APRA Executive Board Member Suzanne Smith - Speech to the All Actuaries Summit 2024

Think Bigger: The Power of a Thriving Insurance Industry

Society empowered by a thriving life insurance industry

It’s a privilege to be here today and to join this panel. Naomi and the Actuaries Institute asked me to set out some context as to how APRA views the life insurance industry in Australia today.

The theme of this summit, "Think Bigger, Live Better," challenges us to envisage a thriving insurance industry that supports the wellbeing of our society. Drawing upon this optimistic and forward-looking theme, it is worth reminding ourselves what it means when our communities are supported by a strong and sustainable insurance industry. 
                 
For individuals, insurance protection translates to a life with fewer worries. It provides financial support in times of accidents or disasters and safeguards us from unforeseen events. Insurance offers the confidence to embark on adventurous travels, pursue entrepreneurial dreams and find peace of mind knowing that loved ones are protected.

A thriving insurance industry also bolsters the broader economy. It promotes financial stability, fosters consumer confidence to spend, instils greater certainty for business investments, and supports financial markets through the investment of insurance premiums.

When we look at the numbers, the industry is fulfilling its foundational requirements: providing a safety net in the face of unexpected events like death, disability, or loss of income. In 2022 alone, life insurers paid over $11 billion in claims payments to around 85,000 Australians - a powerful testament to the industry’s impact on community resilience. Life insurers remain well-capitalised in line with APRA’s prudential requirements, so policyholders can be confident their insurer has the capacity to pay valid claims.

For the life insurance industry to go beyond its foundational level and to thrive – as a stable pilar to community confidence and economic growth – the industry must be able to adapt and innovate to meet evolving consumer needs, allowing more Australians to understand and access valuable insurance.

Like you, APRA values an industry:

• With a deep understanding of the societal trends and risks we face today.
• An industry that designs products fit-for-purpose and is adaptable to meet changing consumer needs.
• One that places the right solutions with the right consumers, matching individuals with the most suitable protection.
• And, an industry that builds long-term trust through product, pricing and process transparency, as well as responsiveness. This will help consumers understand their policies and have the confidence that promised solutions will be delivered when required.

Such a thriving insurance industry, in a market with healthy competition, would empower both individuals and the broader economy.

A complex set of challenges

As will be discussed over the next few days, there are many challenges in the industry that demand our attention:

• New retail business sales have dropped more than 50 per cent in the past five years and for every new retail policy coming into force around three are lapsing.
• Complex products and a declining number of financial advisors – down 43 per cent over the last five years - leave many consumers struggling to grasp the value and scope of their coverage.
• The industry’s long-term sustainability has been questioned due to some pricing practices and legacy product design.
• Product innovation has not kept pace with societal, demographic and lifestyle changes. Our workforce today is much more diverse and fluid compared to the one the products were originally designed for. The pandemic has increased mental health concerns, particularly for young people, and society is aging.
• Unfortunately, consumer trust in the industry has also eroded, driven not only by out-dated product design, but also by negative experiences with fluctuating retail and group premiums, poor claims processing experiences in the group space and a confusing array of products.
• And of course, external factors like rising interest rates and cost-of-living pressures are exacerbating the trend for people to opt-out of insurance, particularly when premiums are increasing.

Transforming challenges into opportunities

While these challenges are significant, they do present opportunities to rebuild relevance and trust within the community.

I would like to emphasise APRA’s support for diverse and innovative thinking, by making the following points: 

1. Firstly, insurers have the opportunity to create innovative products that are adapted to today’s demographics and risk profiles. 
   • The need of the ageing population for quality retirement solutions, for example, offers immense potential. Products and services can be significantly improved to empower retirees to spend their savings confidently, enabling them to participate more fully in life.
   • Additionally, growing levels of mental ill health require coverage solutions to address this previously neglected area. A recent study shows over 40 per cent of adults have experienced a mental disorder at some time in their lives¹, and young people are now particularly at risk. Many will have pre-existing conditions when they seek out insurance, and in our current model, they face higher premiums and either partial – or in the worst-case scenario – total exclusion from cover.
      
2. Secondly, when creating these innovative products, I encourage you to take a holistic view across the insurance offerings and consider how insurance links with social security provisions, like workers compensation, NDIS, aged care or healthcare. The industry should look to develop comprehensive protection bundles to simplify navigation of the insurance landscape for consumers. This involves asking critical questions about the ideal protection package, identifying coverage gaps and overlaps.
    
3. My third point is that the industry can increase transparency around risk assessment, product design, pricing, sales and claims processes to rebuild trust. Consumers need a clear understanding of their coverage so they can feel confident in their insurance, not just left hoping for the best in the face of disaster. The industry can embrace the “Design and Distribution Obligation” and the “Target Market Determination” to better serve consumers.
    
4. And finally, it is important to tap into data and technology to enable these ambitions. Used thoughtfully, carefully and with appropriate guardrails, data and technology can unlock a deeper understanding of consumer needs, their behaviour and ultimately enhance customer outcomes.  

Collaboration is key

We recognise that building a thriving industry requires a united effort from all stakeholders – insurers, industry bodies, government, financial advisors, and consumer groups. Through collaboration, we can identify root causes, address structural deficiencies, and design solutions that meet the evolving needs of the community. In an industry where new business is falling and parts of society are already underinsured it is time to "Think Bigger" and work together to grow the pie, not merely fight over a shrinking slice.

Fortunately, some positive system-wide initiatives have already made progress, like the industry’s response to APRA’s Individual Disability Income Insurance (IDII) intervention, the ongoing clarification on how genetic test results can be used, and the more recent investigations into the role of Total and Permanent Disability (TPD) insurance in modern society. These examples demonstrate the industry’s commitment to collaboration and adaptation.

Embracing change to create positive momentum

I remain confident that we can rebuild a thriving industry and as I look around at all the capability in this room, I call upon you to face the challenges head on.

Because of product homogenisation and fierce price competitiveness, life insurers have historically been reluctant to move first in terms of product development. But there may well be opportunity in embracing the “First-Mover Advantage” to develop products that truly serve a changing community, build reputation and establish market leadership.

The industry has built some muscle through the IDII experience. To improve sustainability it is time to employ this strength and apply the learnings across other product lines, like TPD.

Although there are no quick fixes and experimentation is required, we encourage the industry to focus on community understanding, community coverage and community outcomes, which in turn will foster industry sustainability. 

In wrapping up, I would like to leave you with these thoughts:

1. “Think bigger” means to develop a system-wide understanding of the challenges and cooperate on solutions. Not just within your industry but by engaging the wider ecosystem.
    
2. “Think bigger” calls for increased transparency to empower consumers to make informed decisions and rebuild trust.
    
3. “Think bigger” means taking initiative to develop future-fit products by anticipating emerging trends and considering the protection bundle. Study the broader social and financial impact on our communities and be bold to innovate. A new generation of customers awaits engagement, retirees need your product expertise and, importantly, new technologies offer opportunities.
    

This conversation marks the beginning of the "Think Bigger, Live Better" journey for the life insurance industry. Let us work together to write the next chapter.

Footnote

¹National Study of Mental Health and Wellbeing, 2020-2022 | Australian Bureau of Statistics (abs.gov.au)