Insurance companies toughing it out
Standard and Poors managing director Ian Thompson explains why insurance companies are struggling against the banks at present.
Sunday, April 9th 2000, 12:00AM
While there were pluses to the policyholder in increasing the transparency in the products, insurance companies threw away a packaged product that was highly profitable and designed to meet the test of time.
In the bundled product insurance companies designed products that included a variety of elements from asset allocation to asset management, plus the products were designed to last a long time.
By unbundling the policies and making them transparent life offices risk losing parts of the business, especially as the market moves more and more down the commoditisation path.
He says policyholders can go out and buy the various elements that made up a bundled product from different providers, and often the buying decision will be made on price and returns.
To keep much of the business the insurance companies have to have above average returns in all areas, however "that is a big ask", he says.
Thompson, who was in New Zealand from Melbourne last week promoting the Australian and New Zealand Life Insurance Digest says insurance companies are struggling at present.
Many are feeling competitive pressure, particularly from the banks that are much bigger and have managed distribution well recently.
The issue for the insurance companies is that the banks have muscled in on their territory in two ways.
Banks are cross-selling insurance to its customers, plus they have also become actively involved in selling managed funds.
Thompson says banks are taking market share off life offices in their insurance operations.
Secondly, while insurance companies have always been involved in funds management they are now under more pressure to do well in that market.
"The challenge for the life industry is that (risk) business isn't enough to sustain them."
He says it's understandable banks have gotten into the funds management business because it is a fairly low risk strategy for these, generally, conservative organisatons.
Thompson says the banks are winning the war at present partly because of their strong brands and powerful branch networks.
"Banks have some pretty strong advantages to bring to bear," he says. "They are travelling on the halo approach."
However, the situation isn't all bad in Thompson's eyes. He says banks have a natural market share and it would seem they are getting close to that now.
"Over time they will come under scrutiny in the investment management area."
Thompson says the banks have done the first part of the strategy well - that is capturing the customers - the challenge will be whether the can hold onto them.
"That they have yet to prove," he says.
Another important issue for insurance companies is their capital strength and security.
Thompson says demutualisation has been a double-edged sword of the industry as it has generally weakened the insurance companies' financial position.
While efficiencies have allowed life offices to provide lower cost services, it has also seen the reduction in the financial strength underpinning insurance obligations.
"A key area of ratings pressure for the insurance industry globally is capitalisation relative to risk. In Australasia many life companies have shown clear deterioration."
The other mismatch to develop in this era of rationalisation is that policyholders are being asked to make a long-term commitment when they buy, however that commitment not necessarily being matched by the companies.
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