AFA News 09 March 2021. On Thursday 4 March 2021, APRA issued a media release on life insurance statistics for December 2020. This media release included a breakdown of the key performance statistics for the life insurance industry for the 2020 year. Some of the numbers in this report, such as a decline of 70% in total revenue, received some media attention last week.
Whilst we think that it is very appropriate to place some scrutiny on these statistics, there also needs to be a level of caution. These statistics include both pure risk life insurance business and investment life insurance business. These days we tend to think about the life insurance industry through the lens of the risk only business. The most significant factor in the numbers for 2020 was a substantial deterioration in investment revenue, which declined from a contributor of $24.6B in the 2019 year to a detractor or loss of $2.3B in the 2020 year. What offset this was a movement in net policy liabilities of a similar amount, resulting in only a very small change in net profit after tax, which was a net loss of $0.1B for the year. Investment performance is a key consideration in the pricing of risk products, and with interest rates very low at present, we are aware that this has been a big factor in recent performance. The statistics also showed a 9% decline in Net Policy revenue, an 8% decline in Net policy expenses and a 12.5% decline in Operating expenses.
The most relevant table in the report was the following, that demonstrated the movement in the profitability of each of the risk products, measured in millions. This shows that all products are losing money except the Individual Lump Sum product. It is interesting to note that the losses in the IDII market are declining and that the biggest loss in the latest quarter is actually the Group Disability Income Insurance market. The APRA commentary provides a note of caution, in mentioning that the improvements were mainly driven by a release of reserves for each product.
| Year to 31 Dec 2019 | Year to 31 Dec 2020 | Dec Quarter 2020 | |
| Individual lump sum | 653.3 | 543.7 | 73.0 |
| Individual disability income insurance | -1,472.8 | -739.9 | -97.5 |
| Group lump sum | -240.6 | -173.5 | -7.8 |
| Group disability income insurance | -270.9 | -122.5 | -108.0 |
| TOTAL | -1,331.0 | -492.3 | -140.3 |
APRA also noted that capital ratios had risen, largely as a result of capital injections in response to the IDII capital charge, that was introduced as part of the APRA Intervention in the IDII market.
Life insurance company profitability accounting is complex. It is appropriate for financial advisers to keep an eye on these numbers; however, it is also critical that we have a rough idea what we are looking at, and don’t be too alarmed by factors that are not directly relevant. The life insurance market is under significant pressure, however, the impacts of all the recent reforms, including those in the Group Super market have led to a less than 10% decline in total risk product annual premiums.
Please email us at policy@afa.asn.au if you have any questions on the APRA statistics.
Issued 09.03.2021. AFA Policy & Education Update
