial services industry chaired by David Murray (referred to as the ‘Murray Report’). The FSI website likened the potential impact of the review to its predecessor report, the 1997 Wallis Report, that brought about the establishment of the industry regulators APRA and ASIC. The final report was published in December 2014, and while at first glance it did not appear to suggest anything as dramatic as establishing a new regulator, it does contain a number of recommendations that are likely to have direct impact on the operations of Life Insurance companies, such as the recommended opening up of new data sources.
Further evidence of the impact of regulation has been felt during the implementation of the Stronger Super Reform. As part of this reform, APRA requested details of insurance attached to superannuation contracts, in the “SRF 250 Insurance” submission. This is new data that has not previously been submitted to APRA and a recent survey identified the collection of data for submission to be considered somewhat difficult. Collecting data for this form typically requires consolidation of information from policy systems and if treated strategically, should result in a single source for insurance policy information for internal management use as well as for compliance purposes.
While government mandated changes to planner remuneration or an increase in reporting requirements from regulators may seem like additional overhead, they do represent an opportunity for advanced insurers to differentiate themselves from competitors. For example, improved visibility of insurance arrangements attached to super and better internal measurement of adviser commissions and quality may be a beneficial result of meeting regulatory requirements.
New Public Data Sources
One of the recommendations from the Murray Report is specific to data access and use:
Recommendation 19: Review the costs and benefits of increasing access to and improving the use of data, taking into account community concerns about appropriate privacy protections.
The report expands on the recommendation to suggest the Australian Government investigate broader access to public sector data and encourage cross-sharing of private sector data. The Murray Report references an earlier report by the National Commission of Audit that suggests improvements in the collection and sharing of public sector information “both within and outside government” and notes that there is limited access to datasets compared to the US and the UK. A quick scan of the US public sector open data website, data.gov, reveals some of the 130,000 datasets that are available. A search for the term ‘life insurance’ returns 98 hits, including statistics on the average age of (Government) life insurance policyholders. Looking deeper reveals that there are 822 health related datasets including mortality rates and cause of death statistics, and lifestyle information, data that would prove extremely useful when forecasting future claim rates or planning new and more relevant product offerings. The UK public sector site, data.co.uk, contains 1701 health related data sets, although there are no published datasets returned when using the search term ‘life insurance’. A similar search on the Australian equivalent, data.gov.au, returns 7 hits for the ‘life insurance’ search (mostly APRA reports), however there are only a patchy collection of 22 health- related datasets (which includes information such as a listing of sailing clubs in Victoria!).
The NCOA report also recommends that the Australian Bureau of Statistics take a lead role in the collection and co-ordination of improved datasets. Perhaps the recent announcement of $250million investment by the Australian Government in the ABS IT Infrastructure is an early indication of intent to support the recommendation.
This represents another opportunity for advanced life insurance companies to develop systems to take advantage of the future increases in richer information about the general populous, for use in developing actuarial and risk models for example. While the initial volume of available data is unlikely to be large enough to be described as “Big Data”, it would make sense to align architecture for real-time analytics with the potential new sources of data.
Social Media – Hype or Reality?
In Australia, Facebook has almost 14 million users, which is more than 50% of the population, and Twitter has approximately 2.8 million users. Both these channels represent an opportunity to communicate with customers and get immediate direct feedback. However, insurers in Australia have taken a fairly cautious approach to using the potential opportunity.
Probably the best global example for the potential of social media exists in the US. Progressive Insurance have linked their traditional TV advertising with the ability for customers to interact via Facebook. The ads are built around a fictional character called ‘Flo’. Flo has her own Facebook page and currently has more than 5 million ‘likes’. Australian’s may be a little more reserved when it comes to ‘liking’ personalities created by Insurance companies and their media companies, however. Kitty, Progressive’s Australian equivalent, has just 5,000 likes.
It would be fair to say that the Progressive example represents the leading edge of Social Media, and combines TV presence with the interactive nature of the Facebook page, and serves as a powerful example of what is possible for an Insurance company. The rapid proliferation of Social Media sites, however, has made it difficult for companies to monitor all communication channels with their customers, resulting in the risk of brand damage due to bad publicity.
Whatever the view on the usefulness of social media in the corporate enterprise, it cannot be ignored. Insurers should develop a robust Social Media Strategy and use integrated analytics to monitor and adjust accordingly. For further guidance a good place to start is Accenture’s publication specifically aimed at social media for the insurance industry.
