Insurer profit margins squeezed

Significant reduction

By Victoria Papandrea
Thu 05 Aug 2010

There has been continued downward pressure on insurer profit margins during the last year, according to a Rice Warner report.

While superannuation fund members and employees benefit from the scale and competitiveness of the group insurance market, margins available for insurers and reinsurers have reduced significantly, according to research by Rice Warner Actuaries.

The firm's 2010 group insurance market report found there has been continued downward pressure on insurer profit margins during the last year.

"APRA (Australian Prudential Regulation Authority) statistics suggest post-tax profit margins of 10.3 per cent for both group death and TPD (total and permanent disablement) cover and group income protection cover. This figure represents an average across the industry," the report said.

Based on the experience of insurance reviews and tenders carried out over the past 12 months, the report indicated it is likely that some new group insurance arrangements have been written on significantly lower margins.

"The increasingly competitive group insurance market, combined with potential strengthening of capital requirements for life companies, means there is little room to accommodate any deterioration in claims experience within current prices."

The report also noted that the Cooper review's analysis of the pricing of life insurance was heavily flawed, with its conclusion that life insurance margins were abnormally high.

"This was based on an assertion that claims are only about 43 per cent of premiums," the report said.

The group insurance market has grown by 13 per cent per annum over the past 15 years and the report indicated it is expected to grow by 11.7 per cent per annum over the next 15 years.

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