Distribution Channel and Customer Analysis
Government regulation has the potential to affect the way in which financial advice is provided to customers but it is not the only disruptive force at play in the distribution channel. A relevant and tailored experience is becoming the minimum expectation from a customer base that has become more tech-savvy. There is an increased reliance on Digital channels, such as online customer portals and mobile apps, as a way of attracting and retaining customers. A 2010 survey by Accenture of customer expectations of insurance providers in Europe and South America found that 43% of customers expected to be purchasing insurance via online channels (versus 49% via an agent). That number rose to 70% when looking at the data for the UK only.
Accurate data about advice distribution channels should include measurement of:
- Advice network
- Adviser, licensee selection
- Performance management and retention
- Training and education management
- Web Channel / Mobile app Management
Taken to the extreme, automated financial advice from so-called Robo Advisers has become a reality, although at this stage it is mostly focussed on investment portfolio management. Of course, the quality of automated advice is reliant on a detailed understanding of a customer’s personal situation coupled with a knowledge of the marketplace. While traditionally this has been the domain of a human adviser who is able to ask relevant questions to identify a customer’s needs, it may not be too long before the algorithms and models used by those human advisers are made available online or via applications. Simple calculators for the level of insurance cover for an individual are readily available today on most providers’ websites or on industry comparison websites. What is less readily available is the automated ability to compare across products, particular where insurance is provided as part of superannuation.
Key components to providing quality automated or online advice is having a consolidated store of product offerings and associated conditions, fees and level of cover, and an accurate understanding of an existing customer’s situation. Typically this function is performed in Product and Customer Master Data Management (MDM) applications, coupled with Customer Relationship Management (CRM) systems. Combining CRM and CMDM systems with accurate customer policy data and recent transactions history are key to determining accurate segmentation of customers allowing for targeted offerings and simplification of products.
Typical analysis of customers includes:
- Customer coverage
- Campaign analysis
- Search engine optimisation and analysis
- Customer Acquisition and Conversion
- Website navigation path analysis
- Buyer conversion rates
- Customer Value Management
- Predictive models for cross-sellingup-selling
- Product association analysis
The challenges faced by Australian Life Insurers are many and varied, ranging from increased Government oversight and intervention, greater regulatory obligations and a more volatile customer base. Opportunities exist, however, for forward thinking insurers to improve transparency of data within the organisation and to take advantage of an increase in external data sources, such as the public data sites and social media content. An accurate view of the current customer base will allow more relevant product offerings, consolidation of data will allow improved regulatory compliance and social media represents an opportunity to get improved customer feedback if monitored and analysed correctly.
In a future blog article we will provide a framework for implementing solutions to these challenges, providing a foundation for improved data and analytics capabilities.
_________________________ ASIC Report. This figure excludes investment revenue  The ASIC Money Smart website suggests that Australians spend an average of $12 a week on their mobile phone plan, or $624 per year.  http://www.aami.com.au/safe-driver-smartphone-app  http://www.qbe.com.au/Personal/Insurance-Box/Insurance.html  “Insurers warned to use Big Data responsibly”, FT.com  http://ifawebnews.com/2015/04/29/john-hancock-launches-iphone-app-to-reward-healthy-activity/  PwC Banana Skins report September 2013  World risk Rankings: Regulation, ranked #1. Political Interference, ranked #10, Distribution Channels, ranked #11.  http://www.abc.net.au/news/2015-04-15/life-insurance-industry-warned-it-has-two-months-to-end-commiss/6394504  http://media.amp.com.au/phoenix.zhtml?c=219073&p=irol-newsArticle&ID=2041213  http://fsi.gov.au/  “APRA Reporting; a missed opportunity?”, September 2014  “Government investment in the ABS”, ABS website  “Towards Responsible Government,” National Commission of Audit, February 2014  https://www.facebook.com/flotheprogressivegirl  “Insurers and Social Media: vast potential, significant challenges”, Accenture 2012  “How the Tech-Savvy Consumer Is Driving the Insurance Industry Toward Emerging Technology”  http://www.accenture.com/us-en/blogs/accenture-blog-on-insurance/Media/Changing_Channels-Accenture_Multichannel_Distribution_Insurance_Consumer_Survey.pdf  http://www.moneymanagement.com.au/news/financial-planning/robo-advice-unseat-poor-quality-planners And http://www.smh.com.au/money/investing/are-robots-the-future-face-of-financial-advice-20141007-10q9pd.html